| Feb 28, 2008

Legalese - February 28, 2008

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Legalese - February 28, 2008 Secured LoansPeter Graham, Lawyer, Rural Legal Services

Sooner or later most of us must plan the purchase of a major item such as a house, car or some farm equipment. This seldom can be done without arranging a loan to finance the purchase.

The person who agrees to lend you the money, the creditor, may do so based simply on your promise to repay the loan. More often than not, however, the creditor wants more than your promise. I think of Linus, in the Peanuts comic strip, and his security blanket. The creditor, like Linus, wants to feel secure but wants something more than a blanket!

What the creditor wants is some protection if you are unable to repay the loan. One way the creditor can obtain protection is by obtaining security for the loan. For example, in the case of personal property (a car, boat or some other item that is not real estate) the creditor obtains such security by taking a "security interest" in the property.

In Ontario, the granting of security interests is governed by the Personal Property Security Act (PPSA). The security interest gives the creditor certain rights in the property. If you, the debtor, do not make payments on the loan as promised, the creditor, in addition to suing you on your promise to pay, may seize the property. By following a procedure set out in the PPSA, the creditor may sell the property and use the money received from the sale to pay off the loan. Before doing so, he must give you notice of the sale and an opportunity to buy back the property.

The same type of approach is used in the purchase of real estate. The interest in the real estate which is granted to the creditor is a "charge" which is commonly referred to as a mortgage. The person lending the money is the mortgagee and the person borrowing the money is the mortgagor.

The interest in the land taken by the mortgagee secures the repayment of the loan. If the mortgagor is unable to repay the loan, the mortgagee has steps he can take in addition to suing the mortgagor on the promise to pay. For example, it is a common provision of a mortgage to grant to the mortgagee the right to sell the property if the mortgagor is in default for a specified length of time.

If the personal property under the PPSA or the real estate subject to a mortgage is sold on the default of the loan, the amount received by the creditor in excess of the amount owing to him is paid to the debtor. On the other hand, if the amount received by the creditor on the sale of the property is less than the amount owing to him, the deficiency is the responsibility of the debtor.

The above examples of secured transactions are for the purchase of personal property or real estate. That is, the loan is made to pay for the property and the security is taken in the property purchased.

Security can also be given by a debtor in property which he already owns. For example, a mortgage can be given on your house to secure the payment of a loan you require to start a business. This arrangement is referred to as "collateral security".

Collateral security may also be in the form of a charge known as a lien. For example, if you apply for legal aid, and own real estate, you will be required to grant a lien on your property to secure the payment of your share of the legal fees. The lien remains on the property until you pay your share of the legal fees. If you have still not paid your share of the legal fees by the time you sell the property, the amount owing is paid from the money received from the sale.

There are many variations on the foregoing security arrangements. If you are asked to secure a loan, make sure you understand the nature of the security being requested. Also ask about the action the creditor can take against the property securing the loan if you can't make the loan payments on time.

Legalese is a column of general information and opinion on legal topics by the lawyers of Rural Legal Services, Box 359, Sharbot Lake, ON, K0H2P0, 613-279-3252, or 1-888-777-8916. This column is not intended to provide legal advice. You should contact a lawyer to determine your legal rights and obligations.

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