Security in Commercial Property Transactions

In certain commercial property transactions, the parties will agree to deferred payment. This will almost always be in return for some form of security provided by the purchaser to the seller. This article will focus on the types of security that can be offered.

Legal Charge

The most common security that is provided by the purchaser is to allow the seller to register a legal charge on the property title. This will remain on the title until the seller is paid the remaining sum upon which the seller will sign a form confirming the charge has been discharged. Until that happens, the purchaser cannot transfer the property to another party.

On demand Bond

The purchaser could also offer a bank bond. This is a strong form of security as it imposes a primary obligation on the giver of the bond – in this case the purchaser – to pay a specified sum of money on the happening of a particular event regardless of the terms of (or any variation to) the underlying obligation. In the case of a commercial property transaction, the particular event will usually be the failure to make the deferred payment.

Guarantee

Guarantees are usually given where a parent company is willing to act as surety for the purchaser.

Where a guarantee is given and the purchaser fails to make the deferred payment, then the seller will need to establish liability on the purchaser (the “obligor”/ “guarantor”). The fact that there is a failure to pay alone will not be enough. It imposes a secondary obligation and so it is dependent on the underlying contract containing the guaranteed obligations. It is important to note that where any changes are made to the underlying contract, that the guarantor is made a party to the contract. If this is not done the guarantor’s liability could be inadvertently discharged.

Conclusion

The security will much depend the circumstances of each individual transaction. However, it is usually best practice to have a legal charge as a basic form of security in all cases, and then to choose between a bond or a guarantee as additional security.

For the reasons given above, a bond from a major financial institution may well be stronger form of security and thus it may be the preferred option for a seller. Where a parent company is willing to give security, then a guarantee will be most suitable.

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