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Kate Beaumont from Lexis Nexis interviewed partner Andrew Evans and director Hannah Rowbotham from our banking and asset finance division about the new Goods Mortgages Bill which promises a new era of better protection for consumers.
This article was first published on Lexis®PSL In-house analysis on 3 January 2018.
What is the background to this draft Bill?
In order to obtain effective security in England and Wales from an individual over goods remaining in the individual’s possession, it is currently necessary for the parties to enter into a bill of sale under the archaic Bills of Sale Acts 1878 and 1882. The bill of sale is required to be in a prescribed form and can only secure a fixed amount and a fixed amount of interest. Deviations from the prescribed form render the bill of sale and the loan secured by it void. Also, the bill of sale has to be registered at Queen’s Bench Division of the High Court. Given the rigid nature of the form and the draconian consequences of not getting it right, most lenders will only lend on goods if they are pledged, ie the borrower has to transfer possession to the lender or a third party who holds them on behalf of the lender. It follows that, for example, a borrower who wants to borrow against art and keep the art on his or her walls will probably not find a lender willing to do this.
What does the new Bill provide?
The Bill permits an individual who owns ‘qualifying goods’ to create a charge over such goods (a goods mortgage) as security to discharge an obligation. Qualifying goods includes tangible moveable property provided that they are in England and Wales when the charge is created, but excludes aircraft, ships and currency notes or coins that are legal tender. The goods have to be in existence at the time the goods mortgage is created. A fluctuating amount can be secured. There is a distinction between a general goods mortgage and a vehicle mortgage. Previous drafts of the Bill anticipated a distinction between a general goods mortgage and a vehicle mortgage for registration purposes, so as to ensure continuity with existing practices in relation to registration and de-registration on commercial asset finance registers. However, that [aspect of the] distinction has been dropped in favour of a single registration regime. Where the distinction may yet resurface is in the context of the prominent statements that would appear on goods mortgages, which would be the subject of secondary legislation. The Law Commission anticipates a different form of statement for vehicles, warning of the specific consequences of failing to keep up payments or fraudulent dealing. The goods mortgage will be registrable in a single government electronic register. Certain protections are granted to a borrower (including the requirement to obtain a court order) before a lender can take possession of the goods on a default. In certain cases, it is possible for the borrower to contract out of these protections.
Does the Bill address everything it was hoped it would address? Could anything in the draft Bill have unintended consequences?
Yes, the Bill seeks to address the issues it was hoped that it would. However in protecting innocent private purchasers from having to return goods bought in good faith (especially motor vehicles), there remains a risk to the lender that (notwithstanding that a lender has duly registered its goods mortgage) its goods mortgage is liable to be defeated by an innocent purchaser who bought the goods without actual notice of the goods mortgage, ie registration is not enough to put a third party on notice of the goods mortgage.
What are the implications for commercial lawyers?
It will greatly simplify the way in which loans can be made secured on goods retained by the borrower, but given the risk that a goods mortgage could be defeated by an innocent third party, it will be interesting to see whether mainstream lenders are willing to lend on goods (art, for example) which remain in the possession of the borrower.
Are there any other points of interest worth mentioning here?
The Bill has been unable to resolve at least one other thorny issue related to the idiosyncrasies of movable property as security, being the extent to which such property may become fixed to land (whether by act or omission). Sculptures, paintings and other art installations will often be fixed to real property and the lack of clarity in the case law about when chattels become fixtures and form part of the land, means there remains a risk that the secured property will no longer be secured by a goods mortgage and fall out of the reach of a lender. Previous iterations of the Bill sought to ring-fence mortgaged chattels, keeping them out of reach of land law where they became fixed to real property after the mortgage was creared. However the final Bill has withdrawn that protection.