Security Agreement Tips and Pitfalls

If you’re loaning money, and you want a little extra security to make sure you get paid back or that you have some recourse, a security agreement (or security instrument) may be the way to go.

Just like a mortgage, which is of course a form of a security agreement, in a security agreement, you can name property which you can possess or repossess, and sell, as a way of ensuring repayment for yourself.

All Property Can be Secured

Many people know about mortgages or car loans, where property can be repossessed or foreclosed on, but many businesses are not aware that these aren’t the only assets that can be secured by a security instrument.

In fact, legally, there is no restriction on what can, and what cannot, be security for a loan. The only legal impediment is making sure that you draft your security agreement correctly.

Requirements – The Basics

A security agreement must be signed by all parties involved. This sounds obvious, but it means that you cannot, for example, just give someone a receipt that creates a security agreement, or send a letter or email to someone, notifying them. Both sides must affix their signature to the security agreement.

Remember, the property being secured may be owned by more than one person, or a married couple. Even though only one person may have taken out the loan or borrowed money, your security instrument should be signed by all potential owners of the security.

The language of the security agreement must say, clearly, that the parties know they are signing a security agreement and intend to put the property (the collateral)up as security.

But the last part of a security agreement is where problems sometimes happen. The property being secured, must be identified specifically.

So, for example, you could not have security for a loan that secures “the borrower’s personal property,” or even, “the borrower’s vehicle.” These are vague–if the property had to be repossessed and sold, there would be no way of knowing, by reading the description,  what security is actually being secured.

To be valid, a security instrument should identify things like the make, model, year, and physical description of the property that is securing the loan. The police repossessing or the court, should be able to read the security instrument and know exactly what property will be taken or sold, without having to look anywhere else or ask any further questions.

Other Considerations

Even if property does have to be repossessed or taken as collateral, that doesn’t mean that it gets sold immediately after it is taken. There may be a sale process that may take time. The security instrument should detail what happens to the property, during that time–for example, saying that it will not be destroyed or damaged.

You may want to specify how the property will be taken and sold. The more specific it is, the better for the borrower, but the more options, the better it is for the lender (the one taking and selling the security to pay back the loan).

Let us help you draft your security agreements. Call our Fort Lauderdale business law attorneys at Sweeney Law P.A. at 954-440-3993 for help.

Source:

levelset.com/blog/security-agreement-how-to-draft-one-that-works/#:~:text=Certain%20specific%20requirements%20are%20required,subject%20to%20the%20security%20interest