Goods Mortgages – Revolutionising The Business Of Lending Against Art?

The Law Commission has published its long-awaited draft of the Goods Mortgages Bill. Put simply, this will better enable individuals to use goods they currently own, such as artwork, as collateral for their debts.

This Bill has the potential to revolutionise art financing and lending over other high-value assets. With the uncertainty that Brexit brings, the Goods Mortgages Bill could be a saviour and provide a new avenue to the market of financing art.

Why is there a need for reform?

The Bill will replace the Victorian era Bills of Sale Act 1878 and Bills of Sale Amendment Act 1882, which are archaic and inadequate in the modern world. The Bills of Sale Acts allow individuals to grant security over personal chattels, but work within rigidly-defined boundaries, including onerous requirements that documents, and subsequent amendments to documents, be registered at the High Court. Such "chattel mortgages" will be null and void if they do not meet the prescribed form and registration requirements, leaving a lender with no right of redress against a defaulting borrower. Unsurprisingly, they are unattractive to lenders and therefore stifle the ability of individuals to raise finance secured on chattels such as artwork.

These limitations meant that lenders have traditionally favoured the use of a pledge instead of a bill of sale. The pledge is a form of possessory security interest. It therefore does not provide the benefit of enabling borrowers to grant security whilst still keeping the artwork on their walls.

"With the uncertainty that Brexit brings, the Goods Mortgages Bill could be a saviour and provide a new avenue to the market of financing art."

The Bills of Sale Acts came under scrutiny due to the rise in "logbook loans". These loans enabled borrowers to raise finance by granting a lender security over their vehicle whilst still retaining possession of the vehicle. The financial crisis in 2008 and the rise of sub-prime lending meant that the use of "logbook loans" became increasingly popular.

The sudden increase in registering bills of sale in relation to "logbook loans" highlighted the shortcomings of the registration system at the High Court which was not designed to deal with the volume of registrations being made. Not only was it costly to register but it was also an untimely and cumbersome process to search for security interests. This led to vehicles acquired by innocent third parties being seized and sold to pay the debt of the...