When you borrow money from banks or other lending institutions it is important that you understand your obligations and the extent of your exposure. The banks normally rely on your lawyer to make sure that you do. In this article I will briefly explain some legal expressions that are commonly used but are unfamiliar to some borrowers.

 

All Obligations Mortgage

 

Funds are usually loaned by banks against assets (“security” or “collateral”), which, if necessary, can be sold by the bank to recover the outstanding debt. When those assets comprise land and buildings the bank will take a mortgage over those assets to secure the repayment of the loan or the performance of another obligation. The mortgage will be an “All Obligations Mortgage” where it secures all existing and future obligations (and therefore all money) which you have to the bank.

 

Priority Amount

 

The bank will often specify a monetary amount in the mortgage, which is referred to as the “priority amount”. This amount will exceed by some margin the amount of the loan borrowed at the time the relevant mortgage is created. The acceptance of the priority amount does not necessarily mean that such an amount is owed to the bank. The primary purpose of specifying the “priority amount” is to ensure that any advances the bank makes to the level of the priority amount will rank ahead of any subsequent mortgage (and therefore any subsequent loans) given over the same property – it is a protection for the bank. In practice the inclusion of a priority amount should not cause you difficulties unless you propose to give a second mortgage to another funder. In that case you would need the bank’s consent to the proposal and also its agreement to the reduction of its priority against the other funder.

 

Limited Recourse

 

Banks can sometimes be persuaded to provide funding which is ring fenced to a particular transaction or project and secured accordingly. In the event that the borrower encounters difficulties, the bank’s recourse against the borrower will be limited to the proceeds that can be realised from the specific security provided. A limited recourse loan gives greater certainty to the borrower of the extent of its exposure to the bank.

 

Limited Liability

 

Another way of giving greater certainty to the borrower as to the extent of its exposure to the bank is to include a limit in the mortgage and loan documentation on the maximum amount that the borrower can be required to repay to the bank. The borrower’s liability to the bank is limited or capped at the level specified. This mechanism is quite commonly used in relation to guarantees.

 

All Obligations Guarantee

 

An all obligations guarantee exposes the party giving the guarantee (the “guarantor”) to liability for the satisfaction of all of the obligations and all of the liabilities that the guaranteed party has from time to time to the bank. Given that the guarantor is incurring the commitment for the benefit of another, the banks take particular care to ensure that the guarantor receives appropriate advice. It is normally prudent to limit the guarantor’s liability to a maximum amount thereby providing the guarantor with certainty as to the amount it could become liable to pay in the event that the guaranteed party runs into difficulties.

 

Default Notice

 

A default notice is sometimes referred to as a “Property Law Act Notice”: In the event that a borrower fails to repay its loan or to perform its obligations, a lender can take steps to exercise its remedies. Before a lender can realise property which is the subject of a mortgage with a view to recovering money owed to it, it must serve the owner of the mortgaged property and other interested parties such as any guarantor with a default notice. Among other things, the default notice must specify the breach (usually failure to make a payment when due) and allow the owner of the mortgaged property at least 20 working days to remedy the default. If the period specified expires without the default being remedied the mortgagee may proceed to exercise its power to sell the mortgaged property.

 

Before entering into any contractual commitment you should be fully aware of the nature and extent of your obligations and liabilities. If in doubt ask.