A third party security is security given by an entity which secures the legal responsibility of a third party. If the third party security does no longer include any non-public obligation to pay at the part of the mortgagor or chargor, it is able to be handled like a constrained recourse assure in order that the liability of the mortgagor or chargor is confined to the amount which may be realized upon disposal of the third party security.
In this guide, we look at how this type of security is different to direct security and the key considerations for lenders to be aware of and take into account when they are being granted third party security.
Why does third party security differ from direct security?
Third party security differs from direct security, because the rights and duties applying in relation to guarantees and indemnities also apply to a third party charge. Generally speaking the duties are embodied in the overriding principle that a creditor must not prejudice the rights of the surety against the principal debtor or the rights of contribution against his co-sureties. Broadly speaking, the right of subrogation is the right of the surety to “stand in the shoes of” the creditor once it has been repaid by the surety and the right of contribution is the right of the surety to recover from his co-sureties money to the extent that the surety has borne more than his fair proportion of the liability to the creditor.
How can you achieve the same effect as a third party security?
The same effect can be achieved by taking a guarantee and a direct security and indeed this is probably a better method. Many banks will not have a third party security template for this reason.