Security Agreement

What is a Security Agreement?

A Security Deed or Security Agreement is a document which a lender and borrower may sign, giving the lender the right to claim the borrower's assets if the borrower fails to make payments when due.

Just like how a mortgage gives a lender the right to sell a borrower's house if the borrower fails to pay their loan, a Security Deed gives a lender the right to seize or sell the borrower's personal property (such as a vehicle, equipment, machinery or other similar property) if the borrower fails to pay their loan.

A Security Deed is used for personal property but not for real estate.

What is the difference between a Security Agreement and a Loan Agreement?

A Security Deed is not a Loan Agreement and does not deal with the actual lending of money. Instead, it sits alongside the loan agreement, "securing" the loan by giving the lender some avenues for recovering their money if the borrower defaults on the loan.

It is common for a Security Deed to be used by the parties to secure their rights and obligations under different kinds of contracts such as Loan Agreements, Service Agreements, Freelance Agreements, Contracts for Sale of Goods, Vehicle Sale Agreements, Business Sale Agreements and other similar agreements.

What does "grantor" mean? What does "secured party" mean?

In this document, the party granting the security interest is called the "grantor" and the party whose interest is being secured is called the "secured party".

For example, if this document is being used with a loan agreement, the "lender" under the loan agreement would be the "secured party" under this Security Deed, and the "borrower" under the loan agreement would be the "grantor" under this Security Deed.

What does "collateral" mean?

In this document, "collateral" refers to the property which is secured by the Deed. It might be a vehicle, a piece of machinery, or some other equipment or personal property. By providing that property as colleteral, the grantor is agreeing that if some predetermined event happens (for example, the grantor does not repay a loan on time) then the secured party can seize the collateral.

When describing the collateral, it is important that it is described very clearly, including any applicable registration numbers, serial numbers or other identifying characteristics. If this is not done, then the secured party may later find that there is confusion about what collateral is actually covered by the Deed, so the Deed may not actually give them the protection they think it does.

If in doubt, seek legal advice before signing the Deed.

What are the prerequisites of a Security Agreement?

A Security Agreement contains some complex legal terms, so the parties should take their time to carefully review the document, ensure that they understand it, and ensure that it accurately represents their situation.

The parties should be careful when describing the collateral (i.e. the property which is secured by this Deed) to ensure that it is described very clearly, including any applicable registration numbers, serial numbers or other identifying characteristics. If this is not done, then the secured party may later find that there is confusion about what collateral is actually covered by the Deed.

If the parties make errors in the document or provide incomplete information, it is possible that the Security Deed may not provide them with the protection that they think it does. Therefore, if in doubt, seek legal advice.

Who is involved in a Security Agreement?

The two main parties in a Security Agreement are the "grantor" and the "secured party".

The grantor is the party granting the security interest. For example, the grantor might be borrowing money from the secured party (under a separate loan agreement), and might be providing some of their property as collateral to secure the loan.

The secured party is the party whose interest is being secured. For example, if they are lending money to the grantor (under a separate loan agreement), then they might be using this Security Agreement to give them the right to seize some of the grantor's property if the loan is not repaid.

What can be the duration of a Security Agreement?

There is no mandatory timeframe for a Security Agreement. However, the duration of the agreement is often determined with reference to any related contract. For example, if the Security Agreement is being used to provide security for a loan, then the Security Agreement will need to remain in effect for as long as the loan does.

What has to be done once a Security Agreement is ready?

Once the document has been finalised and the parties are happy with it, they may sign it and both keep a copy.

Importantly, the Security Agreement is structured as a Deed. There are certain formal requirements that need to be met in order for a Deed to be validly signed (discussed below). To ensure that the document is legally binding, the parties will need to pay attention to these formal requirements. If in doubt, the parties should seek legal advice.

Most secured parties also choose to register their interest on the PPSR (discussed below).

What are the requirements for signing a Deed?

The Security Agreement is structured as a Deed. There are certain formal requirements that need to be met in order for a Deed to be validly signed. A Deed will need to be signed in accordance with those formal requirements, or it may not be legally binding.

For example, for an individual to validly sign a Deed, the signature clause should read "Signed Sealed and Delivered" and they should sign it before an independent adult witness, who also provides their full name and signature.

The rules regarding the signing of Deeds by companies are set out in the Corporations Act 2001, and generally require the Deed to be signed by two directors, or by a director and the secretary or in the event that the company has a sole director who is also the secretary (or a sole director and no secretary), by that person.

If the parties are unsure about this, they should seek legal advice.

Is it necessary to register the Security Agreement?

It is not mandatory to register the Security Agreement. However, most secured parties also choose to register their interest on the Personal Property Securities Register ("PPSR") as doing so can provide a higher level of protection (discussed below).

What does it mean to register a security interest on the Personal Property Securities Register ("PPSR")?

This is an important step that provides more protection for the secured party and helps to notify third parties that the secured party has an interest in the secured property. If the grantor becomes insolvent, then an interest which is registered on the PPSR will have priority over unregistered interests, as well as interests that are registered on the PPSR at a later date.

Furthermore, if the grantor tries to sell the secured property, then potential buyers may search the PPSR and may refuse to buy the property while it is subject to a registered security interest.

Further information is available from the website of the PPSR or the parties may seek legal advice.

What must a Security Agreement contain?

A Security Agreement should contain:

• the full names and addresses of the parties;
• a clear description of the collateral;
• any applicable serial numbers, registration numbers, or other identifying details for the collateral;
• details about the obligations that are being secured (for example, if the Security Agreement relates to a loan, then the details of that loan agreement);
• rules about how the grantor is obliged to maintain/take care of the collateral;
• details about what the secured party may do if the grantor defaults (for example, the secured party may be entitled to take possession of the collateral).

When describing the collateral, it is important that it is described very clearly, including any applicable registration numbers, serial numbers or other identifying characteristics. If this is not done, then the secured party may later find that there is confusion about what collateral is actually covered by the Deed, so the Deed may not actually give them the protection they think it does. If in doubt, seek legal advice before signing the Deed.

Which laws are applicable to a Security Agreement?

This Deed is subject to the broad principles of contract law.

Security interests generally are governed by the Personal Property Securities Act 2009 (Cth).

If this Deed is being used in connection with consumer credit, then the National Credit Code in schedule 1 to the National Consumer Credit Protection Act 2009 (Cth) may apply.

If either of the parties are companies, then the Corporations Act 2001 (Cth) may also apply.

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