An after-acquired clause is a provision within a mortgage agreement that stipulates that any additional property obtained by the borrower after the mortgage has been signed will automatically become additional security (collateral) for the mortgage obligation. This clause aims to provide lenders with additional assurance that the borrower’s obligations will be met, potentially reducing the risk associated with lending.
Structure and Types of After-Acquired Clauses
Inclusive After-Acquired Clause
An inclusive after-acquired clause covers all types of property obtained by the borrower, irrespective of how and when it is acquired.
Selective After-Acquired Clause
A selective after-acquired clause specifies certain types of property or conditions under which the acquired property will be included as additional security.
Legal and Practical Considerations
Enforceability
The enforceability of after-acquired clauses varies by jurisdiction. Courts may scrutinize these clauses to ensure they do not unfairly prejudice other creditors or unduly burden the borrower.
Filing Requirements
In certain jurisdictions, lenders may be required to file financing statements or amend existing ones to perfect their interest in the after-acquired property.
Priority Issues
The inclusion of after-acquired property might affect the priority of claims in the event of borrower bankruptcy, potentially leading to legal disputes.
Examples in Practice
Example 1: Real Estate
A borrower takes out a mortgage to purchase a house. The mortgage agreement contains an after-acquired clause. If the borrower subsequently inherits another property, this new property may automatically become additional collateral under the terms of the clause.
Example 2: Commercial Lending
In commercial lending, a business may take out a loan secured by its inventory. An after-acquired clause in the security agreement might state that any new inventory acquired by the business will also serve as collateral for the loan.
Historical Context
The concept of after-acquired clauses has evolved as part of the broader development of secured transactions law. These clauses gained prominence with the rise of more sophisticated lending practices, particularly in commercial and real estate finance.
Applicability and Comparisons
Comparisons with Other Clauses
- Dragnet Clause: Unlike an after-acquired clause, a dragnet clause aims to secure all debts owed by the borrower to the lender, not just those tied to newly acquired property.
- Cross-Collateralization Clause: This clause allows one piece of collateral to secure multiple loans, differing from the after-acquired clause, which focuses on newly acquired property as additional security.
Related Terms
- Collateral: Assets pledged as security for a loan.
- Secured Transaction: A transaction that involves a security interest in personal property.
- Mortgage: A loan agreement secured by real property.
FAQs
What is the primary benefit of an after-acquired clause for lenders?
Are after-acquired clauses common in residential mortgages?
Can a borrower negotiate the terms of an after-acquired clause?
References
- UCC Article 9 - Governs secured transactions and includes rules about after-acquired property.
- Real Estate Law Journals - Discuss the legal implications and case law concerning after-acquired clauses.
- Banking and Finance Textbooks - Provide additional context and examples related to secured lending practices.
Summary
The after-acquired clause is an influential provision in mortgage and security agreements, providing lenders with additional collateral from property acquired by the borrower post-signature. This clause plays a critical role in mitigating risk, ensuring the lender’s secure interest, and is subject to varying degrees of legal scrutiny based on jurisdictional regulations. Understanding this clause and its implications can help borrowers and lenders navigate the complexities of secured transactions.
