Title-Based Security (Quasi-security)
Other than the security interest (movable mortgage), the Cape Town Convention governs the retention of title and lease. In jurisdictions where the numerus clausus rule is adopted for secured transactions, these transactions are not secured transactions. Still, the creditor’s interest can be secured through the title (ownership) to the object and is enforceable by termination of the contract accompanying recovery of the title (ownership). These transactions are known as “title-based security,” “quasi- sUretes” or “quasi-security interests.”
A major issue with respect to the title-based security is whether or not they are subjected to the same or parallel rules as the mortgage or hypotheque. In some jurisdictions, it is considered that a transaction-type with the same function must be regulated in the same manner. This may be called “functional approach.” In others, emphasis is given more on the differences in the form, in which case a title-based security is not subjected to the same rules as a mortgage or hypotheque.
A jurisdiction known for its functionalist approach is the United States, where Article 9 of the Uniform Commercial Code (UCC) covers secured transactions broadly. However, as far as the lease is concerned, UCC Article 9 only applies to leases for security purposes, and the lease not for security purposes (true lease) is governed by Article 2A. The PPSA of common law provinces in Canada has a larger scope of application and applies not only to transactions creating security interests but to non-financial lease of more than 1 year. The Code Civil of Quebec distinguishes property law and contractual “quasi-suretes”, but generally parallel rules apply to both, including the registration.
In contrast, the traditional formalism is maintained in such jurisdictions as England, Germany, Greece and Poland. In England, the finance lease, conditional sales agreement, hire-purchase agreement and retention of title clause, collectively known as title-retention agreements, are not subject to registration, unless the court recharacterises the transaction as a secured transaction because the document does not truly reflect what the parties have agreed. Nor are they governed by the same rules with regard to their enforcement. Further, the operating lease is entirely out of the scope of mortgage registration. Similarly, in Greece the distinction between the mortgage (simple and preferred mortgages) as property right (real right) on the one hand and leases and title-reservation agreements as contractual right on the other hand is emphasised. This is so notwithstanding that there is a special statute on aircraft leasing (Law 1665/1986). Poland shares the same distinction as the basic approach, though there is a special rule that a conditional sale becomes opposable vis-a-vis the buyer’s creditor through production of confirmation in writing with the authenticated date.
Even in jurisdictions where the law appears to treat the title-based transaction according to its form, academic theories are familiar with the functional approach. Furthermore, for the purposes of registration, the functional approach is sometimes adopted as a statutory rule. This is the case in Portugal, where the title reservation agreement and financial leasing are registered if the object of the transaction is a movable subject to registration, and in Spain, where any agreement with the same economic goal as a hire purchase agreement is registered in the Registry of Movables. Still, in these jurisdictions the functional approach is confined to registration and the court usually treats the title-based security as fully fledged property right. The opposite is true in Japan, where the Supreme Court employs a functionalist view and treats the owner under a title-based security agreement as a secured creditor in the corporate reorganisation procedure.
On this issue, the Cape Town Convention unifies the divergent rules only to the minimum. The unification is achieved to the extent that the title reserved by a conditional seller and the interest of a person who is the lessor under a leasing agreement can be registered in the International Registry. It has gone even further than the UCC of the United States in that a lessor’s interest under any kind of leasing agreement is registrable. However, with regard to the exercise of remedies, the Cape
Town Convention distinguishes the security interest and the title reserved by the conditional seller and the lessor’s interest. In this connection, characterization is made according to the applicable law. Thus, the meaning of “charge” or “lease” will be different in those jurisdictions adopting the functional approach and those not. This means that the divergence in domestic law is not entirely overcome.