On Monday 19 September 2016, Boodle Hatfield LLP was delighted to host a seminar presenting the Law Commission’s recommendations on reforming the law of loans secured on personal goods.
The Law Commission highlighted the Bills of Sale Act 1878 and the Bills of Sale Amendment Act 1882 as being archaic Victorian statutes which are wholly unsuited for modern credit arrangements. The calls for reform have stemmed from the logbook loan sector which uses Bills of Sales to secure loans and where sharp practices have been deemed disproportionate and unfair on borrowers. The proposed reforms will not only regulate the logbook loan market but will also have knock on effects on the more exclusive art and luxury asset lending sector.
The Law Commission recommended that a new Goods Mortgage Act should be enacted by parliament and hoped that, subject to further discussions with key stakeholders, a Bill could be drafted by next year and enacted by the spring/summer of 2018. The aim of the Act would be to provide appropriate protection to borrowers; protect innocent third party purchasers who buy these goods without realising they are subject to a bill of sale; to cut down on red tape; and to remove unnecessary restrictions on secured lending for small businesses.
Bills of sale are a means by which individuals, trustees and unincorporated businesses can use goods they own as security for loans while retaining possession of those goods. The art and finance report published by Deloitte estimates the global art lending market to be in the region of £6 billion per annum in 2014 with the potential to reach £15-£20 billion. However, much of this lending takes place in the US.
One of the members of the panel at the seminar, Harco van den Oever of Overstone Associates, commented that the art lending sector was disproportionately based in the USA when compared to the global art market, a third of which is generated by the UK. It was felt that, with appropriate reform, the UK could lead and grow this area and that the Law Commission’s recommendations were a positive step in the right direction.
The other notable difference between the US market and the UK is the presence of the Uniform Commercial Code which allows creditors to give notice that they have an interest in the personal property of a debtor. This public registry provides lenders with a more accessible and transparent registration format than the Bills of Sale Acts which currently require registration at the High Court and which can only be searched manually and by the name of the borrower and their postcode.
The remedies available to lenders for default by a borrower are also extremely harsh under the current legislation e.g. giving lenders the right to seize the property without the need for a court order. However, on the other hand, if the Bill of Sale does not meticulously follow the prescribed form set out in the Bills of Sale Acts, the loan is void and the lender has no recourse to the borrower or the asset.
Luke Dugdale of Cadell & Co presented the lender’s point of view and he felt that currently in the UK art finance was a very unattractive proposition for lenders. There are very few providers that allow the borrower to keep the art of work on the wall and borrow against it and those that do preferred to avoid the Bills of Sale Act and enter into a sale and lease back arrangement. In addition, the costs of borrowing are very high due to the lack of competition in the market.
Panellists from Boodle Hatfield LLP commented on how the sector requires two key steps in addition to the legal reforms proposed which are welcomed. Firstly, the establishment of an independent and robust asset register for luxury goods that is easily accessible by lenders and third parties. Secondly, the establishment of a self-imposed Code of Practice that provides lenders with a framework within which to work, minimising their risk and building a platform for the sector to grow. This is a very exciting development for lenders that, with the right advice and guidance, could see them grow their bottom line and boost the UK’s post Brexit economy by improving liquidity through better availability of credit.