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Buying Goods Subject to Security

March 2018

The “ordinary course of business” exemption.

When buying or leasing valuable goods it is important to check that they are not subject to a security interest. Otherwise, the secured party is able to use its security interest to call in the goods you purchased or leased, to repay the debt they are owed.

However, the Personal Property Securities Act 1999 (“the Act”) provides some protection. One situation where a purchaser is protected is if you are dealing with a seller or lessor in the ordinary course of their business. For the purposes of this article, seller means both a seller and a lessor.

Section 53 of the Act provides that when you buy or lease goods that have been sold or leased in the ordinary course of business of the seller, you take those goods free of any security interest. This exception does not apply if you know that the transaction will be in breach of an existing security agreement, or where the security interest was granted by a person other than the current seller.

By way of example, this exemption can apply when purchasing a vehicle from a dealer. The vehicles for sale will often be subject to a security interest in favour of a third party (perhaps the vehicle’s former owner or the dealer’s bank), and the dealer clearly sells vehicles in the ordinary course of their business. If you were to buy a vehicle from the dealer you would therefore usually receive the vehicle free of the third party’s security interest, even if that interest had not been discharged as part of the sale. In contrast to this, if you buy the vehicle from a private seller (such as via Trademe) without first ensuring that all security interests have been discharged, the security holder could recover that vehicle from you to repay any debt still owed by the private seller – even if you paid for the vehicle in full.

Whether a sale or lease is, in the ordinary course of the seller’s business, depends on the facts of each situation. Some common factors the Courts consider include whether the transaction took place at the seller’s business premises, and the quantity and price of the goods sold or leased. This means for example that if you are buying from a car dealer, but the vehicle you buy is bought at a remote place unrelated to the dealership, and for less than market value, the transaction might not be considered as part of the seller’s ordinary course of business and this exemption may not apply.

We recommend you search the Personal Property Securities Register, to determine whether there are any registered security interests that relate to the property you are buying. If there is an interest registered, you should carefully consider whether you are protected by the “ordinary course of business” exemption, and if not, you should take steps to ensure that the security interest is discharged before you part with your cash.