Introduction
On 6 February 2017, the New South Wales Court of Appeal handed down its decision in Power Rental Op Co Australia, LLC v Forge Group Power Ltd (in liq) (receivers and managers appointed). [1] This is one of the first appellate court decisions [2] to consider the meaning of 'fixtures' within the context of the Personal Property Securities Act 2009 (Cth) (PPSA). In dismissing the appeal, the Court of Appeal has confirmed that the meaning of 'fixtures' under the PPSA is determined by applying the common law approach. Importantly for bankers, insolvency practitioners and owners of industrial property, the decision illustrates the importance of giving proper consideration to the possible application of the PPSA to lease, hire and bailment arrangements, even where those arrangements are for structures or items which may be anchored, affixed or annexed to land.
Background
Forge Group Power Pty Ltd (Forge) entered into a lease with General Electrical International Inc (GE) in relation to mobile gas turbine generators for use at a power station at Port Headland in Western Australia (Lease). GE did not register its interest under the Lease on the Personal Property Securities Register (PPSR). Forge appointed administrators and is currently being wound up. The liquidators of Forge identified the Lease as a 'PPS lease' and applied to the Court for declarations that the security interest under the Lease had vested in Forge immediately before it entered into voluntary administration under s.267 of the PPSA.
The question for the Court at first instance was whether the Lease was a PPS lease within the meaning of s.13(1) of the PPSA. If it was a PPS lease, it was undisputed that GE's interest had vested in Forge. There were two issues considered by the primary Court:
- Was GE was regularly engaged in the business of leasing the goods?; [3] and
- Were the turbines fixtures within the meaning of the PPSA? [4]
At first instance, the primary judge concluded that there was a PPS lease because GE was regularly engaged in the business of leasing goods and the turbines were not fixtures within the meaning of the PPSA. The turbines had therefore vested in Forge under s.267 of the PPSA.
On appeal, Power Rental Op Co Australia, LLC and Power Rental Asset Co Two, LCC (Power Rental), who acquired the benefit of the Lease from GE, challenged only the second of these findings.
Issues before the Court of Appeal
The PPSA does not apply to an interest in land. [5] Section 8 of the PPSA lists a number of other interests which fall outside the scope PPSA. One of those excluded interests is 'an interest in a fixtures'. [6] 'Fixtures' is defined in s.10 of the PPSA as 'goods, other than crops, that are affixed to land.' Therefore, critical to the Court of Appeal's decision, was the concept of 'fixture' under the PPSA and, in particular:
- Whether the words 'affixed to land' in the s.10 PPSA definition of 'fixtures' incorporates the common law meaning of 'affixed to the land' (which the primary judge applied) or whether the section creates its own test based solely on whether the goods are physically affixed to land 'in a non-trivial manner'; and
- Whether the turbines were fixtures on either basis. [7]
The Court of Appeal's decision
The Court of Appeal [8] held that:
- The definition of fixtures in s.10 PPSA is to be interpreted in accordance with the common law meaning of the term; [9] and
- The turbines were not fixtures within the common law meaning of the term. [10]
The Lease was held to be a PPS lease and the primary Judge's finding that GE's security interest had vested in Forge was upheld.
The common law meaning of fixture
In determining whether an item is a fixture within the common law meaning of the term, the Court will look to the objective intention with which the item was put in place having regard to the object and degree of the annexation. [11] If the object and degree of the annexation indicate that the item was intended to become a part of the land, the item will likely be a fixture. The circumstances of each case are unique and so the question is determined on a case by case basis. In applying the common law approach, the Court of Appeal referred to the factors listed by Conti J in National Australia Bank Ltd v Blacker. [12] Those factors, which are neither exhaustive nor definitive, are:
- Whether the attachment was for the better enjoyment of the property generally or for the better enjoyment of the land and/or buildings to which it was attached;
- The nature of the property the subject of affixation;
- Whether the item was to be in position either permanently or temporarily;
- The function to be served by the annexation of the item;
- The degree of annexation and to that end:
- Whether removal would cause damage to the land or buildings to which the item is attached;
- The mode and structure of annexation;
- Whether removal would destroy or damage the attached item of property; and
- Whether the cost of renewal would exceed the value of the attached property.
In considering the above factors, the Court of Appeal focused on the temporary nature of the turbines in light of the objective intention with which they were placed on the land. [13] Despite the turbines being affixed to the land by means of electrical/fuel connections and seismic & wind kits, [14] and the installation requiring concrete slabs and the use of a crane, [15] the Court of Appeal found that the degree of annexation was not 'so substantial or enduring as to warrant a finding…that the turbines thereby became fixtures.' [16] This finding was made despite the 'obvious constraints on the ready mobility of the turbines once they have been installed and commissioned.' [17] Importantly, the connection 'was designed to be reversible or detachable…and not of a permanent nature.' [18] In explaining its decision, the Court used the analogy of the detachable nature of a plug in an electric socket. [19]
The Court of Appeal further held that the temporary nature of the turbines could 'readily be gleaned from the finite terms provided for under the Lease…', [20] which was intended to operate for a relatively short period of time. [21] The Court also held that 'the existence of a contractual right to remove the turbines does not mean that, absent such a right, [the turbines] would have become fixtures at common law.' [22]
Comment
The Court of Appeal's decision clarifies the principles to be applied when deciding whether personal property, such as large industrial items, brought onto land under a PPS lease or other security covered by the PPSA will require perfection under the Act. When dealing with such items, parties ought keep in mind that:
- The mere annexation of an item to land will not, on its own, be determinative of the characterisation of the item as a fixture. Simply because an item is difficult to remove or temporarily affixed to the land does not mean that it has become a part of the land;
- A failure to correctly characterise items as fixtures can have significant consequences for parties under the vesting provisions of the PPSA. If in doubt as to whether the PPSA applies registration of a financing statement will be a wise precaution.
The decision is another example of the significant consequences that a failure to register a security interest on the PPSR may have where the grantor subsequently enters into external administration. For another recent example of the operation of the vesting provisions of the PPSA and the importance of attention to detail when registering on the PPSR, see our recent note on OneSteel Manufacturing Pty Limited (administrators appointed) [2017] NSWSC 21 or contact us.