Agreements and documents relating to loans can become quite complex. Most people associate loans with the typical loan agreement provided by a financier that needs to be signed and returned in exchange for the loan amount. This is generally true, but there are also other related documents that can become relevant and muddy the waters such as Deeds of Priority and Deeds of Forbearance, which are two documents we deal with frequently in this context.
Let us assume you have an existing mortgage registered on your property for a loan you have taken. Now let us assume you wish to take out a further loan and this further loan will be the subject of a second mortgage to be registered on your title.
In these circumstances, the first mortgagee, or the first lender who has the first mortgage registered on your property will commonly want the proposed second lender to enter into what is known as a Deed of Priority.
The principle of a Deed of Priority is fairly simple, it outlines that the first lender and first mortgage has priority to the second lender and second mortgage and that once the first lender is paid back, then the second lender will be entitled to payment.
Despite the seeming simplicity of the document, we are often asked to liaise with the first lender to see whether or not they require a Deed of Priority and if so, on what terms.
They will often supply a Deed of Priority which we will then need to review and advise on. Not only do we ensure you understand the terms and are satisfied with the document, but we also ensure the second lender is equally satisfied.
There are number of things that need to be looked at to ensure the document is not onerous or risky. For example, among many other things, we need to ensure that your liability and any guarantees under your existing loan do not change and are not extended under the Deed of Priority. The Deed should only deal with the priority between lenders and any term which attempts to change your existing responsibilities needs to be checked and investigated.
The terms in such documents can and do change which is why it is always prudent to carefully consider them in detail and where any uncertainty is present or risk is added, these need to be queried and amended and an experienced eye is most suited to such a task.
Another common document associated with loans, especially in the event that you have defaulted under a loan is a Deed of Forbearance.
A Deed of Forbearance in its most basic form preserves the lender’s rights to take action against you as a result of a default.
For example, let us assume you have failed to make repayments as required under your loan agreement. The lender under that agreement would have a right to take some action against you to recover the money owed to it, including interest, as well as any loss or damage it may have suffered as a result of your default.
A Deed of Forbearance states that even though you are in default and even though the lender has a right to take action against you, the lender is not going to take that action immediately. The lender is giving an extension to the borrower to satisfy its obligations.
However, even though no action is being taken now and an extension is being given to the borrower, the rights the lender has are preserved and that action can be taken at a later date, notwithstanding the extension of time it allowed.
So it is a document that sets out that the lender is not waiving its rights and entitlements just because it provided an extension of time to the borrower.
As with a Deed of Priority, it is important to closely review such a document to ensure that the lender is not trying to provide itself with more power than it has, or trying to extend or increase your liability and responsibility.
Both documents are complex and have serious consequences. We ensure you clearly understand the documents and what they mean to you and importantly, ensure you understand your responsibility under these documents and any risks to you so that you can make a clear and informed decision about the proposed documents or terms.
Equally, we are often asked to draft these very documents on behalf of people who have loaned money to another. In such a case, we will have a very informed discussion with you to advise on commercial terms, the rights and responsibilities of the parties and ensure not only your intentions are reflected in the agreement, but that your interests are protected.
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