Security collateral is a measure to ensure the fulfilment of obligations to return leased property, which is a movable property in a property lease contract. Additionally, security collateral aims to ensure the fulfilment of payment obligations and the obligation to return the property either in value or with an equivalent valuable item in case the lessee fails to return the leased property. In this article, TNTP will present the basic content you need to know about the measure of securing the performance of obligations: the security collateral measure.
1. Concept of security collateral
Security collateral is an act whereby a lessee of a movable property transfers a sum of money or precious metals, gems or other valuable things (hereinafter referred to as security collateral property) to the lessor for a specified time limit to secure the return of the leased property.
Thus, the security collateral measure is only used to secure the obligation to return leased movable property. This means that parties are not allowed to use collateral for obligations related to any other types of contracts, including real estate lease contracts.
Collateral assets do not include real estate, negotiable papers, and property rights. Typically, the value of collateral assets is equal to the value of the leased property, but it can be lower or higher depending on the agreement of the parties.
2. Conditions for the effectiveness of collateral
The collateral contract is considered a civil transaction, so for this contract to become effective, the parties must comply with the provisions of Article 117 of the Civil Code regarding the conditions for the effectiveness of civil transactions. According to this, the participants in the contract must have legal capacity, civil conduct capacity compatible with the established contract, voluntary participation, and a purpose and content of the contract that does not violate legal prohibitions and is not contrary to social ethics.
3. Rights and obligations of parties putting up collateral
Parties putting up collateral have the rights and obligations to:
• Request parties receiving collateral to cease extracting, using or establishing civil transactions for security collateral properties; preserve and keep security collateral properties from losing value;
• Exchange and replace security collateral properties or include security collateral properties in other civil transactions when parties receiving security collateral agree;
• Pay for parties receiving security collateral appropriate costs for managing, and preserving security collateral properties. Appropriate costs are necessary, legitimate expenditures which, in normal conditions, parties receiving security collateral must pay for to prevent security collateral properties from going missing, being damaged or destroyed;
• Register property ownership or fulfil other obligations as per the law to enable parties receiving security collateral to possess security collateral properties in case the collateral giver violates commitments regarding contracting or contract performance;
• Other rights and obligations agreed upon or prescribed by the Civil Code or the relevant law provisions.
4. Rights and obligations of parties receiving collateral
Parties receiving collateral have the rights and obligations to:
• Request parties putting up security collateral to cease exchanging, replacing or establishing other civil transactions with security collateral properties without the consent of parties receiving security collateral;
• Possess security collateral properties in case the collateral giver violates commitments regarding contracting or contract performance;
• Preserve security collateral properties;
• Refrain from establishing civil transactions, extracting, or using security collateral without consent of properties of parties putting up security collateral;
• Other rights and obligations agreed upon or prescribed by the civil code or the relevant law provisions.
5. Handling security collateral properties
According to Article 2 of Article 329 of the Civil Code, in the case of returned leased property, the lessee receives the security collateral properties after paying the rent; if the lessee does not return the leased property, the lessor has the right to demand the return of the leased property; if the leased property is no longer available for return, the security collateral properties belong to the lessor.
In addition to the methods of handling security collateral properties as prescribed by law, the parties can also agree on other methods to handle security collateral properties. For example, in case the lessee does not return the leased property, the lessor has the right to retain the security collateral properties and demand compensation for damages, paying the difference if the value of the security collateral properties is lower than the leased property, etc.
This article, “Security collateral – Basic content you need to know” is presented by TNTP. In case of any issues requiring discussion, please contact TNTP for timely assistance.