Bills of sale are legal instruments, still used today, that allow individuals to transfer ownership of goods to another while retaining them physically. Historically, bills of sale were most often used as security for loans where the borrower would grant ownership to the lender over, say, a painting which would act as the security but (in contrast to pawn broking or granting a pledge) could keep the painting hanging on their wall. Once the loan was repaid, the ownership of the painting would be reinstated to the borrower.
This method of lending would appear at first glance to offer an attractive option for lenders in relation to the art world, but in 2014, of the 260 bills of sale (not relating to vehicles) registered at the High Court, only one was over artwork. The explanation for why this seemingly very useful instrument is almost never used by borrowers or lenders is obvious for anyone who has ever attempted to put a bill of sale in place. Lenders are therefore forced to use another procedure requiring them to take possession of artworks. This makes the prospect far less attractive for borrowers and means that a large potential asset backed lending market, providing greater liquidity, is being underutilised.
It is for the reasons discussed below, that the Law Commission has requested replies to a Consultation to repeal the Bills of Sale Acts and replace them with the ‘Goods Mortgages Act’, the deadline for reply being 9 December 2015. This consultation has received relatively little exposure however and the potential for reform in areas other than logbook loans is seemingly underappreciated.
The definition of ‘bill of sale’ in the current legislation is by reference to documents or transactions that constitute a bill of sale. The proposed legislation will define a ‘goods mortgage’ by the elements that would need to be satisfied for the legislation to apply. Broadly the elements are anticipated to be when: (1) an individual; (2) uses goods; (3) which the individual already owns; (4) as security for a loan or other non-monetary obligation; and (5) retains possession of the goods. This would not cover a pledge agreement (where the goods over which security is taken must be handed over to the lender to perfect the agreement), and the Law Commission has also asked for comments on how the legislation would apply to arrangements where the goods were stored in a specific place but not necessarily in the home of the borrower.
Deloitte estimated the global art lending market to be in the region of £6 billion ($9.6 billion) per annum in 2014 with the potential to reach £15-20 billion. Much of this market share is taken by the USA where the lender registers its security interest over an individual’s artwork under the Uniform Commercial Code. The register ensures that, even though the borrower can keep the work for their enjoyment, third parties are put on notice that a loan is secured over the work and the lender’s position is secured. France and Belgium have followed suit, amending their respective Civil Codes so that pledge agreements over goods can be perfected by registration in a register of pledges, instead of being perfected by the lender taking possession of the goods physically.
In the UK a lender can register a charge over an English company’s interests at Companies House. In relation to the assets of an individual, however, there is only the High Court bill of sale register. This register is so cumbersome to search, and its upkeep so sporadic that any lender who does use the bill of sale process (currently mostly those lending against vehicles) will usually also register with private asset finance registries.
The difficulties of searching, and the irregularity of the administration of the current bill of sale register means that third parties and lenders are given little protection from fraudulent borrowers granting multiple securities over the same assets. As well as that, it can be costly both to register and to search for loans on the High Court register, and timing can be problematic. Currently a security bill must be registered within seven clear days of execution, failing which an application must be made to the Court and a penalty fee of £50 paid for late registration.
The lack of reliable register is a substantial reason why, in the UK art world, pledge agreements are utilised instead of bills of sale. The Law Commission acknowledges that the market for secured lending over assets is a field that has a lot of potential for expansion if the registration process was modernised (paragraph 10.30 of the Commission Report) as can be seen from the USA, and its strong market in asset security lending.
In its consultation, the Law Commission proposes that a goods mortgage should be valid against a borrower even if it is unregistered, and can be enforceable against a third party purchaser acting in good faith only if it is registered. It says however that the current High Court register should be retained, ideally being converted into an electronic online register that can be easily searched. The drawback is that due to the lack of current users their recommendation is that the costs of the electronic conversion could not be justified. We consider that this looks at the market the wrong way confounding potential by current usage. We believe instead that by making the register a relevant and practical resource it will attract usage. The Law Commission will require persuasion on this point.
Based on current usage, the initial proposed changes suggest that submissions could be made to the High Court by email to a dedicated address. An automatic reply would be generated on receipt of the email, confirming the date and time of the registration (an element that has been problematic in the postal system and manual stamping process currently being used). The registration process would not have a time limit, but if it was not registered the charge would not be valid against a third party good faith purchaser. In order to search, an email request would be sent to the High Court who would then search and email back, without the need for additional fees.
Another frequent complaint with the current bill of sale regime is in respect of the standard form of the document, which is often closely followed due to the strict and harsh sanctions for failure to comply with the document requirements (see below). The document is said to be restrictive and unworkable where there are revolving facilities, overdrafts or guarantees sought. Of greater concern, is that its Victorian wording is considered incomprehensible to the modern borrower. It is proposed that a goods mortgage document should be formulated in plain English and should be signed (and witnessed) separately from any credit agreement. The Law Commission has made suggestions as to the various pieces of information that should be required, which do not include various aspects (for example a fixed monetary amount) that they propose should be contained in the accompanying credit agreement instead.
When a borrower defaults on a loan secured on an asset using a bill of sale, currently the lender is entitled to repossess the asset after 14 days, and then to sell it 5 days later. Within those five days, the borrower can apply to the court to restrain the order of sale, but this is rarely done as it can be costly and the court is unlikely to be able to act so rapidly. As such, the right to repossess under the Bill of Sales Act is harsh, particularly where part of a loan is paid off, and it does not take into account the difference between a borrower who intends to repay the loan, and one who does not. The proposals for the new legislation are that where a goods mortgage is a regulated credit agreement (i.e. where they are not for business purposes of more than £25,000 or do not relate to a loan of over £60,260 taken out by a high net worth individual) and a third of the loan has been paid off, the lender must obtain a court order to repossess the goods. This will encourage negotiations between borrowers and lenders, and reframe the system so that lenders see repossession as a last resort.
While the borrower is currently not protected by the wording of the bill of sale, compliance by the lender is also severely enforced. Lenders can lose their right to the secured goods and the right to sue the borrower for repayment of the loan if the strict requirements for the documentation of a bill of sale are not complied with. It is proposed that as the goods mortgage will deal with only the grant of security and not the loan itself, only the right to the secured goods against the borrower and third parties will be lost in the instance of non-compliance, but the lender will still be able to seek repayment of the loan.
In terms of the documents itself the Law Commission suggests that for regulated credit agreements, clear warnings should be given on the face of the goods mortgage document. For goods mortgages which do not secure regulated credit agreements these warnings would not be required, as it is presumed that the borrower will have taken legal and financial advice and so require less legislative protection.
Another proposed change is in relation to ensuring that bills of sale have further flexibility in terms of the type of security that can be obtained over an object. Currently an object can only be subject to one bill of sale. Where there is a bill of sale over an asset worth £500,000, for a loan of £20,000 for example, another bill of sale could not be granted over any of the £480,000 not charged. Under the new legislation, it is proposed that ownership of the asset will pass to the lender but, if the parties agree, the goods mortgage can alternatively take effect as a charge, enabling assets to bear more than one charge
Several other areas are discussed in the Bill of Sales Consultation document for example whether a goods mortgage should be able to be taken over future assets and whether there should there be a minimum loan amount to use a goods mortgage. The Consultation is due to publish its final report in the Summer of 2016, with the final replies to be submitted next week. The Consultation document and response form are available here.
We would urge those concerned in the art lending business in the UK to submit responses on the basis that there is a chance to improve the legal procedure and to facilitate a market offering which is currently unattractive and therefore underutilised in the context of the size of the London art market. The current proposals are an improvement but there is potential to go further.