Legal Definitions - real security

Real security refers to a type of collateral or guarantee for a debt that involves an interest in real property. Real property includes land and anything permanently attached to it, such as buildings, structures, or fixtures. When a lender takes real security, they gain a legal right over that specific property. If the borrower fails to repay the debt as agreed, the lender can typically enforce their rights against the property, often by selling it, to recover the money owed. This provides a strong assurance to the lender because real property is generally a valuable and tangible asset.

• Example 1: Home Mortgage

  A family purchases a new house and obtains a mortgage loan from a bank. The house itself, along with the land it sits on, serves as the real security for the loan. If the family were to stop making their mortgage payments, the bank would have the legal right to initiate foreclosure proceedings, sell the property, and use the proceeds to recover the outstanding debt. This arrangement gives the bank confidence in lending a large sum, knowing they have a valuable, fixed asset to secure their investment.

• Example 2: Business Expansion Loan

  A manufacturing company needs a substantial loan to purchase new machinery and expand its production facility. The company offers its existing factory building and the land it occupies as real security to the lending institution. The bank approves the loan, understanding that if the company defaults on its repayment obligations, they can pursue legal action to sell the factory property to recoup their funds. The commercial property's inherent value and permanence make it a reliable form of collateral.

• Example 3: Agricultural Land Loan

  A farmer seeks a loan to invest in new irrigation systems and expand their crop cultivation. They offer a portion of their farmland as real security to the agricultural bank. In this scenario, the specific parcel of land provides the bank with a tangible asset that can be sold if the farmer is unable to repay the loan due to unforeseen circumstances like poor harvests or market downturns. The land's enduring value as a productive asset makes it suitable for real security.