This article outlines some common types of collateral that private lenders may consider requesting from a borrower to secure repayment of a loan.

The appropriateness of each form of collateral will depend on a variety of factors, such as:

• the profile of the borrower (e.g., their current and forecast assets and income, or whether they are an individual or a company, the nature of their business);
• the nature of the loan and the purpose of the loaned funds;
• the risk to the lender (e.g., the term of loan, amount of the loan, likelihood of default);
• the relationship between the lender and the borrower (e.g., is it a commercial or personal relationship);
• the types of security available.

Mortgage or Caveat over Real Property

A mortgage is a legal agreement where the borrower provides the lender with a security interest in real property to secure the repayment of a loan.

A mortgage is typically registered on the title of the property, giving the lender a legal interest in the property. If the borrower default on the loan, the mortgage permits the lender to step in and take possession of the property. Depending on the agreed terms of the loan agreement, the lender can then choose to carry out the development project itself, or it can choose to evict the occupants and sell the property to recover the debt.

A mortgage is considered a superior form of security due to its enforceability and priority over other claims (such as caveats).

A caveat, on the other hand, is a notice lodged on the title of a property to prevent its sale or transfer without the lender’s consent. A caveat acts as a warning to third parties that the lender claims an equitable interest in the property. The borrower is prevented from selling the property unless the caveat has been withdrawn by the lender or if it removed by way of a lapsing notice or court order.

Unlike a mortgage, a caveat does not grant step-in rights. Therefore it is a weaker form of security compared to a registered mortgage.

Security Over Personal Property

A general security agreement (GSA) allows a lender to take a security interest over all present and future personal property of the borrower. Similarly, a specific security agreement (SSA) allows a lender to take security over specific assets.

Personal property includes items such as motor vehicles, aircraft, boats, household goods, business inventory, plant, equipment, agriculture (e.g., crops or livestock) or other general goods (e.g., machinery, printers, coffee machines, jewellery or artwork). It can also include intangible personal property such as Intellectual Property, company shares and choses in action.

This type of security is governed by the Personal Property Securities Act 2009 (Cth) (PPSA). Under the PPSA, a security interest must “attach” to the collateral and be “perfected” (usually through registration on the Personal Property Securities Register) to be enforceable against third party creditors of the borrower.

By registering the security interest on the Personal Property Securities Register, the lender records its security interest in those assets against the borrower, meaning any time the borrower wishes to apply for a loan or credit or if it tries to transfer its personal property, the security interest will appear against the borrower.

Mortgage Over Shares in a Pty Ltd Company

In addition to a registered security interest over shares, a lender can also take a mortgage over shares in a proprietary limited company as security for a loan. This involves the borrower granting the lender a security interest in the shares they own.

This type of security is particularly useful when the borrower holds significant equity in a company, and if the loan is being used by that company (eg, to purchase land, to fund construction or other working capital).

Such a mortgage is typically formalised through a written agreement and may also require the parties to sign a share transfer form (with the lender as the recipient of the shares) which can then be registered and lodged with ASIC by the lender under power of attorney. It may also be registered under the PPSA if the shares qualify as personal property under the Act.

Personal Guarantee Secured by Collateral

A personal guarantee is a promise by a third party (the guarantor) to repay the loan if the borrower defaults.

To support the guarantee, the lender may require the guarantor to provide their own collateral, such as a mortgage over their property or a general security agreement over their assets. This ensures that the lender has recourse to the guarantor’s assets in the event of default.

Conclusion

Private lenders in New South Wales have a range of options to secure repayment of loans, each with its own advantages and limitations. Mortgages and general security agreements provide robust security, while caveats and personal guarantees offer additional layers of protection. It is crucial for lenders to carefully document their security arrangements and ensure compliance with relevant legal requirements, such as registration under the PPSA, to protect their interests effectively.

Legal advice should always be sought to tailor security arrangements to the specific circumstances of each loan transaction.

If you require advice regarding a proposed loan transaction, please contact our commercial team.