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Property Law Act 2007 – something old, something new

05 January 2008

The Property Law Act 2007 came into force on 1 January 2008. Amongst some restatement of existing law in (largely) modernised language, there are also changes that could significantly impact on fundamental day-to-day aspects of business. Examples include the terms of security granted over assets, enforcement of securities held and the commercial terms of premises leases. A number of these changes are retrospective and will “re-write” securities and leases entered into before 1 January 2008.

Broad scope

The Property Law Act regulates many features of business, a number of which will be relevant to almost all organisations. While it is not possible to address all these matters here, significant areas include:

  • funding secured by a charge over land or other property (whether the business is a lender or borrower)
  • premises leases (whether the business is a landlord or tenant)
  • insurance of leased premises.

In the current economic environment, the enforcement of charges over property is a growing area. It is critical that secured creditors understand the legal requirements relating to enforcement, and the potential risks of non-compliance with those requirements. Equally, businesses that have granted charges over their assets should ensure they are aware of their rights if a default does occur.

Similarly, the rights of landlords and tenants in the context of insolvent and distressed businesses need to be clearly understood.

Secured funding

Categories of property affected

Under the new Property Law Act, the term “mortgage” includes any charge over property that secures payment or performance of obligations. Certain provisions relating to mortgages apply to charges over all types of property, not just land – a significant expansion of scope. This includes property as diverse as manufacturing equipment, shares and crops. Any debentures, “all property” securities and charges granted over specific assets are caught.

There are also provisions in the Act that only apply to mortgages of specific categories of property, such as accounts receivable and goods (being tangible personal property, such as plant and equipment). This results in increased regulation of the terms of those charges and their enforcement.

Terms implied into mortgages

Any mortgage of property entered into on or after 1 January 2008 will include a number of implied terms, unless they are expressly excluded. As a result, a business granting a charge over its assets (such as its office equipment) could be unintentionally agreeing:

  • to maintain insurance over the assets for their full insurable value, including naming the mortgagee as an insured party
  • to maintain and repair assets to a particular standard
  • that an event of default occurs if it undergoes a material change of control or management – including as a result of a change in shareholding (and in other circumstances).

Although there is an exception in respect of charges over inventory, this is a significant change in law, and it is important for any business granting security over any of its assets to understand the full terms of that security.

Enforcement of mortgages

Understandably, the enforcement of mortgages over land, including exercise of a power of sale, was heavily regulated by the laws in place prior to the introduction of the new Property Law Act. The procedural requirements under the new Property Law Act have been further extended, and now require a default notice to be served on a broader range of parties, including other mortgagees and caveators. Failure to notify such parties could result in the mortgagee being liable in damages for any loss arising from that failure. This legislates for mortgagee liability in a wide range of circumstances.

Enforcement of mortgages (i.e. charges) over “goods” now also falls within the scope of the Property Law Act. If debts are secured by a mortgage over goods, the general rule is that, following a default, any amounts accelerated by the mortgagee will not be payable unless:

  • a compliant default notice has been served, and
  • the default has not been cured at the end of the period specified (at least 10 working days).

Similarly, mortgagees and receivers cannot sell mortgaged goods unless this procedure has been followed.

There are some exceptions to the notice requirements if the goods in question would lose significant value if there was a delay in sale, if the goods are inventory and if the mortgagee has a charge over all the assets of a company.

The Personal Property Securities Act 1999 also applies to mortgages over personal property, and there is significant ambiguity and inconsistency between the new Property Law Act and Personal Property Securities Act. The interaction between the two Acts is open to interpretation in a number of areas, which can potentially be used to some advantage.

Leases

The changes introduced by the Property Law Act in respect of leases are generally tenant-favourable, and have a consumer protection flavour to them. Tenants will have more flexibility in dealing with their leases. For example, if a lease allows the tenant to do any of the following things with the landlord’s consent, the landlord cannot unreasonably withhold that consent:

  • assign the lease
  • sublease the premises
  • create a mortgage over the leasehold interest
  • change the way in which the premises are used.

These rights will greatly assist a tenant (or its mortgagee or receiver) to transfer a lease interest. Landlords’ discretion in these matters is limited, and a landlord’s only alternative is to include absolute prohibitions on the matters mentioned above. Of course, such prohibitions may reduce the rental a landlord is able to generate from the lease.

Tenant protection where landlords exercise cancellation rights (e.g. remedy periods and judicial relief) has been strengthened and extended to mortgagees and receivers.

Insurance

Subject to precise agreement otherwise, the new Property Law Act prohibits landlords (and therefore their insurers) from requiring tenants to bear the cost of damage to leased premises from insurable risks, including the tenant’s negligence. The cost of damage caused by negligent tenants is therefore likely to be borne by landlords in the form of increased insurance premiums, which landlords may then seek to pass on through increased rentals.

Conclusion

The processes prescribed in the Property Law Act for the exercise of rights in relation to property are heavily “form” driven and technical. In times when financial problems can emerge quickly and unexpectedly, it is critical for secured creditors and landlords dealing with distressed entities to be aware of the procedures required to enforce their rights, and to ensure that those procedures are correctly followed. Failure to fulfil these requirements can create a significant risk of loss, including through delay and liability for damages.

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