Without An Agreement Of The Parties There Can Be No Security Interest

Since default is such a serious risk, debtors should be well aware of their obligations when entering into security agreements. Some obligations are secured only by a security right in certain designated assets, and liability for repayment of the debt is limited to the asset itself, with no further claims against the debtor. These are called “recourse obligations”. The question of lease versus security is negotiated on the basis of the requirements of Article 9 that a security right must be perfected in a certain way (as we shall see). If the transaction turns out to be a security right, a landlord who does not meet these requirements runs the risk of losing their property to a third party. And consider this example. Ferrous Brothers Iron Works “rents” a $25,000 punching press from Millie`s machine shop. Under the terms of the lease, Millie`s must pay an annual rent of $5,000 for five years, after which Millie`s can take possession of the machine for payment of $1. During the rental period, the property remains with Ferrous Brothers.

Is this “lease” really a security? Since ownership comes with a small fee when the entire lease is executed, the transaction would be interpreted as a transaction that creates a security right. What difference does it make? Suppose Millie`s goes bankrupt in the third year of the lease and the receiver wants to sell the punching press to pay off the debts of the machinery repair shop. If it was a genuine lease, Ferrous Brothers would have the right to recover the machine (unless the trustee has taken over the lease). However, if the lease is actually intended to create a security right, Ferrous Brothers can only claim its security if it has otherwise fulfilled its obligations under article 9 – for example, by registering its security right, as we shall see. Depending on the relative solvency of the debtor, the quality of the asset and the availability of a structure to separate the obligations of the asset from the obligations of the debtor, the interest rate charged for one may be higher or lower than the other. When conditional sales became popular for financing industrial equipment and consumer goods, the United States also began government lawmakers to launch it in early the 20th. They quickly became almost as complex as the old forms of security interests they had evaded. [30] There are a number of other agreements that the parties may enter into that provide security in the commercial sense of the term, but do not actually establish ownership of the assets. For example, it is possible to grant a power of attorney or conditional option in favor of the secured party in respect of the article, to use a retention-of-title agreement, or to execute undated transfer instruments….