Drafting An Enforceable And Legal Security Agreement
The business of lending can be a profitable one, but as everybody knows with lending comes the risk of not being paid back. That risk can often be minimized by securing property, but securing property the right way and the way the law requires is an absolute necessity.
Why Secure Any Property?
The benefit of securing property is easy to see—it’s the same reason your home has a mortgage on it. In the event of nonpayment, you can take whatever property is secured, and sell it. Of course, the value of the property may not equal what is owed to you, so there still may be a balance left, but at least the sale of the property will yield you something if the debtor doesn’t pay.
Additionally, just the threat of having a lien, and repossessing property, can often be enough to induce someone to pay back money owed when they normally wouldn’t do so.
Requirements for a Security Agreement
There are three main requirements for a valid security agreement.
The first is obvious—a signature. This is often overlooked; simply a document or a disclosure, unsigned, will not suffice. Make sure that the signer is the actual debtor. In other words, you don’t want the debtor being a company, and the signer of the security interest being an officer, or business owner individually.
The second requirement is that the parties in fact intend for a security interest to exist. This can be done with simple language that says just that—that the debtor is agreeing to or providing a security interest in the property.
The third requirement is where many people get tripped up. The collateral—the property that can be repossessed if the debt isn’t paid—must be stated specifically in the agreement.
Many people mistakenly give broad descriptions of the secured property, like the security agreement including “all property” of the debtor. However, the property must be described with enough particularity and specificity that it can be identified.
Using makes, manufacturers, model names, numbers, serial numbers, VIN numbers, or other identifying information can be very helpful. Ask yourself, if someone had to come into the debtor’s property and take the secured property, would they know what to take just by reading your security agreement?
Other Things to Include
You can include other things in your security agreement.
Commonly, people will have requirements as to how the collateral or secured property is treated—for example, prohibiting the property from being thrown out, or requiring that the property be maintained and kept in good shape. You want to make sure that if you do have to repossess the property, that it has as much value as possible.
You can also disclose that a financing statement will be filed in the public records (this is called perfecting a lien), which will alert other creditors of the priority of your lien on the property.
Do your business agreements say what you need them to say? Call the West Palm Beach commercial litigation attorneys at Pike & Lustig today for help today.