What Is an After-Acquired Clause?
An after-acquired clause is a provision included in legal contracts ensuring that subsequent acquisitions of assets will be included in the debtor's liability to the lender. It is sometimes also referred to as the “after-acquired property clause.”
- An after-acquired clause is a provision in legal contracts to account for any future assets a debtor might acquire.
- The clause says that any assets the debtor acquires at a later point in time will be added to the list of collateral that was put up in conjunction with the debt or loan agreement.
- The purpose of such a clause is to avoid the time, effort, and cost of having to go through a new process to adjust the loan terms every time the debtor adds to their assets.
- In many ways, the clause provides extra protection to lenders.
- An after-acquired clause can be used as a bargaining chip by a borrower who may not otherwise meet collateral requirements.
Understanding an After-Acquired Clause
An after-acquired clause is a proactive strategy that dictates that any and all property acquired by the debtor can be automatically added to the list of collateral attached to the debt or loan agreement. This relevant property can represent all types of assets or claims of value, including real estate, inventory, and accounts receivable listings.
By including this provision in the original contract or loan agreement, the lender avoids the hassle and inconvenience of needing to go through a new and separate process to adjust the terms of the loan each time the debtor may increase their assets or take possession of any additional property. The lender does not need to initiate any new process or take any additional steps in order for this condition to go into effect. The lender also does not need to worry about constantly monitoring and tracking any changes in assets the debtor may experience.
Advantages and Disadvantages of an After-Acquired Clause
This clause is used as a way to provide extra protection to lenders. The clause ensures that new purchases can be seized if previously held loan payments have defaulted or if the debtor otherwise fails to live up to their obligations. This type of clause is commonly included in bond indentures and mortgage agreements.
The after-acquired clause may be helpful for borrowers who don’t have the highest-quality credit and may pose a higher risk for lenders. These lenders may be more agreeable to extending credit if they know they will have the opportunity to expand their potential claims to encompass additional collateral at some point in the future.
However, it can have some disadvantages for borrowers, as well. As a result of this clause, the borrower’s current, existing lenders will automatically have a claim not only to the assets they own at the time they incur that debt, but also to any additional assets they may add during the lifespan of the loan.
This means future assets acquired during that period may be subject to the automatic placement of a lien or other claim. The borrower may then have difficulty using those same assets to obtain new credit or loans. This situation can limit their opportunities for increasing their available credit or generating financial growth.
Saves time reporting assets
Protects lenders in case of borrower default
Can be used as a bargaining chip by borrowers
Borrowers can have future assets seized
Asset forfeiture can affect new credit or loans
Can limit opportunities to use new collateral to generate growth
Can a Mortgage Have an After-Acquired Property Clause?
Yes, a mortgage can have such a clause. Commercial properties specifically will have an after-acquired clause stating that the mortgagee will have an equitable lien in all the real property that the mortgagor obtains after the mortgage has been executed.
What Is Considered After-Acquired Property?
After-acquired property is personal or real property that a borrower acquires after having taken on a debt secured by all of their property. This property then becomes additional collateral for the debt. This can include improvements to real property used as a security on an agreement such as a trust deed or mortgage. It can also include personal property that has been pledged.
What Is Future Property?
Future property is any property acquired or contributed after the original issue date. It refers to property that is expected to be acquired subsequent to, or after, the date of the loan agreement execution.
The Bottom Line
After-acquired clauses can benefit both the lender and borrower but are typically used as a way for the lender to gain access to property obtained by the borrower after the signing of an agreement. It can be a way for borrowers who may not otherwise be considered for a loan to gain approval from the lender. However, borrowers need to be aware of the implications such a clause will have on their ability to use future collateral to obtain new loans or generate growth.