Securities for Lending III Flashcards
What is a guarantee?
What parties are required to make one?
A guarantee is a promise by a third party to repay the lender if the borrower fails to pay. A gurantee is actually more beneficial to a bank than a first party security provided by the borrower as its value doesn’t require to be deducted by the bank in ranking on the borrower’s estate. The parties involved are:
- The lender in whose favour the guarantee is granted
- The guarantor who signs the deed
- The borrower on whose behalf the guarantee is given
What types of guarantee are there?
- Specific - these cover isolated debt only
- Continuing and limited in amount - most common type, secures any bank account or liability that the principal debtor owes the bank subject to a limitation
- Joint and several - the other party to the contract has any number of rights of action against any or all of the other parties, and thay may be sued in any combination and number of times.
What are the advantages of using a guarentee as security?
- Easy to take e.g. no form of registration necessary
- Far reaching clauses contained within a bank guarentee give the bank the max possible protection and powers
- The guarantor’s max liability is fixed to the amount quoted on the form
- Except specific guarantees, all the principal debtor’s liabilities are secured, now and in the future
- Provided the guarantor remains financially sound the guarantee has a stable value
- Where supporting security has been taken, which itself is stable in value, then the security is a very strong one
- Because guarantees are 3rd party securities, they can be ignored when claiming against principal debtor for recovery
What are the disadvantages of using a guarantee as security?
- If the guarantee is not supported by security which has a stable value, the worth of the guarantee is entirely dependent upon the financial standing of the guarantor
- Although a guarantee contains many far-reaching clauses, a guarantor may still be able to avoid liability on a technicality
- The guarantor often considers the giving of a guarantee a formality and the liability not real, which of course isn’t true
- If the guarantor will not pay up, legal action may be necessary which may be time consuming and expensive
What are the steps involved in completing the security of a guarantee?
- Establish the financial standing of the guarantor(s) - if a joint and several guarantee is being taken, an enquiry for the full amount is made on all the guarantors
- Review the general conditions - it’s essential that an intending guarantor takes independent legal advice to prevent any undue influence claims
- Use the standard bank guarantee form - where a guarantor suggests alterations, additions or deletions, reference will have to be made to the bank’s legal department
- Place where the guarantee should be signed - where independent legal advice is not taken, it is preferable to have all guarantees signed at the branch in the lending officer’s presence
- Joint and several guarantees - the bank must ensure that when there is more than one guarantor, all sign, otherwise the security is unenforcable
- Correct specification of principal debtor - In normal circumstances a banker is expected to define correctly the name of the principal debtor
- Copy guarantee to guarantor(s) - if the guarantee is regulated by the CCA 1974 then each guarantor should be provided with a completed and signed copy of the guarantee
- Annual status enquiry on guarantor - annual status enquiries should be carried out on each guarantor
What’s the difference between a legal and equitable charge/mortgage?
Legal gives legal force to a charge, equitable is simply ‘what seems right.’ As such the rights of an equitable mortgage are less than a leagl one and are consequently rarely seen these days.
A memorandum of deposit is required to establish an equitable mortgage.
What are the steps in taking a legal first mortgage in England and Wales?
- Obtain the Title Information Document
- Have it updated by sending to the Land Registry after obtaining the owner’s consent
- Search using form 94A and on receipt, note when the protection period for searching expires
- Value the property
- Search the local Land Charges Registry for any encumbrances such as road proposals, compulsory purchases etc. that might reduce value
- Check on overriding interests by asking the owner to complete a questionaire and if any interests emerge, insist on independent legal advice and then they must postpone their interest
- Execute the document of charge
- Register at the Land Registry
- Give notice to the property insurance company
- Receive Title Information Document from the Land Registry
How does one obtain an equitable charge?
An equitable charge is obtained by taking the Certificate of Title to the property along with a signed Memorandum of Deposit
How does one take security over land and property in Scotland?
By way of standard security rather than legal mortgage
What are the advantages to the lender of taking a standard security?
- Generally, provided there are no problems with title to the property, the completion of this type of security is simple although solicitors have to be involved and the process can be time consuming and expensive
- The value of land and houses has historically been very stable and has tended to increase in value over a period of time, although in times of recession the value can fall
What are the disadvantages to the lender of taking a standard security?
- There is a risk that property may turn out to be difficult to sell either through deterioration in the upkeep of the property or lack of demand for the particular type of property in its area
- In realising its security the bank may have to consider evicting the occupants from the property if they will not vacate voluntarily
- In some cases the bank may require to enter into possession of the tenanted property and have to take on the responsibilities of landlord
- As solicitors are employed to act fot the grantor of security and for the bank in constitution of the security, there are attendant legal expenses to be met by the customer
- Valuation can prove difficult and expensive
What are the constitutent parts of the standard security?
- Personal obligation
- Description of the property
- Standard conditions
- Warrandice
What can a bank do in the event of a mortgage default?
SAFES:
- Sue the covenant to repay (not often used as they will probably not have money)
- Appoint a receiver (in the case of a property which has rental income)
- Foreclose - taking over the ownership (not used these days)
- Enter into posession - an essential prerequisite to -
- Sell the property having obtained an order for posession from the County Court
What is a contingent liability?
What types are there?
A contingent liability arises when a bank undertakes an obligation, i.e. paying a debt, to a third party on behalf of a customer. The bank may ask the customer to sign an undertaking, called a counter indemnity, to reimburse the bank in respect of any payments which it has made in discharging this obligation.
- Direct credit substitutes - where a bank is called upon to meet the customer’s obligation (should the customer fail to pay) on an advance provided by a 3rd party.
- Transaction related - the risk to the bank is dependent on the likelihood of something other than default of a debt (e.g. a customer failing to complete a building)
- Short term trade related - associated with the movement of goods over which a bank has certain rights, e.g. a documentary credit. In this instance the bank will undertake, at the request of the customer, to pay a particular amount in an agreed currency to a beneficiary (exporter).
- Other e.g. the bank may be asked to endorse a bill of exchange on behalf of a customer
What is retention of title?
Sale of Goods Act 1979 - a seller can retain the title to the goods sold until payment. Therefore, if the payment isn’t forthcoming the seller can reclaim the goods even if it’s currently in the buyers possession. This differs to a contractrual lien in which the seller keeps the goods in their posession until payment.
