UK: Out With The Old, In With The New, What Will Goods Mortgages Mean For You?

The year 1878 brought the first UK weekly weather forecasts and the relatively unknown Bills of Sale Act 1878, which governs the way that individuals can use goods that they already own as security for loans and other obligations.

Whilst weather forecasting has seen some dramatic technological advances over the last 139 years, bills of sale are still governed by the same archaic law, subject to a few changes made in 1882. However, a system of high pressure has been developing and thankfully, moves are afoot to give this Victorian legislation what many feel, is a much needed revamp.

So what are the problems with the current system and what's in store under the proposed new one?

Current problems

The existing bills of sale of regime has been criticised for being unnecessarily complex and costly and some of the perceived problems are:

  • Vehicles may be seized by lenders without a court order (even where the risk of a lender not being repaid in full is minimal);
  • Buyers may not be aware of existing logbook loans and may receive a nasty shock if they find out that they have purchased a vehicle subject to an existing logbook loan;
  • The registration requirements for bills of sale at the High Court can be cumbersome and disproportionate in cost to the value of the underlying asset;
  • Bills of sale that are provided as security can only be used to secure fixed sum loans (rather than variable rate/revolving credit type facilities) which restricts the ability to lend and borrow; and
  • The current legislation is difficult to understand and uses wording that is no longer appropriate for use in the 21st century.

What's in store?

The Law Commission has recently been consulting interested parties on the draft provisions of a new 'Goods Mortgages Bill' (Bill), which it is hoped, will address the current problems and lift unnecessary restrictions on secured lending against goods to more sophisticated borrowers.

Key features under the proposed new regime

So, what does the proposed Bill say? Our table below highlights some of the key questions and answers.

What is the new security going to be called?

  • The new security will be called a 'goods mortgage'. That replaces the terminology, 'bill of sale'.
  • A 'goods mortgage will be a 'charge' over goods (similar in nature to a typical mortgage of land, aircraft or ships).

Who will be able to grant a goods mortgage?

  • Individuals; and
  • Co-owning individuals (it is proposed that these include trustees, but exclude beneficiaries under a trust).

In addition, where individuals each own a separate share of goods, each individual will be able to create a goods mortgage over that separate share, but if individuals own goods as 'joint owners', all joint owners will need to grant the goods mortgage.

What types of goods will a goods mortgage be able to cover?

  • Moveable tangible property (i.e. 'physical' property rather than intangible property such as intellectual property).
  • Growing crops and other things that are attached to, or form part of land, but which are capable of being detached from it (and that's as long as they are charged separately from any interest in that land).

Are there any exclusions to what can be charged?

  • Yes, the following cannot be charged by way of goods mortgage:

    • goods that are outside of England and Wales when the goods mortgage is created;
    • future goods (i.e. the goods must exist and be owned by the mortgagor when the goods mortgage is created);
    • currency notes or coins that are legal tender anywhere in the world (however, this means that old coins which are no longer legal tender, but which could be part of a valuable collection are capable of being charged);
    • UK registered aircraft and any aircraft related items already subject to a UK aircraft mortgage (e.g. engines, spare parts);
    • ships registered on Part I, or with full registration on Part II, of the UK Ships Register (that's because mortgages already have to be registered against such ships under existing legislation).

Note that goods mortgages could in theory still be granted over non-UK registered aircraft, bareboat chartered ships, small ships, unregistered ships and fishing vessels with simple (rather than full) registration. This would tighten up some of the registration gaps in existing law and help purchasers of ships identify where individuals have mortgaged ships, given not all ship mortgages currently need to be registered.

What obligations will be able to be secured by a goods mortgage?

  • Any obligations, subject to the following exceptions:

    • Only a high net worth individual (see below) can use a goods mortgage to secure a guarantee or indemnity;
    • Goods mortgages securing running-account credit (e.g. overdrafts/variable rate loans/revolving facilities made up to a specified credit limit) can only be granted by (i) businesses borrowing over £25,000 who use the facility wholly or predominantly for their business and (ii) high net worth individuals
  • To qualify as a 'high net worth individual', net income in the preceding financial year must have been at least £150,000 OR net assets (excluding main residence, life/endowment policies and pensions) must be at least £500,000.
  • In each case above, the mortgage must include a declaration from the person creating the mortgage contracting out of additional protections in the Bill.
  • The Law Commission has been consulting on whether other obligations should be excluded from goods mortgages and news is awaited.

Will a lender be able to make further advances against a goods mortgage?

  • A lender will be able to make subsequent further advances against an existing goods mortgage if:

    • it agrees that with the lender under any subsequent registered goods mortgage;
    • the subsequent goods mortgage isn't registered at the time of the advance; OR
    • the lender is obliged to make further advances under the goods mortgage.

    (This is a similar approach to that which already exists to charges over property and provides an element of protection to competing chargeholders and flexibility for first ranking chargeholders).
  • In addition, if a subsequent unregistered goods mortgage is registered by the time of a further advance, the lender making it will not have priority under its prior goods mortgage for that further advance UNLESS that prior mortgage was made expressly to secure a current account or other further advances and the prior mortgagee does not have actual notice of the registration of the subsequent mortgage at the time of making that advance.

What are the consequences if a 'goods mortgage' entered into by an individual doesn't fall within the definition of 'goods mortgage' in the Bill?

The security created by the goods mortgage is void, except for:

  • any pledge, lien or other security over goods where custody of the goods remains with the security beneficiary until all secured amounts are repaid in full;
  • certain agricultural charges; and
  • aircraft mortgages (capable of registration under section 86 of the Civil Aviation Act 1982).

What about hire purchase and conditional sale agreements? Will they be 'goods mortgages'?

True hire purchase agreements and conditional sale agreements will not be 'goods mortgages'. However if the transaction is a sham arrangement having the effect of being a loan secured against goods, there is a risk that such an arrangement may be capable of being re-characterised as a security interest. Therefore, care will be needed to ensure that such agreements are not caught out by the new regime.

Will there be a prescribed form of goods mortgage document?

  • There is no prescribed form (so the goods mortgage could be separate from, or included within, the underlying credit agreement, albeit in practice we expect these will be separate documents to avoid the disclosure of commercially sensitive information contained within credit agreements).
  • The following will need to be included:

    • Date of the mortgage;
    • Names and addresses of the parties and witnesses;
    • Description of the goods and the secured obligation; and
    • 'Health warnings' to non-high net worth individuals and businesses borrowing £25,000 or less that they may lose the goods if they don't keep up with repayments and may be guilty of a criminal offence if goods are sold before the loan is repaid.

Where will goods mortgages have to be registered and will there be a separate registry for vehicles?

  • This remains under discussion. A vehicle mortgage register is being considered, with a separate one for all other goods mortgages at the High Court, albeit updated from the current paper-based system.
  • It has been proposed that 'vehicle mortgages' will include both vehicles that are registered at the DVLA, but also any vehicle intended for use on public roads and which has a vehicle identification number or other unique identifier, such as a serial number.
  • The current registration requirements at the High Court can be cumbersome and disproportionate in cost to the value of the underlying asset, so we hope that the new registration regime(s) will be simpler and cheaper.

What protections will the new regime give to third parties?

  • All owners of goods subject to a goods mortgage (including dealers) must disclose the existence of that mortgage, or face up to 10 years in jail for fraud.
  • Third party purchasers will take free of a goods mortgage if it hasn't been registered OR the purchaser is a private purchaser who acts in good faith and does not have actual notice of the mortgage. However, if the goods are simply acquired as a gift, this carve out won't apply.
  • Liability of the mortgagor isn't affected by these provisions, but there is the danger that an intermediary (e.g. a car trader) could still sell goods subject to a mortgage granted by another party. However, the proposed provisions may prove strong enough to deter commercial traders from selling and no additional protections are suggested, as the existing laws of conversion and action for reversionary injury provide other potential remedies to lenders here. However, it remains to be seen whether further vehicle provenance checks will become the norm so that parties to vehicle sale and purchases have certainty around whether vehicles are actually charged.
  • Unregistered goods mortgages will be void against trustees in bankruptcy.

What possession rights will lenders/credit providers have?

  • These are broadly the same as the existing Bills of Sale regime, but there are restrictions on (i) when a lender can take possession of goods AND (ii) on when it can enter premises to take possession without consent or without a court order.
  • Additional protections apply to goods mortgages which aren't granted by high net worth individuals or to secure business loans of over £25,000 (see next question and answer below).
  • Possession: No possession is allowed unless a trigger event has occurred (these include non-payment of secured sums, non-compliance with maintenance/insurance covenants, moving the goods where not permitted in the goods mortgage, offering the goods for sale without mortgagee consent, non discharge of certain other obligations, seizure of goods and mortgagor bankruptcy)
  • Entry into premises: No premises may be entered to take possession of goods without a court order or consent. The Law Commission has been consulting on whose consent would be required in each instance, albeit it is currently thought that consent in the mortgage itself won't be sufficient and consent would need to be provided at the time of entry. Further clarity on this point will be welcomed as entering premises is of fundamental importance to lenders when seeking to enforce their security.

Will there be any other requirements relating to possession?

  • As a general rule for goods mortgages (other than those created by high net worth individuals or securing business loans of over £25,000), the mortgagee will have to give the mortgagor a possession notice (in prescribed form) before taking possession of any goods UNLESS the obligation secured is a monetary obligation, the redemption amount is determinable at the outset (i.e. not variable rate type loans) and less than one third paid of the redemption total has been paid at time of possession.
  • The mortgagor then has three options: (i) require the lender to get a court order for possession (ii) terminate voluntarily by handing goods back or (iii) seek debt advice. It has 14 days to decide, but if the debt advice option is chosen, there is a proposed 28 day stay.
  • These requirements will be in addition to any 'default notices' required for regulated credit agreements under the Consumer Credit Act 1974. They do not replace those requirements.

What are the consequences for a lender if it takes possession without following the provisions of the Bill?

  • The Mortgagor is entitled to have the goods returned.
  • In addition and of key importance to lenders, the mortgagor is released from all further liability under the obligation secured by the goods mortgage. However, there would be no entitlement to refund of moneys already paid under the corresponding loan.

Can a mortgagor terminate a goods mortgage in any other circumstances?

  • Yes. There is a voluntary termination right for mortgagors (excluding high net worth individuals or securing business loans of over £25,000), by informing the mortgagee and delivering up the goods, albeit where multiple mortgages are created over the same goods, all lender consent will be required.
  • Termination may be refused where the mortgagee has made a court application for possession, or if it is otherwise entitled to possession and has incurred possession costs in attempting to take possession, or where the goods have been deliberately damaged or a non-maintenance covenant hasn't been complied with in the goods mortgage which has a significant adverse effect on market value of the goods.

Are there any other provisions of interest?

  • Lenders will be interested in their ability to sell once they have possessed goods. Subsequent mortgagees won't be able to sell without prior mortgagee consent or a court order. There is a proposed five working day period before a mortgagee can sell goods once it has seized them.
  • Contracting out of the provisions of the Bill is not permitted if it would be inconsistent with them. However, mortgage terms granting borrowers additional rights or protections are unlikely to be unaffected.

What about assignments of receivables/book debts? How are they treated?

  • Under the current regime, receivables finance agreements containing an assignment of book debts and made by unincorporated businesses must be registered at the High Court to avoid them being invalid in insolvency.
  • The Bill treats such assignments of book debts as though they were a general goods mortgage and therefore, we expect that some form of registration regime will continue to apply to them.

Some final thoughts

Whilst further clarity is needed around several areas such as registration and consent to enter premises when taking possession of goods, the Bill contains some very welcome developments in relation to this area of law.

The Law Commission raised 25 questions on the Bill in its recent industry consultation, so we expect that there may be some further changes to the proposals mentioned above.

We await the results of that consultation and any new proposals with interest.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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