Control agreements: Overview, definition, and example
What are control agreements?
A control agreement is a legal arrangement where one party (often a lender, investor, or creditor) obtains control over certain assets, typically as collateral for a loan or obligation. This agreement outlines the terms and conditions under which the controlling party has the authority to manage or direct the use of those assets. Control agreements are commonly used in the context of secured financing, particularly when a borrower pledges collateral that can be held or controlled by the lender or another third party.
For example, in a lending scenario, a lender may require a control agreement when a borrower pledges accounts receivable or deposit accounts as collateral. Under this agreement, the lender gains control over the collateral to ensure that if the borrower defaults, the lender can access the pledged assets to recover the outstanding loan balance.
Why are control agreements important?
Control agreements are important because they provide security for lenders and creditors by allowing them to take control of pledged assets if a borrower defaults. These agreements mitigate risk by ensuring that the collateral is accessible and can be used to satisfy the debt. For borrowers, control agreements often represent a requirement to access financing, and they typically outline the limitations and conditions under which the lender can exercise control over the assets.
For businesses, control agreements help secure financing by offering lenders confidence in the collateral’s availability, improving the likelihood of securing favorable terms for a loan. For lenders, control agreements reduce the risk of lending by ensuring they can gain access to valuable assets if necessary.
Understanding control agreements through an example
Imagine a company takes out a loan from a bank, and the company uses its cash account as collateral. As part of the loan agreement, the bank requires a control agreement, where the bank gains control over the cash account. If the company defaults on the loan, the bank can exercise control over the cash account to recover the loan balance. The control agreement ensures that the bank has access to the collateral without needing to go through the borrower, which provides additional security for the loan.
In another example, a lender may provide financing to a business and require a control agreement for the business’s accounts receivable. If the business defaults on the loan, the lender gains the right to collect the accounts receivable directly, reducing the risk of non-payment.
Example of a control agreement clause
Here’s how a control agreement clause might appear in a financing agreement:
"The Borrower agrees to enter into a Control Agreement with the Lender regarding the Borrower’s Deposit Account held at [bank name]. Under this Control Agreement, the Lender shall have exclusive control over the Deposit Account in the event of a default, and the Borrower shall not make any withdrawals or transfers from the Deposit Account without the Lender’s prior written consent."
Conclusion
Control agreements are vital tools in secured transactions, ensuring that lenders or other controlling parties have access to collateral in the event of a default. By providing security for loans or obligations, these agreements help facilitate financing and protect the interests of creditors.
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.