(Promissory Notes, Deed Of Trust,
When lending money for the purchase of real estate, it is important to have evidence of the debt to protect yourself and your monies lent. All types of written evidence are not, and will not protect your loan the same however.
Technically, a promissory note is a legal instrument in which one party promises in writing to pay a sum of money to the other, either at a fixed or determinable future time or on demand, under specific terms. If the promissory note is unconditional and readily salable, it is called a negotiable instrument. Referred to as a note payable in accounting, or commonly as just a “note”. We recommend you allow a LOKK LEGAL Attorney to draft your promissory note for you. This way is the best way to provide you and your money security from a whole host of potential issues.
For your convenience, LOKK has provided you an example of a Promissory Note we have drafted for a previous client.
Mortgage/Deed Of Trust (Real Property)
Deeds of Trust are used generally in California to secure an interest in a piece of real property. When securing an interest in a piece of real property, the order of priority, your ability to collect, as well as the specific language used is paramount. LOKK LEGAL can structure your Deed of Trust so that you can lend with confidence.
Generally, transactions involving deeds of trust are normally structured, at least in theory, so that the lender gives the borrower/trustor the money to buy the property; the borrower/trustor tenders the money to the seller; the seller executes a grant deed giving the property to the borrower/trustor; and the borrower/trustor immediately executes a deed of trust giving the property to the trustee to be held in trust for the lender/beneficiary. In reality, an escrow holder is always used so that the transaction does not close until the escrow holder has the funds, grant deed, and deed of trust in their possession, so that the transaction can be “rolled back” if one party is unable to complete its part of the deal.
Deeds of trust differ from mortgages in that deeds of trust always involve at least three parties, where the third party holds the legal title, while in the context of mortgages, the mortgagor gives legal title directly to the mortgagee. In either case, equitable title remains with the borrower.
A deed of trust is normally recorded with the recorder or county clerk for the county where the property is located as evidence of and security for the debt. The act of recording provides constructive notice to the world that the property has been encumbered. When the debt is fully paid, the beneficiary is required by law to promptly direct the trustee to transfer the property back to the trustor by reconveyance, thus releasing the security for the debt.
Security Agreements (Personal Property)
One of the most common uses of a Security Agreement is accompanying a Promissory Note. In a Security Agreement, the Grantor, typically a borrower assigns, grants and pledges to the Grantee, typically the lender a security interest in personal property which is referred to as the collateral. Examples of typical collateral are shares of stock, livestock, and vehicles. A security agreement is not used to transfer any interest in real property (land/real estate), only personal property. The document used by lenders to obtain a lien on real property is a mortgage or deed of trust.
The Security Agreement sets out the various rights the Grantee will have with respect to the collateral, which are in addition to all other rights which the lender may have by law, such as those rights contained in Article 9 of the Uniform Commercial Code which has been adopted in some form by each state in the United States. The Security Agreement also addresses issues such as permitted sales or other transactions with the collateral in the ordinary course of the Grantor’s business and notices that may be required to be given by the Grantee to the Grantor if certain actions are taken. There are many forms available for purchase from legal supply and banker supply companies, in addition to software that will produce a Security Agreement according to specific user input.
In order for a security interest to attach to the collateral in the possession of subsequent purchasers, it must be perfected. If the Security Agreement is for a purchase money security interest, perfection is automatic. Otherwise, the lender must record either the agreement itself, or a UCC-1 financing statement, in an appropriate public venue (usually the state secretary of state or a state business commission under that person’s authority). Perfecting the interest creates constructive notice, which is deemed legally sufficient to inform the rest of the world of the lender’s rights in the collateral. Where a borrower has used the same property as collateral with respect to multiple security agreements made with different lenders, the first lender to record the interest has the strongest claim to that property.
LOKK has provided a sample Security Agreement for your convenience.
Surety “Personal Guarantee”
The giver of a “guarantee” is called the surety or the “guarantor”. The person to whom the guarantee is given is the creditor or the “obligee”; while the person whose payment or performance is secured thereby is termed “the obligor”, “the principal debtor,” or simply “the principal.”
Suretys have been classified as follows:
Those in which there is an agreement to constitute, for a particular purpose, the relation of principal and surety, to which agreement the secured creditor is a party; those in which there is a similar agreement between the principal and surety only, to which the creditor is a stranger; those in which, without any such contract of suretyship, there is a primary and a secondary liability of two persons for one and the same debt, the debt being, as between the two, that of one of those persons only, and not equally of both, so that the other, if he should be compelled to pay it, would be entitled to reimbursement from the person by whom (as between the two) it ought to have been paid. When lending money, one wants to ensure that the money is secure. In order to do that it is advisable to have a legal professional draft the proper documents within the transaction.
At LOKK we have the experience and expertise necessary to draft and/or review your promissory notes, deeds of trust, security agreements, or surety documents before you lend any money.