After-Acquired Clause

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.”

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.

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.