Goods Mortgages – an explosion in art-lending?

The Law Commission is currently consulting on its latest piece of draft legislation – the Goods Mortgages Bill. As the name suggests, the proposed legislation enables individuals to use goods they currently own as security for debts. It also regulates the relationship between borrowers, lenders and third parties who may acquire secured assets.

The Bill replaces the current law in this area (contained in the “Bills of Sale Acts”) which is antiquated and needlessly complex. Recently, this area of law has come under scrutiny thanks to the expanding “logbook loan” industry, which involves the making of low-value loans to individuals on the security of their cars. However, there are also examples of higher-value lending over other assets, including furniture, wine and classic cars.

The Law Commission anticipates that modernising the law will lead to an increase in such high-value loans, particularly within the art lending market. These hopes were echoed at a seminar hosted by Boodle Hatfield in September 2016, where experts in the art finance market suggested that reform could make the UK market more attractive for lenders, and help to bring down the costs of borrowing.

The exhibition of art tends to enhance its market value, and it is often inconvenient to remove and transport pieces – especially if they are large or fragile. By contrast with pawns or pledges where the lenders takes possession of the secured asset, bills of sale (and the proposed goods mortgages) allow the borrower to enjoy or use the secured piece during the course of the security arrangement.

However, as the law stands, it is difficult for individuals to secure their art in this way. The need to comply with rigid formality requirements inhibits flexible lending, making it impossible to secure revolving credit arrangements or guarantees. A failure to comply with the strict formalities prescribed automatically invalidates the security: errors are easy to make, and may only come to light years later when a dispute arises. Lenders are required to register their security at the High Court, but the current register cannot be effectively searched, and is costly to use.

For lenders, borrowers, and potential third party purchasers, the current regime is therefore unsatisfactory. As a result, borrowers are forced to use artificial arrangements, which allow them to get around the Bills of Sale Acts. Many incorporate, allowing them to make use of the company charges regime. However, incorporation is inconvenient and may come with significant drawbacks, depending on the borrower’s circumstances. Alternatively, borrowers may use sale and lease back, or similar legal devices, as a way of approximating the effect of a goods mortgage.

The Goods Mortgages Bill aims to remedy this gap in the law, by introducing a more streamlined and flexible framework for the granting of security by individuals. It also makes provision for co-owners and partners to mortgage property in which they may have something less than full ownership.

The consultation on this new draft Bill follows a government commitment, set out in the Queen’s Speech on 21 June, to press ahead with reform in this area. It contains a draft Bill, commentary on the draft clauses, and a number of questions for consultees. Certain parts of the discussion may be of particular interest in the art lending context, including:

  • The securing of guarantees and revolving credit arrangements.
  • The question of whether it should be possible to secure non-monetary obligations (such as service obligations) by way of goods mortgage.
  • Issues about “tacking” – which arise where a lender attempts to make further advances on the strength of a pre-existing security, in preference to other secured creditors.
  • The question of whose consent is needed for repossession from premises.
  • Issues surrounding the mortgaging of shares in goods.

The full consultation and a summary of key questions can be found at http://www.lawcom.gov.uk/project/bills-of-sale/. The consultation closes on 7 August.

This article was written by John Williams from The Law Commission

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