Blog Post

Buying a car subject to a security?

partners • October 5, 2017

The purchase of a new car is a very common and necessary purchase but it can also be a potentially risky and extremely costly exercise, especially if you buy your car privately.

An example of such a risk is in relation to the Personal Property Securities Act (“PPSA”). It is increasingly common for buyers to hunt out bargains on sites such as Trade Me or Auto Trader only to have someone turn up at their door at some point in the future to repossess their new car claiming a security interest. Such a security interest may exist as a result of a credit contract between the lender and the seller of which the buyer is completely unaware.

Under the PPSA a lender who has a valid security agreement with the principal debtor (in this case the seller) may enforce that interest against third parties (this includes the buyer), assuming the lender has a valid security agreement that has attached to the vehicle. Attachment generally occurs when value is given by the lender and the debtor acquires rights in the collateral. A good example of acquiring rights in the collateral is the taking of possession.

Limitations

There are some limited exceptions to this rule that might allow the buyer some protection:

An adequate description of the vehicle is required in the security agreement. In the case of a vehicle used for personal use it must be described as consumer goods and include a description that will enable the vehicle to be identified. The includes the VIN number, chassis number and where appropriate the car’s registration number. The security will not be enforceable against third parties if the vehicle is not adequately described.
If the vehicle was worth less than $2,000.00 at the time the security interest attaches and the third party (buyer) had no knowledge of the prior security interest at the time the vehicle was purchased the third party takes the vehicle free of any security interests.

When does a security interest exist?

So how do you determine whether a security interest exists in the car you are buying? One important concept under the PPSA is the registration of the security interest on the Personal Property Securities Register. The Register is important to lenders and creditors as generally the firstin-time to register their security interest will have priority against other secured creditors in enforcement of their interest in that particular vehicle. Any buyer can search the Register prior to completing the purchase for as little as $3.00. The Register can be found at www.ppsr.govt.nz.

Searches

Searches for vehicles may be conducted by their VIN number, chassis number and registration number. If, following the purchase of the car, a search reveals an error in the registration (i.e. numbers are missing or wrong) the lender may not be able to enforce their security against the third party.

One concerning aspect of the PPSA regime is that a lender will still have the ability to enforce their security against third parties even if they have not registered their security interest on the Register. Although it is very unlikely a lender will not register their security for priority reasons, in the absence of registration the innocent buyer of the car will have no way of knowing whether the vehicle is subject to a security interest.

Protection from Repossession

The buyer has one saving grace where a security interest exists but has not been registered. Where the goods are consumer goods (that is acquired for use primarily for personal, domestic or household purposes) as opposed to inventory or equipment (for example a company car), the enforcement of security interests must be carried out in accordance with the procedure in the Credit (Repossession) Act 1997. One of the key functions of this Act is that if the Security Agreement between lender and seller does not give the seller a right to enter property and repossess in case of default, the lender will have no right to enter the innocent buyer’s property to repossess the goods.

Despite this protection the third party will still be in possession of a vehicle subject to a security interest. This would prevent the buyer from using that vehicle as a charge for any future lending, as it is unlikely any lender will accept as security for a loan, goods that are already subject to a security interest. This may create a problem for the buyer trying to sell their car in the future.

If you have any questions regarding this matter the team at Ward Adams Bryan-Lamb are happy to assist. Phone: 03 218 2833

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