Security interests are basically mortgages over personal property. They secure repayment of money, and/or performance of obligations. Repayment is the most common use. However, some businesspeople don’t know that you can secure credit that you extend to customers. In this article, we’ll look at several ways to use security interests.
Shareholders’ Agreements
Shareholders’ Agreements usually deal with many things, including rights of first refusal, shotgun clauses, major decision provisions, arbitration clauses and so forth. However, until recently, they were not often used to secure amounts that a company owes it shareholders – like unpaid dividends, shareholder loans and other debts and obligations of the company to its shareholders – generally over all the company’s personal property (including future property).
Banks and other lenders generally make shareholders let the lender’s security interests rank first in priority. However, security interests for shareholders will usually put their claims in front of the claims of unsecured creditors. The importance of that cannot be overstated, because usually unsecured creditors end up with nothing when a business fails.
Separation Agreements
We all know that an agreement to pay support doesn’t always mean that payment will be received, even if there is a court order. Recently, in British Columbia, spouses entitled to maintenance are negotiating to obtain, at the same time a separation agreement is signed, a security interest over all a paying spouse’s personal property. Again, this can provide significant protection to the recipient spouse.
For privacy reasons, it is be desirable to put the security interest in a separate agreement – not the main separation agreement, since the personal property security law can require disclosure of the terms of security interest to third parties – and separation agreements contain lots of fairly private information.
Building Contracts
Contractors (and others) now consider security interests as part of their building contracts. A security interest in a customer’s personal property only needs a paragraph or two in the contract. Registration can be deferred (to save time and money) until it is apparent that trouble is brewing (although the longer registration is deferred, the greater the risk that priority will be taken by other claims). The security interest will give the contractor a chance to collect payment that may be faster, cheaper and more effective than relying on builders liens.
Mortgage Commitment Letters to Secure Commitment Fees
The grant of a security interest in personal property to secure obligations, including unpaid commitment fees, has already proved a powerful remedy for at least one BC mortgage lender. Buried in a multi-page commitment letter, a short paragraph created an effective security interest. The lender encountered difficulty collecting an application fee (application fees for large loans often are well into five figures). The lender only filed a financing statement after the borrower signaled its unwillingness to pay the commitment fee. The security interest ended up being the deciding factor in persuading the borrower to ante up the payment.
These are just a few examples of how creative lawyers can protect their clients through innovative uses of Security Agreements.