Legal Definitions - specialty debt

A specialty debt refers to a debt that arises from a very formal type of agreement, often called a "specialty contract" or a "deed." Historically, these agreements were literally sealed with wax, but today, "under seal" often signifies a document that is formally executed, witnessed, and delivered, indicating a clear intention to create a legally binding obligation of a higher standing than a simple contract.

Key characteristics of a specialty debt include:

• It is created through a highly formal document, such as a deed or a bond.
• It often has a longer period during which legal action can be taken to enforce the debt (known as the statute of limitations) compared to debts arising from simple contracts.
• In some legal systems, the formal nature of the document means that the agreement may be enforceable even without the traditional element of "consideration" (something of value exchanged between parties) that is usually required for simple contracts.

Here are some examples to illustrate specialty debt:

• Mortgage Deed: When an individual borrows money from a bank to purchase a home, they typically sign a mortgage deed. This is a highly formal legal document, often executed "under seal" or with equivalent formalities, that secures the loan against the property. The obligation to repay the loan, as outlined in this deed, constitutes a specialty debt.

  Illustration: Because the mortgage debt arises from a formally executed deed, the bank generally has a much longer time (e.g., 12 years or more, depending on jurisdiction) to pursue legal action if the homeowner defaults, compared to a simple personal loan agreement which might have a shorter limitation period (e.g., 6 years).

• Corporate Bonds: A large corporation might raise capital by issuing bonds to investors. These bonds are formal financial instruments, often structured as deeds, which represent a promise by the corporation to repay the principal amount along with interest to the bondholders by a specific date. The money owed by the corporation to its bondholders is a specialty debt.

  Illustration: The formal nature of the bond as a specialty contract provides investors with a robust legal claim. If the company fails to make payments, bondholders can rely on the extended enforceability period associated with specialty debts, offering them greater security and a longer window to seek repayment through legal channels.

• Deed of Covenant for Payment: Imagine a situation where a parent formally agrees, through a deed of covenant, to pay their adult child a specific sum of money annually for a set number of years, perhaps to help with educational expenses, without receiving anything in direct return. This formal promise to pay creates a specialty debt.

  Illustration: Even though the parent is not receiving immediate "consideration" (something of value in exchange) from the child, the formal execution of the agreement as a deed makes the promise legally binding. If the parent fails to make a payment, the child has a specialty debt claim, which benefits from the longer statute of limitations and the inherent enforceability of a deed.