When it comes to securing a loan or financing for a project, there are various legal documents that come into play. Two of these documents include the control agreement and pledge agreement. While they may seem similar on the surface, they have their differences and unique purposes.
A control agreement is a legal document that is used in situations where a lender needs to ensure that they have control over the collateral that they are using to secure a loan. In this agreement, the borrower agrees to give the lender control over the collateral, which could be a company’s bank account or any other asset. The lender will then maintain this control until the borrower has paid off their debt or fulfilled their obligations.
On the other hand, a pledge agreement is a legal document that is used to pledge an asset as collateral for a loan or financing. In this agreement, the borrower pledges an asset, which could be a property or a piece of equipment, as collateral. The asset remains in the borrower’s control unless they default on their loan, at which point the lender can seize the asset to recover their losses.
One of the key differences between these two agreements is the extent of control that the lender has. In a control agreement, the lender has full control over the collateral, while in a pledge agreement, the borrower maintains control of the asset until they default on their loan. Additionally, the collateral used in a control agreement is typically a financial asset, while the collateral used in a pledge agreement can be any tangible asset.
Another difference between these two agreements is how they are regulated. Control agreements are typically governed by UCC Article 9, which provides a framework for secured transactions in the United States. Pledge agreements, on the other hand, are typically governed by the laws of the state where the asset is located.
In conclusion, control agreements and pledge agreements serve different purposes when it comes to securing a loan or financing. A control agreement gives the lender full control over the collateral, while a pledge agreement allows the borrower to maintain control until they default on their loan. Understanding the differences between these agreements is important for both lenders and borrowers to ensure that they are selecting the appropriate legal document for their specific situation.