Possession isn’t everything: why chattel mortgages matter 

In today’s competitive lending environment, the ability to take effective security over a borrower’s assets is essential for managing credit risk and protecting loan exposure. For lenders seeking to take security over tangible, movable assets, chattel mortgages offer a compelling solution. By transferring legal title of the asset to the lender while allowing the borrower to retain possession, chattel mortgages strike a balance between control and operational flexibility. 

This article provides lenders with a practical guide to the use of chattel mortgages highlighting their key features, ideal use cases, and the legal and logistical considerations that can impact enforceability. Whether financing high-value machinery, vehicles, or other identifiable assets, understanding the strengths and limitations of this security instrument can help lenders structure more robust and enforceable lending arrangements. 

What is a chattel mortgage? 

A chattel mortgage is a type of security interest taken over chattels, these being movable objects that a person can possess in physical form. Examples of chattels include jewellery, vehicles or machinery. 

How a chattel mortgage works 

In a chattel mortgage: 

1. The borrower (mortgagor) transfers legal ownership of the chattel to the lender (mortgagee) as security for a loan.  

2. This transfer is temporary – once the loan is fully repaid, ownership is transferred back to the borrower.  

3. The chattel must be clearly identifiable, and all relevant ownership documents must be transferred to the lender for the security to be effective. 

The borrower will retain physical possession of the chattel whilst the security is outstanding and, therefore, the lender is likely to place restrictions on what the borrower is entitled to do with the chattel during this period. Typically, the borrower will be prohibited from selling or transferring the chattel or using it as security for another loan. These restrictions are usually set out in a negative pledge clause in the mortgage. 

When will a chattel mortgage not be a suitable form of security? 

There will be circumstances where a chattel mortgage is not the most effective form of security or where it is unsuitable to cover the assets being charged. These include: 

1. Bulk goods or inventory – where individual items cannot be easily identified and therefore title to a specific asset cannot be shown. 

2. Low-value or frequently changing assets – where assets will be frequently renewed or replaced during the life of the security and it would be inappropriate to restrict this, such as will be the case with trading stock. 

In such cases, other forms of security, such as a floating charge, may be more appropriate. (A floating charge would allow the lender to secure a fluctuating pool of assets, including current and future chattels, without needing to identify each item individually.) 

Key considerations for lenders 

Chattels are movable 

Whilst a chattel mortgage may contain restrictions on movement or sale, enforcement can be difficult if the asset disappears or is relocated. This will especially be the case if the chattel is moved to a different jurisdiction where the applicable law may differ, impacting the enforceability of the security.  

When determining whether a chattel mortgage is the most effective form of security in the circumstances, lenders should consider: 

1. Whether the asset is likely to be moved.  

2. If GPS tracking or location covenants are appropriate. 

3. Whether a pledge (where the lender, or their agent, retains possession of the chattel until the security is discharged) would be a more appropriate alternative.  

Risk of becoming a fixture 

If a chattel becomes affixed to land (where it becomes part of the land, such as machinery bolted to a factory floor), it may legally become part of the property. This could render the chattel mortgage ineffective unless the lender also has rights over the property. Here, lenders should: 

1. Assess the likelihood of the asset becoming a fixture. 

2. Include provisions allowing the chattels removal or severance from the property. 

3. Consider if it is appropriate to also take security over the property.  

Access to chattels 

Consideration must also be given to where the mortgaged chattel will be kept and if the lender would need to seek additional rights to access that location in an enforcement situation. Here, a lender should consider working with any relevant third party to secure access rights. 

Non-incorporated borrowers 

Chattel mortgages are most effective when a borrower is a company or LLP. For individuals, partnerships or other unincorporated businesses, non-possessory security over their chattels must comply with the requirements of the Bills of Sale Act 1878 and the Bills of Sale Act (1878) Amendment Act 1882. These acts impose outdated and burdensome requirements, making this form of security unattractive.  

When chattel mortgages work best 

Lenders should consider chattel mortgages when dealing with: 

1. Plant, machinery and equipment – these are often high value and identifiable assets which will not be suitable for possessory security as they will be used in the day-to-day business of the borrower. Title documents, as well as security over insurance and applicable repair and maintenance contracts, will need to be considered when drafting the chattel mortgage.  

2. Works of art – borrowers may be unwilling to part with possession of these when granting security. As with plant, machinery and equipment, works of art will often be easily identifiable and high value chattels.  

In each case, due diligence on title (including authentication in the case of art), insurance, and maintenance contracts is essential to ensure the lender’s security is robust and enforceable.  

Conclusion 

Chattel mortgages can be a highly effective security tool for lenders, particularly when dealing with valuable, identifiable and operationally essential assets. But like any tool, they work best when used in the right situation – with the right assets, the right borrower and the right legal safeguards in place.  

By understanding when and how to use chattel mortgages, and when to consider alternatives, lenders can enhance their security position, reduce enforcement risk and lend with greater confidence. 

Please do get in touch with your usual contact in the Banking & Finance Team if you would like to discuss any of these issues in further detail.