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Why is a power of attorney important in security?

Gateley Legal

Security documents usually contain various promises (called undertakings) from the person granting that security (we’ll assume it’s the borrower here) to the person taking it (the lender).

These will often include undertakings:

  1. relating to the borrower’s conduct;
  2. ensuring that the borrower does nothing to lower the value of the secured assets;
  3. ensuring that the borrower only deals with the secured assets in a certain way; and
  4. ensuring that, if there is an issue with the security, the issue can be fixed, perhaps by security being retaken or new security being granted by the borrower. This last type of undertaking is known as a further assurance provision.

Why include a power of attorney?

Where the relationship between the borrower and the lender has broken down then it can often be difficult to get a borrower to comply with the undertakings it has given in the security document. The lender needs a way to ensure they can force the borrower to comply. The threat of breach of contract is not always enough and not always a fast enough solution.

That is why it is important that any security document contains a power of attorney. The power of attorney clause in a security document allows the lender to carry out certain acts on behalf of the borrower. These acts include complying with the undertakings that the borrower has given.

How does this work in practice?

If, for example, a legal charge has provisions relating to the upkeep and insurance of the property and the borrower isn’t meeting these obligations, by using the power of attorney clause, the lender can, in the borrower’s name, remedy the breaches, perhaps by putting insurance in place or entering into repair contracts. Or if a property is bought by a borrower at a later date and the borrower is not complying with an obligation to grant a legal charge over it in favour of the lender, the lender can use that power of attorney to take the security.

The remedies available are fairly wide but they all depend on the exact provisions of the power of attorney clause and the obligations of the borrower under the security document.

What else?

For a power of attorney to be effective it must be granted as a deed. This is why they are often seen in security documents but are not useful in loan agreements which are merely contracts and not deeds.

The nature of the power of attorney in a security document can be different to the type you may come across where somebody is just signing documents for another person. It will usually state that it has been given ‘by way of security’ and ideally should be ‘irrevocable’. Where the power of attorney includes both of these elements then, so long as the lender still has obligations owed to it by the borrower, the power of attorney can’t be revoked, even on the death, incapacity, bankruptcy of the borrower or, in the case of a corporate borrower, its winding up or dissolution.

Does your security contain a power of attorney…?

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