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When businesses lend money or sell goods on credit, they will usually put a security interest over the good. This guarantees payment of the good if the business does not pay, as the goods can be taken back. However, security interests can get complicated when multiple parties are involved and want payment for the same thing. This is where the Personal Property Securities Act (PPSA) comes in. Previously regulated by case law, the PPSA governs personal property securities consistently among all businesses. The PPSA has also consolidated certain issues in case law that the courts used to have to unravel. One of these is the law relating to a retention of title clause. This article will outline how the PPSA applies to the retention of title clauses.

How Does the PPSA Work?

The New Zealand PPSA is modelled on the Australian version. It was a much-needed reform to New Zealand law around personal property security. Previously, case law dominated personal property security law, making it hard for businesses to know how it worked. For example, businesses need to know what can be taken from them. It is also important to know who has priority over goods when a business goes into liquidation. Furthermore, it also defines what can be a security interest.

Another aspect of the PPSA is the PPSA register. The PPSA register is an online database that is publicly available for anyone to view. It shows who has registered a security interest over what good. A business that has registered their security interest is said to have perfected it, which means they have higher priority than someone who has not perfected it. However, other circumstances take precedent, such as a Purchase Money Security Interest.

What Is a Retention of Title Clause?

If a contract contains a retention of title clause, it means the person selling the good retains full ownership over the property until the person buying the good pays the good off in full. This allows a person to take the good back if the buyer fails to pay the full amount. Under the PPSA, a retention of title is a security interest. Before the PPSA, a retention of title clause was popular to include in contracts as it guaranteed payment for the good. However, with the advent of the PPSA, a retention of title clause became redundant in some circumstances.

What Must a Retention of Title Clause Contain? 

For a retention of title clause to be valid, you must inform your contracting party what the retention of title clause means for the possession of their goods. Your customer must also inform you in writing that they have received this. Additionally, your customer must receive a copy of the contract, which contains the retention of title clause.

How Does a Retention of Title Clause Work With the PPSA?

The PPSA has meant that even though a retention of title clause is valid, they are not always necessary. This is because the PPSA is concerned with priority and perfection. If you register a security interest on the PPSA register, the security interest is considered perfected. This means that this entity will have the highest priority against anyone else who has not perfected their security interest before they have. This means that if you use a retention of title clause and you have not perfected it, you can lose out to someone who does not have a retention of title clause but has perfected their security interest. This can be the case even if the retention of title clause is valid and has followed all the correct steps. 

This is why you must register any security interest you have over a good on the PPSA register, so that you have the best chance of getting the good back if your contracting party does not uphold their obligations. 

Key Takeaways

The PPSA is important legislation that helps businesses define a security interest and who gets priority in a dispute. A perfected security interest gets priority over a security interest that you have not registered on the PPSA register. One of the results of the PPSA is that retention of title clauses do not hold the same weight as they once did. This is because a person who perfects a security interest will always win regardless of whether the other creditor had a retention of title clause. This is why you need to register all security interests on the PPSA. 

If you need any legal assistance with retention of title clauses, contact LegalVision’s contract lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Will a retention of title clause win over an unregistered security interest?

This will depend on when the security interest was established and if any priority rules mean that one person will have a better claim than the other.

Should I register every security interest I enter into?

Yes, this will give you the best chance of receiving the good back if your debtor goes into liquidation.

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