June 4, 2015
It is becoming more and more common for settlements and orders arising from the breakdown of a relationship to involve the payment of funds over a period of time.
While documenting the obligation is a good start, many practitioners miss an opportunity to add value to their clients by ensuring that the obligations are properly secured.
Ensuring that reasonable and appropriate security is put in place benefits all parties. It provides motivation and certainty for the payor, while minimizing the possibility of agreed upon entitlements not being received.
Types of Security
The types of security which can be put in place are virtually limitless. See some of the more effective forms of security below.
Charge on Lands
Almost all settlements involve the transfer or disposition of a home and the parties often own or control other real property. If the person holding or receiving the property also has obligations to honour, a mortgage or other land charge can be registered against the lands. In the event the obligations are not honoured, the lands can be foreclosed upon and any equity used to discharge the obligations.
Transfer back agreements can also be drafted confirming that if the obligations are not discharged, the lands will revert or be transferred to the non-defaulting party.
Escrow of Shares
This is one of the most beneficial but overlooked types of security. Often the shares of a corporation form part of the assets to be transferred or divided. As opposed to an outright transfer, shares can be held in escrow until they are paid for or other obligations discharged. The use of an escrow arrangement is very beneficial as it allows the payor to control the shares and receive all dividends, other payments and benefits accruing to the shares as long as the obligations are being discharged.
General Security Agreement
A general security agreement provides the payee with security over all present and after acquired personal property of the payor. One of the benefits of a general security agreement is that you do not need to inventory the assets held by the payor at the time the security is granted. The payor is also generally allowed to buy and sell assets as the agreement only encumbers assets held at the time of default.
Security over Specific Assets
If a general security agreement is not possible or appropriate, security over specific assets can be obtained. Some examples of the types of assets that can be secured are:
1. Shares and Securities;
2. Life Insurance;
3. Bank and Investment Accounts;
4. Vehicles, Boats, Planes, etc.;
5. Debts Payable; and
6. Rights to Acquire Property.
The benefits of securing obligations are many. The payee is elevated to the status of secured creditor which gives priority over the secured assets. As the secured assets should be available for enforcement upon default, the likelihood of zero or minimal recovery by the payee should be greatly diminished.
While the benefits for the payee are evident, there are also many benefits to the payor. The granting of security may be the final piece that allows a settlement to be made. There may be an extreme level of distrust between the parties which can be minimized through the granting of security, use of independent escrow holders, etc. There is also clarity as to which of the payor’s assets are encumbered, allowing other assets to be dealt with freely.
There are a number of potential dangers and risks to lawyers and their clients if obligations are not properly secured. If the payee does not receive his or her agreed upon entitlements, the separation agreement may be called into question and the advice received scrutinized. The chances of future complaints are greatly decreased if the issue of security is at least identified and explored.