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Second-Tier Lending: Understanding the Fine Print

Second-Tier Lending: Understanding the Fine Print

Written by:
Hamish Coupe

In today's financial landscape banks are tightening their lending requirements, prompting many buyers to explore alternative options to borrow such as second or third-tier lending. Mezzanine financers and other last-resort money lenders can provide vital financial support, however it is crucial to approach these agreements with caution and a clear understanding of the fine print. After all, surprises are for birthdays, not loan agreements!

Commonly, people are aware of the nature and operation of a mortgage over land, or perhaps a general security agreement over a company’s assets that has been registered on the Personal Property Securities Register, but there are other tools available which a lender might choose to include within an agreement they propose for you to sign. If money is tight and the pressure is on to raise funding, a borrower may feel pressured to act quickly and without fully considering the terms. We help our clients to achieve their goals, but with a clear understanding of the risks and the outcomes which could eventuate.

Enforcement: When the Unexpected Happens

In the unfortunate event of a default, the costs associated with enforcing a loan or guarantee can escalate quickly. We've seen cases where borrowers were caught off guard, unaware of the extent of their obligations or the rights they had granted to the lender.

One example of these often-overlooked terms involves the potential appointment of a 'receiver' over a natural person, who may sometimes have signed up as a guarantor to the loan. You may be familiar with the idea of a company being placed into receivership, but natural people may also be placed in this situation. An appointment may arise when a borrower or guarantor enters into a deed, agreement, or guarantee and subsequently fails to meet their obligations.

Simply put, if a receiver is appointed over you personally, you may lose control of your assets and they may be sold to repay your debts (and/or cover the additional enforcement costs related to the receiver acting).

How Could This Happen?

A receiver can be appointed with regard to a person's property through operation of an established deed or agreement, which might encompass documents such as a general security agreement or guarantee. It's important to note that for an appointment to be enforceable, it must be in writing. Additionally, unless explicitly stated otherwise in the deed or agreement, the 'receiver' may subsequently act as the agent of the ‘grantor’ (borrower).

Practical Considerations: Understanding the Powers of a Receiver

If a receiver is appointed over a natural person, they may wield a wide range of powers. This might include the authority to demand and recover income from property, manage your assets, and in many cases, sell your assets to settle debts owed to the lender. Furthermore, the receiver will oversee any preferential claims against your assets. A receiver has the powers and authorities expressly or impliedly conferred and detailed within the deed or agreement.

Seek Expert Advice for Peace of Mind

Before entering into a loan agreement (or any security documents) with a second or third-tier lender, it's highly recommended to seek professional advice. While lower tier lending can offer valuable financial support, it's imperative to approach these arrangements with careful consideration and a thorough understanding of the terms involved. Avoid unforeseen costs and complications - Seek advice from our team at McVeagh Fleming lawyers to ensure you fully understand your rights and obligations.

Hamish Coupe (Senior Associate)

DDI: 09 950 5986


Brandon Cullen (Partner)

DDI: 09 966 3609


© McVeagh Fleming 2023

This article is published for general information purposes only.  Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice.  If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice.

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