A “security agreement” is a document that provides a lender with a security interest in a specific asset that acts as collateral for the original loan made by the lender. If the borrower defaults on repaying this loan, the secured party may seize and sell this collateral. Thus, a security agreement mitigates the default risk encountered by lenders in every loan transaction.
A security agreement sets forth various rights in the collateral granted by the debtor to the secured party in addition to any rights granted by California state law primarily influenced by revised Article 9 of the Uniform Commercial Code. The agreement should contain language showing an intent to grant the security interest, as well as terms that detail the advancement of funds, insurance requirements, and, of course, repayment of the loan. Such terms may allow a lender to possess or control the collateral until repayment of the loan is complete.
Security agreements may pertain to all types of property, including intangibles such as intellectual property and receivables. However, a security agreement is not used to transfer any interest in real property, only personal property. The security agreement must be authenticated by the debtor, evidenced by the debtor’s signature or electronic marking.
The security agreement must reasonably identify the collateral that is subject to the security interest. A supergeneric description such as “all assets” or “all personal property” is insufficient, whereas a listing of the collateral by category, such as all equipment, inventory and accounts will meet legal requirements.
A loan agreement, promissory note, or deed of trust may contain a security agreement. Any document may contain a security agreement, provided that it includes language granting a security interest where there is a present grant of a security interest evident from the language of the document. While a UCC-1 financing statement contains all of the information required by a security agreement, it is not a security agreement on its face since it does not contain any language specifically granting a security interest.
California law does not always require that a debtor and secured party have a security agreement to legally evidence their arrangement. A security agreement is not required for attachment if the collateral is in the possession of the secured party or the collateral is deposit accounts, electronic chattel paper, investment property or letter of credit rights over which the secured party has control.
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