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Personal Property Securities Amendment (PPS Leases) Bill 2017



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BILLS DIGEST NO. 84, 2016-17 29 MARCH 2017

Personal Property Securities Amendment (PPS Leases) Bill 2017 Paula Pyburne Law and Bills Digest Section

Contents

Purpose of the Bill ............................................................... 3

Background ......................................................................... 3

Security interests ..................................................................... 3

Leases and deeming ................................................................ 4

Leases that are not covered .................................................. 4

PPS Act review .................................................................... 4

The problems with PPS leases ................................................. 5

Court decisions ...................................................................... 5

Issues for small business—general ........................................ 5

Issues for the hire and rental industry—specific ................... 5

Previous amendments ............................................................. 6

Recommendations of the Whittaker Review .......................... 7

Lease with an indefinite term ............................................... 7

Removing references to bailment ......................................... 7

Amending the ‘one year’ test ................................................ 8

Committee consideration .................................................... 8

Senate Selection of Bills Committee........................................ 8

Senate Standing Committee for the Scrutiny of Bills .............. 8

Policy position of non-government parties/independents ..... 8

Position of major interest groups ......................................... 8

Small business ......................................................................... 8

Financiers ................................................................................. 8

Financial implications .......................................................... 9

Statement of Compatibility with Human Rights .................... 9

Parliamentary Joint Committee on Human Rights .................. 9

Date introduced: 1 March 2017

House: House of Representatives

Portfolio: Attorney-General

Commencement: the day after Royal Assent

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at

March 2017.

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Personal Property Securities Amendment (PPS Leases) Bill 2017 2

Key issues and provisions..................................................... 9

Concluding comments ....................................................... 10

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Personal Property Securities Amendment (PPS Leases) Bill 2017 3

Purpose of the Bill The purpose of the Personal Property Securities Amendment (PPS Leases) Bill 2017 (the Bill) is to amend the Personal Property Securities Act 2009 (PPS Act) to extend the minimum duration of PPS leases from more than one year, to more than two years. The amendments will operate so that leases of an indefinite term will not be deemed to be PPS leases unless, and until, they run for a period of more than two years.

Background The PPS Act was enacted to create a single, nationally consistent register for security interests1 over personal property.2 Generally, it has always been recognised that a secured party who has possession of the secured goods is protected by virtue of physically controlling the item. However, in many security arrangements, the goods are in the possession of the borrower. In that case, there is a risk that the property could be used as security for subsequent borrowings without the original or subsequent lender being made aware of the other party’s security interest. If the borrower defaults on its obligations secured by the goods, then one of the lenders is likely to be prevented from enforcing its security by the other lender.

The solution to this problem was to create registers for security interests, where lenders could check if any other person has registered a security interest over a particular item or good.

Prior to the enactment of the PPS Act:

• there were different registers for different kinds of debtor

• there were different registers for different kinds of property

• there were different registers for different forms of security arrangement

• the registers overlapped

• there were no registers for some kinds of securities

• there were different rules for registering securities and

• the different registers had different consequences of non-registration.3

The PPS Act addressed these disparities by establishing the Personal Property Securities Register (the PPS Register) which consolidated and replaced existing Commonwealth, state and territory registers.4 The PPS Act created ‘one single national set of rules and a single national online register’.5 It is a comprehensive law containing the rules ‘governing the validity, priorities, enforcement and extinguishment of security interests in all personal property’.6

Security interests Section 12 of the PPS Act defines a security interest as ‘an interest in personal property provided for by a transaction that, in substance, secures the payment or performance of an obligation …’ A simple example is where a bank provides a customer with a loan to purchase a car. The customer grants the bank an interest in the car (the personal property or ‘collateral’) which secures the repayment of the loan.

The PPS Act is not concerned with:

• the form of the transaction (for example whether it is a mortgage, a lease or a lien) or

1. Section 12 of the PPS Act defines a security interest as ‘an interest in personal property provided for by a transaction that, in substance, secures the payment or performance of an obligation …’ 2. Section 10 of the PPS Act defines personal property as property, (including a licence) other than (a) land or (b) a right, entitlement or authority that is granted by or under a law of the Commonwealth, a State or a Territory; and declared by that law not to be personal property

for the purposes of the PPS Act. 3. Australian Law Reform Commission (ALRC), Personal property securities, Interim report, 64, ALRC, Sydney, 1993, pp. 12-13. 4. P Pyburne and D Spooner, Personal Property Securities Bill 2009, Bills digest 36, 2009-10, Parliamentary Library, Canberra, 2010, pp. 18-20. 5. Explanatory Memorandum, Personal Property Securities Amendment (Registration Commencement) Bill 2011, p. 1. 6. Ibid.

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Personal Property Securities Amendment (PPS Leases) Bill 2017 4

• the identity of the person who has title to the property involved.

Rather, the PPS Act requires security interests to be perfected in order to guarantee their priority as against other security interests over the same item of property.7 One of the key ways in which perfection of a security interest is achieved under the PPS Act is through registration of the interest on the PPS Register.8

Importantly, the PPS Act made a major change to the law as understood by many people prior to its enactment, in that it subordinated title (ownership) of personal property to perfected security interests.

Leases and deeming One common form of security interest is for a lender to lease an item of personal property to a borrower, retaining the title to the property and the right to recover possession if the borrower defaults on its obligations. These arrangements are difficult, if not impossible, to differentiate from genuine leases that do not secure payment or the performance of an obligation. The PPS Act deals with this issue by excluding short-term leases from the definition of a security interest. However, as the lease term becomes longer, especially if it begins to approximate the useful life of the leased property, the lease is increasingly likely to be a security interest.

To resolve this uncertainty, the PPS Act deems longer term leases to be PPS leases and therefore, security interests. These leases are treated as if they were security interests, even if they do not secure payment or the performance of an obligation.

Section 13 of the PPS Act provides that the following are PPS leases:

• a lease for a term of more than one year

• a lease for an indefinite term even if the lease or bailment is determinable by any party within a year of entering into the lease or bailment.9 In this context, ‘an indefinite term can be taken to mean a non-defined period of time or having an open ended date of conclusion’10

• a lease for a specified term of less than one year which contains options to renew the lease (either automatically or at the election of one of the parties) so that the total term, or terms, of the lease might exceed one year and

• where a lease is for a specified term of less than one year but the lessee remains in possession of the goods with the consent of the lessor (that is, the hire company) after the expiry of the initial term so that the total term, or terms, of the lease exceed one year.

Leases that are not covered Leases that are not security interests for the purposes of section 12 of the PPS Act, and are not otherwise deemed to be PPS leases (that is, the term is less than one year) fall outside the scope of the PPS Act. In these cases, the hire business would rely on proof of its ownership of the property which is the subject of such a lease (for example, the lease agreement) to avoid loss of the property in the event of the customer’s insolvency.

PPS Act review Section 343 of the PPS Act requires the Minister to ensure that a review of the operation of the PPS Act be undertaken and completed within three years after the registration commencement time, which is the start of 30 January 2012.11

7. PPS Act, section 21. 8. L Meehan, ‘The importance of perfection’, Law Society Journal, 49(8), September 2011, pp. 60-63 at p. 61. 9. Bailment is the delivery of goods by their owner into the possession of another person on the promise that they will be redelivered to their owner or dealt with in a specific way. A common example of bailment is hiring a car. In that case the hire care company owns the car but

allows the customer to take possession of it on the promise that it will be returned to the hire car company at the end of the period of the hire contract. 10. Explanatory Memorandum, Personal Property Securities Amendment (PPS Leases) Bill 2017, p. 5. 11. Personal Property Securities (Migration Time and Registration Commencement Time) Determination, section 5.

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Personal Property Securities Amendment (PPS Leases) Bill 2017 5

Accordingly, on 4 April 2014, the Attorney-General, Senator George Brandis, launched the review and issued terms of reference for its conduct.12 Mr Bruce Whittaker, a partner with the law firm Ashurst, was appointed to lead the review of the PPS Act (Whittaker Review).13

As part of the review process, Mr Whittaker issued four consultation papers and sought public comment in respect of each.14 An interim report was delivered to the Attorney-General on 31 July 2014.15 The final report on the PPS Act review was tabled before Parliament on 18 March 2015.16

The problems with PPS leases

Court decisions The Supreme Courts of New South Wales17 and Western Australia18 have interpreted the operation of the PPS Act in relation to PPS leases. In both cases a hirer used property owned by someone else as security for borrowing—without the knowledge of the owner of that property. When the hirer entered into insolvency, the liquidator had an enforceable right to possession of the property because the owners of the property had not registered their interest on the PPS Register.

Had they done so, it would not have been possible for a third party to borrow against it as their lenders would have been alerted that the borrower was not the owner of the property.

Issues for small business—general The first round of submissions to the Whittaker Review dealt broadly with issues which are particular to small business. In summary, those issues were:

• low levels of awareness about the PPS Act amongst the small business community.19 Some small businesses were unaware of the existence of the PPS Act, some were unaware that it was relevant to their business operations and others were unaware that a failure to engage with the PPS Act may have adverse consequences20

• the complexity of the PPS Act meant that small businesses needed professional advice, with the cost of such advice considered to be an issue21

• registration and searching processes were financially and administratively burdensome for small businesses, with some suggesting that small businesses are forced to weigh the cost of registration against the risks of not registering.22

Issues for the hire and rental industry—specific The submission to the Whittaker Review by the Hire and Rental Industry Association (HRIA) sets out the problems specifically experienced by the hire and rental industry. The industry services the construction and mining sectors by providing access to earthmoving and heavy equipment, medium to small equipment for trade

12. G Brandis (Attorney-General), Statutory review of the Personal Property Securities Act, media release, 4 April 2014. 13. Ibid.

14. Attorney-General's Department (AGD), ‘Statutory review of the Personal Property Securities Act 2009’, AGD website. 15. B Whittaker, Review of the Personal Property Securities Act 2009: interim report, (the Whittaker Review), AGD, Canberra, 2014. 16. B Whittaker, Review of the Personal Property Securities Act 2009: final report, (the Whittaker Review), AGD, Canberra, 2015. 17. Maiden Civil (P&E) Pty Ltd, Re; Albarran v Queensland Excavation Services Pty Ltd (2013) 277 FLR 337, [2013] NSWSC 852 (27 June 2013). 18. White v Spiers Earthworks Pty Ltd (2014) 99 ASCR 214, [2014] WASC 139 (16 April 2014). 19. This is particularly so in the rural sector. See National Farmers’ Federation, Submission to the Review of the Personal Property Securities Act

2009, submission no. 36, 13 June 2014, p. 5; Australian Livestock and Property Agents Association Ltd, Submission to the Review of the Personal Property Securities Act 2009, submission no. 21, 6 June 2014, p. 3. 20. Review of the Personal Property Securities Act 2009, Summary of first-round submissions: issues particular to small business, 7 July 2014, p. 2. 21. Ibid., p. 3; Civil Contractors Federation, Submission to the Review of the Personal Property Securities Act 2009, submission no. 25, June 2014, p. 3. 22. Ibid.

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Personal Property Securities Amendment (PPS Leases) Bill 2017 6

contractors, cranes and access equipment, mining and related equipment, scaffolding, forklifts and portable accommodation.23

According to HRIA:

The industry is driven by the preference of large numbers of construction and mining firms to hire equipment, rather than purchasing it, based on a desire to remain flexible, reduce capital and maintenance expenditure and gain access to the latest technologies. 24

The first problem identified by the HRIA is that property owned by hire companies can be lost when a customer defaults or becomes insolvent, as is evidenced by the outcomes in the court cases set out above.

The second problem is that the PPS Act is considered to impose a regulatory, financial and administrative burden on hire businesses which is ‘excessive and onerous’.25 This problem is said to be magnified for small businesses in that industry for the following reasons:

• small hire businesses cannot afford to generate or obtain expertise about the PPS Act—which they see as ‘unquestionably highly complex’26 and

• small hire businesses are generally exposed to significantly greater credit risk because their customer base may comprise of smaller companies in the construction industry. In addition, they will have few credit assessment and credit protection skills.27

In addition, according to the Law Council of Australia:

One of the concerns that those who have contributed to this submission have experienced when working with small businesses is the barrier imposed by the cost of resolving disputes relating to the operation of the Act. Clients have frequently been left in a position where another party is wrongfully refusing to deliver up possession of collateral to which the client is entitled to immediate possession under their priority security interest. The client is left with two alternatives when negotiations break down, which are either to commence costly legal proceedings in a court or not enforce their rights. This is hardly a satisfactory result for small businesses, which often do not have the financial capacity to run a ‘test’ case on a particular aspect of the Act.

28

Unsurprisingly, ‘representatives of the equipment hiring industry do not believe the PPS Act should apply to them’.29

Previous amendments This Bill does not represent the first response to the problems identified by small business in relation to PPS leases. During the course of the Whittaker Review, the Government enacted the Personal Property Securities Amendment (Deregulatory Measures) Act 2015 so that certain categories of leases would no longer be deemed to be PPS leases.30 According to the Explanatory Memorandum for the originating Bill, this would ‘simplify the deeming provisions in the PPS Act and minimise the need for small and medium hire business to make registrations in respect of leases of a term of less than 12 months’.31

23. Hire and Rental Industry Association, Submission to the Review of the Personal Property Securities Act 2009, submission no. 15, [2014]. 24. Ibid., p. 3. 25. Ibid.

26. Ibid.

27. Ibid., pp. 3-4. 28. Law Council of Australia, Submission to the Review of the Personal Property Securities Act 2009, submission no. 18, 6 June 2014, paragraph 15, p. 3. 29. Final report, (The Whittaker review), op. cit., p. 28; Elphinstone Engineering, Submission to the Review of the Personal Property Securities Act

2009, submission no. 11, 5 June 2014, p. 2. 30. Parliament of Australia, ‘Personal Property Securities Amendment (Deregulatory Measures) Bill 2014 homepage’, Australian Parliament website. 31. Explanatory Memorandum, Personal Property Securities Amendment (Deregulatory Measures) Bill 2014, p. 1.

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Personal Property Securities Amendment (PPS Leases) Bill 2017 7

The amendment was consistent with one of the recommendations in the final report of the Whittaker Review.32

Recommendations of the Whittaker Review The final report of the Whittaker Review stated:

The concept of the PPS lease, and the consequences for an owner of goods if they enter into a PPS lease with those goods, was the subject of far more comments (and criticisms) in the submissions than was the case for any other topic. Submissions from the short-term hiring industry were especially vehement in their criticism of the fact that their hiring activities are subject to the Act. They objected in particular to the fact that they are at risk of losing ownership of their goods in the insolvency of the customer, if they have hired the goods to the customer for an indefinite period and the customer becomes insolvent during the term of the hire. This was said to be an intolerable outcome …

33

Lease with an indefinite term The Whittaker Review noted the concerns of short-term hiring industry businesses which commonly lease goods out on short-term arrangements to a large number of customers—and, in particular, concerns about the cost and administrative burden associated with managing proper PPS Act registration practices.34

One solution would be to exclude the short-term hiring industry from the operation of the PPS Act altogether. However, the Whittaker Review dismissed the suggestion that the industry could be ‘carved out’ of the Act. Instead it recommended that the definition of PPS lease should be amended to capture a lease of goods:

• for an agreed term of more than one year (taking into account renewal options) or

• for a period of initially less than one year, once the lease has in fact continued for more than one year.35

Removing references to bailment Some submitters to the Whittaker Review recommended that references to bailments in the definition of PPS lease should be removed.36 For instance, the joint submission by Allens, Ashurst, Herbert Smith Freehills, King & Wood Mallesons and Norton Rose Fulbright Australia states:

This is a particular trap for small businesses who may be unaware of the concept. The difficulty is that a reference to bailment means that many normal commercial arrangements which should not be regarded as leases, are caught. If the lessor does not register a financing statement, the security interest will vest on appointment of an administrator or liquidator etc. This means that it will lose its interest in the asset and become an unsecured creditor for its value, when very little was owing to it.

37

The Whittaker Review noted that not all bailments are captured by the PPS Act. Rather, it only applies to bailments by a bailor who is regularly engaged in the business of bailing goods38 and where the bailee provides value for the bailment.39 Nevertheless, it was acknowledged that ‘owners of goods who give possession of the goods to others in the course of their business activities have not been confident that they fall within one of the exclusions’.40

The Whittaker Review concluded that the limitations on the types of bailments that are captured by the definition of PPS lease come close to restricting many of those bailments to ones that are in effect leases as well.

32. Final report, (the Whittaker Review), op. cit., recommendation 19, p. 78. 33. Ibid., pp. 75-76. 34. Ibid., p. 81. 35. Ibid., recommendation 21, p. 82. 36. Law Council of Australia, Submission to the Review of the Personal Property Securities Act 2009, op. cit., paragraph 25, p. 4. 37. Allens, Ashurst, Herbert Smith Freehills, King & Wood Mallesons, and Norton Rose Fulbright Australia, Joint submission to the Review of the

Personal Property Securities Act 2009, submission no. 29, 6 June 2014, p. 26. 38. PPS Act, paragraph 13(2)(b). 39. PPS Act, subsection 13(3). 40. Final report, (the Whittaker Review), op. cit., p. 79.

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Personal Property Securities Amendment (PPS Leases) Bill 2017 8

That being the case, it was recommended that ‘the definition of PPS lease be amended to remove all references to bailments’.41

The Bill does not put that recommendation into effect.

Amending the ‘one year’ test The Whittaker Review noted that some submitters suggested changes so that the ‘one year’ test should be extended to two or three years. However, the Whittaker Review noted:

• the concern that the lessee in possession of goods for an extended period is able to mislead outsiders into believing that the lessee has better title to the leased goods than is in fact the case, because the lessor’s ownership interest is not visible and

• the concern that it is often very difficult to say whether a particular lease is in fact a security interest under section 12. The ‘one year’ test in section 13 adds clarity.

That being the case, the Whittaker Review recommended that references in section 13 of the PPS Act to ‘one year’ not be changed.42

Contrary to that recommendation, the amendments in the Bill extend the ‘one year’ test to two years.

Committee consideration Senate Selection of Bills Committee The Senate Selection of Bills Committee recommended that the Bill not be referred to a committee for inquiry and report.43

Senate Standing Committee for the Scrutiny of Bills The Senate Standing Committee for the Scrutiny of Bills had no comment on the Bill.44

Policy position of non-government parties/independents At the time of writing this Bills Digest, no policy position on the Bill has been announced by the Australian Labor Party (Labor), other non-government parties or the independents.

Position of major interest groups Small business As stated above, small business, particularly the short-term hiring industry, would prefer that the PPS Act did not apply to their business. In its submission to the Whittaker Review, Elphinstone Engineering stated:

The Personal Property Securities Act 2009 is completely WRONG. We should not have to go to another level of administration to protect our property. Our hire agreement should be strong enough to do that. We should have the legal right to remove our legally owned property from a site that has gone into administration without fear of Federal Court injunction whether it is registered on the PPSR or not!

45

Financiers According to the Australian Bankers’ Association (ABA), small businesses are:

… not coming to grips with the notion that title to personal property has become subordinated to the notion of a security interest. This has led to a consequential lack of knowledge by a business on how the Act is able to protect

41. Ibid., recommendation 20, p. 80. 42. Ibid., recommendation 22, p. 84. 43. Senate Standing Committee for the Selection of Bills, Report, 3 2017, The Senate, Canberra, 23 March 2017. 44. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 3, 2017, The Senate, Canberra, 22 March 2017, p. 31. 45. Elphinstone Engineering, Submission to the Review of the Personal Property Securities Act 2009, op. cit., p. 2.

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Personal Property Securities Amendment (PPS Leases) Bill 2017 9

the business’ interests where personal property moves beyond the control of the business. By comparison, REVS [register of encumbered vehicles] was well understood … 46

The ABA suggested that one area of simplification may be that certain interests (such as PPS leases) should no longer be deemed to be a security interest.47

The Australian Finance Conference (AFC) stated that its members were profoundly (and in some cases detrimentally) affected by the changes which resulted from the introduction of the personal property securities regime. The AFC conceded, though:

Overall the changes were beneficial to the financial services industry, but our members in the equipment and motor vehicle finance sector believe that some critical changes are needed to aspects of the PPSA … to ensure that the full benefits of the PPSA can be realised across all business and finance sectors. 48

However, the AFC opined that ‘any exclusion for small business, or for a sector of it, would result in a significant detriment in accessing finance and in protecting small businesses’ financial security’. In addition, AFC rejected the idea of a carve-out for all or some types of small business.49

Financial implications The Bill is not expected to have any financial impact.50

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.51

Parliamentary Joint Committee on Human Rights The Parliamentary Joint Committee on Human Rights considers that the Bill does not raise human rights concerns.52

Key issues and provisions The Bill amends paragraph 13(1)(a) of the PPS Act so that a PPS lease is a lease or bailment of goods for a term of more than two years.53 This is an increase from one year to two years. The effect is to make clear that such an arrangement is a security interest which should be registered on the PPS Register.

Item 3 of the Bill amends existing paragraph 13(1)(c) of the PPS Act so that a PPS lease is also a lease or bailment of goods for a term of up to two years which contains options to renew the lease (either automatically or at the election of one of the parties) so that the total term of the lease exceeds two years. This is an increase of one year to two years.

Item 2 of the Bill deletes the existing broad reference in paragraph 13(1)(b) to a lease or bailment of goods for an indefinite term. Items 4 and 5 of the Bill amend existing paragraph 13(1)(d) of the PPS Act to import the reference to a lease or bailment for an indefinite term into that paragraph. The items operate so that a PPS lease is also a lease or bailment of goods for a term of up to two years—or a lease (but not a bailment) for an indefinite term—where the lessee or bailee, with the consent of the lessor or bailor, retains uninterrupted (or substantially uninterrupted) possession of the leased or bailed property for a period of more than two years.

46. Australian Bankers’ Association, Submission to the Review of the Personal Property Securities Act 2009, submission no. 17, 6 June 2014, p. 1. 47. Ibid., p. 2. 48. Australian Finance Conference, Submission to the Review of the Personal Property Securities Act 2009, submission no. 34, 10 June 2014, p. 1. 49. Ibid., p. 2. 50. Explanatory Memorandum, Personal Property Securities Amendment (PPS Leases) Bill 2017, p. 2. 51. The Statement of Compatibility with Human Rights can be found at page 3 of the Explanatory Memorandum to the Bill. 52. Parliamentary Joint Committee on Human Rights, Report, 2, 2017, The Senate, Canberra, 21 March 2017, p. 57. 53. PPS Act, paragraph 13(1)(a) amended by item 1 of the Bill.

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Personal Property Securities Amendment (PPS Leases) Bill 2017 10

The exclusions from the definition of PPS lease in existing subsection 13(2) of the PPS Act are unchanged. This means that the following arrangements are not PPS leases:

• a lease by a lessor who is not regularly engaged in the business of leasing goods

• a bailment by a bailor who is not regularly engaged in the business of bailing goods

• a lease of consumer property as part of a lease of land where the use of the property is incidental to the use and enjoyment of the land or

• a lease or bailment of personal property prescribed by the regulations for the purposes of the definition— regardless of the length of the term of the lease or bailment.

Concluding comments The Bill makes minor changes to a deeming provision in section 13 of the PPS Act which sets out the arrangements which constitute a PPS lease and which are, therefore, registrable on the PPS register.

The effect of the changes is to define a PPS lease as a lease or bailment of more than two years. This is an increase from the current duration of one year. In addition the amendments will operate so that leases (but not bailments) of an indefinite term will not be deemed to be PPS leases unless, and until, they have run for a period of more than two years.

While some of the submitters to the Whittaker Review would consider that the Bill will be of benefit, others would likely consider that the Bill does not go far enough. It does not delete references to bailment as recommended by the Whittaker Review. Nor does it address the many and varied complaints about the cost and difficulty for small business in complying with the terms of the PPS Act.

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