Asset Classes Used as Collateral
/In this Blog we discuss the various asset classes that may be used as collateral for a secured financing.
Real estate
Security over real estate will commonly consist of a mortgage and a general assignment of rents and leases to be registered against title to the real property in the applicable land registry office, as well as notice of a security interest against the borrower in the applicable personal property registry office pursuant to a general security agreement.
Machinery and equipment
Security over machinery, equipment and other types of goods such as inventory may be granted pursuant to a security agreement that charges this limited category of collateral or, commonly, may be included in a broader grant of security over all present and after-acquired personal property of the debtor.
Receivables
In general, security over receivables can be granted pursuant to a security agreement that charges this limited type of collateral or, commonly, may be included in a broader grant of security over all present and after-acquired personal property of the debtor.
Due to legislation at the federal level and in some provincial jurisdictions, security over debts due from some governmental bodies either may not be obtainable or may require additional specific steps in accordance with such legislation in order to obtain valid security. Contractual limitations on the assignability of an account may also prevent a valid grant of security in such account, although Personal Property Security Act provisions rendering such limitations unenforceable against third parties may operate to permit the security to attach.
Further, an assignment of accounts may not be enforced against any account debtor until such account debtor has been provided with notice of the assignment; until such a time, the account debtor may continue to make payment to the assignor of such account. Outside certain types of loan where the accounts are the primary collateral, this notice tends to be delivered only on contemplation of enforcement on the assignment.
Financial instruments and cash
Security over financial instruments may be granted pursuant to a security agreement that charges this limited category of collateral or, commonly, may be included in a broader grant of security over all present and after-acquired personal property of the debtor.
In addition to perfection by registration, security in investment property ‒ including securities and securities accounts ‒ may be perfected by control (involving physical delivery of share certificates, duly endorsed, or tri-party agreements with issuers of uncertificated securities or with securities intermediaries), which may give the secured party better priority. Commonly, secured parties may also require that the debtor deliver possession of instruments (eg, letters of credit and chattel paper) in order to best protect their security.
Security over accounts due to a debtor with respect to its bank or deposit accounts is granted and perfected in the same manner as other receivables and accounts.
Intellectual property
Security over intellectual property may be granted pursuant to a security agreement that charges this limited category of collateral or, commonly, may be included in a broader grant of security over all present and after-acquired personal property of the debtor.
There is some uncertainty over whether the federal or provincial levels of government have jurisdiction over security in intellectual property; therefore, it can be prudent to register evidence of the security agreement (often a simple one-page confirmation of the grant of security interest pursuant to the security agreement) in the Canadian Intellectual Property Office with respect to intellectual property registered in that office. Given the cost associated with such registration, it is common for lenders to require such registrations only when the intellectual property is material. Registration can take a couple of months to be processed.
Our team at BH Legal has extensive experience with secured lending transactions and taking security, please let us know how we can help at info@bhlegal.ca
