A security agreement is a contract in which an interest is created in certain property to guarantee the performance of an obligation or repayment of a debt. The property may be real or personal. Real property security agreements are governed by state law. Article 9 of the Uniform Commercial Code governs the rest of the property security agreements for all 50 states.
Common scenarios include an individual signing a security agreement with a bank. The individual needs a loan, so he puts up his car as collateral. Or a farmer wants a line of credit, so he offers his crops as collateral.
Security agreements may be oral if the lender has possession of the collateral. Otherwise, they must be written.
Key elements:
- A full description of the collateral.
- An expression of intent by the parties to create a security interest.
- Covenants-what the parties, usually the borrower, may and may not do.
- Default-what happens if the borrower does not pay.
- Signatures of the parties-called authentication.
- Lender must give value in exchange for the creation of the security interest.
- Borrower must own or have title to the collateral.
Secured lenders have the advantage of being able to take the collateral in the event of a foreclosure. Secured lenders have priority in right and time over unsecured lenders. Likewise, perfection-the act of recording the security agreement for public knowledge-creates rights in time among secured lenders.
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