After-acquired property: Overview, definition, and example
What is after-acquired property?
After-acquired property refers to assets that a person or business obtains after entering into an agreement, usually one involving a loan or security interest. If a contract includes an after-acquired property clause, it means that any new assets the borrower acquires will automatically be included as collateral for a loan or security agreement.
For example, if a business takes out a loan and pledges its inventory as collateral, an after-acquired property clause could ensure that any new inventory purchased later is also covered under the loan.
Why is after-acquired property important?
This concept is important because it protects lenders by ensuring they have a claim to both existing and future assets if the borrower defaults. Without an after-acquired property clause, the lender’s security interest would only apply to the assets the borrower owned at the time of signing.
For businesses, it’s crucial to understand this clause because it can affect their ability to use new assets freely. If new equipment, inventory, or property is automatically tied to a loan, it could limit financing options or flexibility in selling those assets.
Understanding after-acquired property through an example
A restaurant takes out a loan and uses its existing kitchen equipment as collateral. The loan agreement includes an after-acquired property clause, meaning that any new ovens, refrigerators, or other equipment the restaurant buys will also be covered under the lender’s security interest. If the restaurant fails to repay the loan, the lender could claim both the old and new equipment to recover the debt.
In another case, a retail business secures financing with its inventory as collateral. As the business restocks and adds new products, those items automatically become part of the lender’s security interest. This ensures the lender always has a claim to valuable assets, even as the inventory changes.
An example of an after-acquired property clause
Here’s how an after-acquired property clause might look in a contract:
“The Borrower grants the Lender a security interest in all assets, including but not limited to, all after-acquired property, which shall automatically become part of the collateral securing the obligations under this Agreement.”
Conclusion
After-acquired property refers to any assets a borrower acquires after signing an agreement, which automatically become part of the collateral if an after-acquired property clause is included. This protects lenders but can limit a borrower’s flexibility in managing new assets.
Businesses should carefully review loan agreements to understand whether new assets will be subject to a lender’s security interest, as this can impact future growth and financial decisions.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.