One element of the nemo dat principle which the PPSA clearly partially overrides in respect of title-based security interests such as leases, conditional sale transactions by retention of title, consignments and outright transfers by way of security, emerges clearly upon the enforcement of security interests.

Title-based security interests provide for the lessor, seller or consignor to hold title to the personal property in question, but nevertheless are regulated as PPSA security interests and must be perfected.

The PPSA reads-down these title-based transactions and treats them as mere security interests, despite the fact that the secured party holds title to the collateral.

This means that in respect of leases, retention of title sales or consignments (or any other title-based security interests for that matter):

(a) if they are not perfected, most¹ of these transactions that secure obligations will be extinguished and the collateral would vest in the grantor if the grantor (the buyer, lessee or consignee) enters bankruptcy, administration or liquidation; and

(b) receivers or controllers appointed under a perfected security interest which has priority to the lease, retention of title sale or consignment (or other title-based security interest) can sell the collateral and use the proceeds to repay their appointing secured party.

The last point at paragraph (b) immediately above concerning a receiver or controller being able to take possession of and sell collateral in which a grantor merely has a leasehold or possessory (conditional sale or consignment) interest, means that the title to collateral which lessors, consignors and conditional sellers (retention of title) hold is disregarded. The PPSA clearly overrides the nemo dat principle to this extent to give effect to its regulation of title-based transactions such as leases, as security interests.

The general rule is that perfected security interests have priority to unperfected title-based security interests. Even if the title-based security interests could have been PMSIs, it is highly likely that if they remain unperfected at the time receivers or controllers are appointed to the grantor, they have not registered in time to comply with the PMSI Rules and would not have PMSI super priority.

Take the scenario in diagram 10 below. The debtor/ grantor D (an individual) acquires a new car for use (not
as inventory) in his business on finance from the car lessor, by the car lessor buying the car and leasing it to D. This is a PMSI over a serial numbered good (motor vehicle). Inventory is not relevant. The lease must be registered within 15 business days of the car lessor supplying (D taking possession of) the car². The lease ideally would also be registered against the serial number of the motor vehicle (the motor vehicle, not being consumer property, is serial numbered property that may be registered against the serial number). The registration must nominate the security interest as a PMSI in the financing statement.

Assume that the car lessor forgets to register the car lease.

The car lessor provides the car to D to use without any registration in place against D. The car lessor is signficiantly exposed under the PPSA to subsequent dealings in the car by D³.

Next, D borrows money from Bank A and grants a security interest over all its present and after-acquired property to Bank A. Bank A duly registers the security interest. Bank A’s security interest is wide and should attach to the car that D leases from the car lessor⁴.

Later, D defaults. Bank A is savvy and well advised. As a precaution, Bank A immediately registers its security interest against the serial number of the car to protect its position in case the grantor tries to dispose of the car.

Assume next that Bank A appoints a receiver. The car lessor remains unperfected. The receiver should be able to sell the car from under the car lessor and distribute the proceeds to Bank A, despite the fact that the car lessor actually owns title to the car. This is because the PPSA treats the car lease as a mere security interest, and the registered (perfected) security interest of Bank A has priority to that of the car lessor.

Expiry of lease term – does the collateral revert to the lessor?

This argument seems to have been consistently rejected. In Canada the relevant case is National Bank of Canada v Merit Energy (2001) (Alberta Court of Queen's Bench, LoVecchio J). In New Zealand the case is Waller v New Zealand Bloodstock Ltd [2005] 3 NZLR 629 (NZ Bloodstock).

The reasoning in NZ Bloodstock is particularly insightful and attractive. The New Zealand Court of Appeal emphasised that the mere termination of a lease does not necessarily take the leased property out of competition with other perfected security interests which also attach to the leased property, especially where the leased property remains with the lessee entity (grantor)⁵.

A lessor who seeks to repossess leased property is, in effect, enforcing a security interest, and can only do so subject to any higher-ranking security interests which attach to the same property (collateral). Where leases are unperfected and the lessee/grantor has granted an all-assets security interest that is perfected, there is a competition between two PPSA security interests - the perfected security interest prevails. This result cannot be circumvented by the expiry of a lease term, especially where the leased property remains with the lessee/grantor upon the grantor's insolvency. The treatment of leases as security interests survives the expiration of the lease term to this extent⁶.