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What is a Security Agreement?
A security agreement is a legal document that provides a lender a security interest in property or an asset that is promised as collateral. It gives the legal claim to the collateral to the creditor in case of a default by the borrower.
A transaction that uses a security agreement is often referred to as a ‘secured transaction’ where the grantor assigns the grantee (typically a lender) a secured interest in the collateral.
You can read more on security agreements here .
Terms Contained in a Security Agreement
A basic security agreement should have the description of the parties involved, the collateral and the statement of intention of providing security interest along with signatures from all parties. However, there are other terms that you might come across in a security agreement:
- Warranties : Warranties or covenants could include conditions agreed upon by both parties. For instance, common warranties include that the debtor must notify the secured party if the property’s value changes, the debtor must maintain the collateral in a good condition, and the property cannot be used in violation of federal, state or local laws.
- Collateral description: The security agreement should describe in detail the asset or property being held as collateral under the agreement. This should include specific listings, quantity of collateral, categories of collateral and description by type.
- Types of collateral: Collateral can be of various types such as inventory, farm products, accounts, stocks, or bonds, and this must be specified in the security agreement.
- Security interest : Security interest attachment must be used for completing security agreements. For this, an exchange of value must occur, the debtor should enjoy rights to the collateral and the debtor must be able to authenticate the security agreement through a signature. The security interest must also be perfected, which means that the secured party can claim promised collateral even in the event of debtor’s bankruptcy. This can be achieved through filing financing statements.
- Priority : In case of multiple parties, priority must be set for the secured parties involved. Generally, the first secured party is given priority. Priority can be achieved by filing a financing statement before other parties.
- Default : The security agreement should define what would be considered a default. These can be theft or improper use of collateral, failure to abide by other obligations, or evidence that provided collateral was false.
- Remedies : The remedies section can provide remedies for creditors to recover losses in case of default from the borrower.
You can read more on components of security agreements here .
Article 9 of the UCC: Security Agreements
Article 9 of the Uniform Commercial Code (UCC) is adopted by all fifty states. It governs secured transactions in which security interests are taken in personal property. Article 9 regulates the creation and enforcement of security interests in movable property, intangible property, and fixtures.
Transactions in which security interests are taken in real property are regulated by real property laws that vary among jurisdictions and not by Article 9. Article 9 regulates interests in personal property as collateral for any outstanding debt. Collateral could include any of the following:
- Inventory (such as raw materials held by business for sale or lease)
- Fixtures (items attached to a real property that if removed from it would require extensive reconstruction)
- Equipment (goods other than inventory)
- Vehicles (cars, buses, etc.)
- Personal possessions
- Accounts (such as promissory notes or insurance policy proceeds)
- Intangibles (such as software rights)
You can read more on Article 9 here .
Types of Security Agreements
Security agreements can be used to specify a collateral that is already in possession of the debtor, an intangible collateral or an after-acquired property.
- Collateral: Collateral can be of various types as discussed previously. A security agreement can be oral if the collateral is already in the physical possession of the secured party or the lender.
- Intangible Goods: Often collateral can be intangible, such as software rights or intellectual property. It is crucial to provide description of intangible collateral in writing.
- Floating Liens: Floating liens can appear in security agreements. These may not be in debtor’s possession at the time of the agreement’s commencement. It can involve acquired property, proceeds from a collateral’s disposition, and future advances.
- After-acquired property: An after-acquired property specification includes any new property acquired or bought after the agreement is signed. For instance, if the security agreement includes after-acquired property and the debtor promises all automobiles owned by the borrower, then even if the borrower buys new automobiles after signing the agreement, the new automobiles will be collateral.
You can read more on types of collateral here .
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Why Businesses Use Security Agreements
Businesses depend on secured transactions for growth. Getting creditors to provide loans can be tough for individuals. Security interest provides reassurance to creditors that they will not suffer losses. The debtor also benefits from a low interest rate in presence of a collateral.
Security agreements provide a legally binding document outlining all terms under which debt can be secured and remedies if the debtor defaults. Businesses use this to ensure they do not suffer losses.
Are you wondering what a security agreement looks like? Here is a sample security agreement .
Security Agreement vs. Mortgage
A security agreement provides a legal title transfer from the borrower to the lender in while leaving equitable rights of the property with the debtor. The lender then provides the loan. Till the borrower is repaying the loan, they keep exclusive right of possession and the right of redemption which means that the lender cannot sell or alter the property. Once the repayment is completed, the debtor can have the collateral back. If the debtor defaults, the lender can gain all rights to the property, as laid under the security agreement.
Mortgage is different from a security agreement. A mortgage is used to secure the lender’s rights by placing a lien against the title of the property. Once all loan repayments have been made, the lien is removed. However, the buyer doesn’t own the property till all loan payments have been made. While mortgages provide security, similar to a security agreement, the property in question doesn’t already belong to the debtor.
You can read more on security agreements and mortgages here .
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Meet some of our Security Agreement Lawyers
I joined Enterprise Law Group, LLP as an Associate in March 2020. My practice has involved a wide range of legal matters from commercial real estate, finance and international business transactions to litigation matters including commercial disputes, personal injury and medical malpractice. Proficient in Spanish, I graduated from the University of Kentucky College of Law, the Patterson School of Diplomacy and International Commerce, and the University of Southern California. Prior to my legal career, I sought diverse professional experiences. After graduating from college, I orchestrated my own volunteering experience in southern Peru with a small non-profit organization. Later I gained valuable professional experience as part of a U.S. Senate campaign, and after that I joined the public policy team at Greater Louisville, Inc., Louisville's Chamber of Commerce affiliate. Prior to law school, I embarked on a month long excursion with the Northern Outdoor Leadership School in Alaska, which gave me a new found appreciation for sustainability.
Agnes Mombrun Geter is the Founder and Managing Attorney of Mombrun Law, PLLC. She is an experienced attorney and is a member of the Florida Bar, New Jersey Bar, and the Pennsylvania Bar. The firm's practice focuses on Estate Planning, Business Law, and Debt Settlement including IRS Debt Relief. The firm's goal is to simplify the law and provide clients with the confidence and information necessary to make their decisions. The firm also provides project-based legal services to other attorneys and law firms, along with assisting as personal counsel and local counsel on legal matters.
Have over 40+ years of corporate and commercial law experience.
I am a business attorney with years of experience advising individual entrepreneurs and small businesses on issues ranging from entity selection/formation to employment law compliance, to intellectual property protection and exploitation. I often act as General Counsel for my clients fulfilling the legal function as part of a team of managers. I look forward to learning more about your business and how I may be of assistance.
Corporate and transactional attorney in sixth year of practice. Focus areas include general corporate counsel, labor and employment law, business partnership matters, securities matters related to privately-held companies, and regulatory compliance in securities and finance matters.
Forest is a general practice lawyer. He provides legal advice regarding small business law, contracts, estates and trusts, administrative law, corporate governance and compliance. Forest practiced complex commercial litigation in Florida for eight years, representing clients such as Host Marriott, Kellogg School of Business, and Toyota. Since moving to Nashville in 2005, he has provided legal advice to clients forming new businesses, planning for the future, and seeking funding through the use of equity and/or debt in their businesses. This advice has included the selection of business type, assistance in drafting and editing their business plans and offering material, reviewing proposed term sheets, and conducting due diligence. Forest is a member of the Florida, Tennessee, and Texas Bars; in addition. Forest has held a Series 7, General Securities Representative Exam, Series 24, General Securities Principal, and Series 63, Uniform Securities Agent State Law.
CA, NY, and FL licensed attorney with nearly a decade of experience in intellectual property, data privacy, commercial contracts, and employment. I also have both the CIPP/US and CIPP/E privacy credentials. Basically, everything your business needs!