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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.)
- Stocks
- Bonds
- 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 .
Image via Pexels by Shane
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 .
Get Help with a Security Agreement
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Meet some of our Security Agreement Lawyers
Jeremiah C.
Creative, results driven business & technology executive with 24 years of experience (15+ as a business/corporate lawyer). A problem solver with a passion for business, technology, and law. I bring a thorough understanding of the intersection of the law and business needs to any endeavor, having founded multiple startups myself with successful exits. I provide professional business and legal consulting. Throughout my career I've represented a number large corporations (including some of the top Fortune 500 companies) but the vast majority of my clients these days are startups and small businesses. Having represented hundreds of successful crowdfunded startups, I'm one of the most well known attorneys for startups seeking CF funds. I hold a Juris Doctor degree with a focus on Business/Corporate Law, a Master of Business Administration degree in Entrepreneurship, A Master of Education degree and dual Bachelor of Science degrees. I look forward to working with any parties that have a need for my skill sets.
Michael O.
A corporate and commercial attorney with experience in transactional legal services including corporate and finance transactions, mergers and acquisitions, real estate, commercial contracts, bankruptcy, restructuring, international business transactions and general counsel services. Additional background skills and experience include investment banking, financial analysis, and commercial litigation. Sectors covered include technology, media, franchises, and business services providers, from start-ups to medium and large enterprises.
Donya G.
I am a licensed and active NY and CT Contracts Attorney, with over 20 years of diverse legal and business experience. I specialize in reviewing, drafting and negotiating commercial agreements. My practice focuses on working with small business clients as well as clients from international brokerage firms on acquisitions, especially in the Ecommerce space; drafting, negotiating, reviewing and advising on business agreements; ; breach of contract issues, contract disputes and arbitration. I am licensed to practice in New York and Connecticut, and am a FINRA and NCDS Arbitrator. My experience includes serving as General Counsel to small businesses. This entails reviewing, updating and drafting contracts such as employments agreements, asset purchase agreements, master services agreements, operating agreements and a variety of business and commercial contracts. Additionally, I assist clients with business strategies, contract disputes and arbitration. My diverse experience allows me to give my clients a well-rounded approach to the issues they face. I have been at top AML law firms; a Vice President at an Investment Bank, a Civil Court Arbitrator presiding over cases in contract law, commercial law, a Hearing Officer, presiding over cases and rendering written decisions, and a Judicial Clerk to a Civil Court Judge. It would be a privilege to assist you and your business with my services.
Jared F.
Jared Fields is an experienced business lawyer and litigator with experience in diverse industries and practice areas. Prior to launching his own practice, he served as the chief legal officer for a group of privately-owned companies, including a real estate development group, construction companies, multiple franchisees, and a professional soccer team. As a result, he is experienced in real estate transactions, commercial agreements of varying degrees of sophistication, employment matters, and litigation, as well as general business legal advice. He was also an in-house attorney for a renewable energy company, where he was responsible for litigation, investigations, enforcement actions, and related securities filing disclosures. Mr. Fields also spent many years as a litigator in private practice, representing clients in matters ranging from securities litigation, to breach of contract, to cases involving real estate and financial services. Mr. Fields has particular experience in legal matters that may involve complex financial, accounting, valuation, and other quantitative issues.
March 6, 2024
Samuel S.
Born in Cleveland, Ohio - 9/15/1974 Lived in Cleveland all my life went to college at Ohio Wesleyan University - graduated in 1996 went to law school at Cleveland Marshall College of Law - graduated in 2001 passed the OH bar exam in 2003 worked at the OH Atty General's office, at cuyahoga county prosecutor office and as a solo practitioner
March 14, 2024
Davy K.
I am a Swiss-American lawyer based in Florida and specialize in business, investments, and other civil matters. I have won many cases in both state and federal litigation, and arbitration. Before litigation or arbitration, however, I like to prevent these legal disputes by ensuring my clients base their business on strong concrete contracts that will protect them even decades down the road. My clients are my top priority, which is why they get my personal cell and can reach me anytime. My firm is also established on the extremely high standards of professionalism, transparent itemized billing, fast turnaround times and more. For more information, visit: https://www.transnationalmatters.com/
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