The Effects of Amending & Restating a Secured Note

by Phil M. Fowler

A secured note is a form of debt repayment obligation secured by an interest in collateral property. Amending and restating a secured note changes the terms of repayment without interfering with the lender's security interest in the collateral property. The lien aspect of the secured note remains unaffected.

Security Agreement

A secured note always involves a security interest, which is a lender's lien on the borrower's collateral property. The lien is the legal tool that gives the lender the right to repossess or foreclose on the collateral property if the borrower breaches his repayment obligations under the secured note. A lien arises under a security agreement, which is a separate contract from the secured note. In a mortgage loan, for example, the borrower signs both the note and a mortgage security agreement, sometimes also called a deed of trust.

Lien Priority

When a secured lender accepts a lien on the collateral property, the lender steps into a line of priority interests in the collateral property. If the collateral property is already subject to a first mortgage, for example, then the next mortgage lender to accept a lien on the same property has a second priority lien on the property, and so forth. Lien priority is important to a secured lender because foreclosure on a lien with senior priority eliminates any junior, or subsequent, liens on the property. Amending and restating a secured note, without a separate agreement altering the lender's lien priority, does not change the lender's lien priority in the collateral.

Amendment

Amending and restating a secured note results in some change, or amendment, to the original repayment obligation. The secured note outlines the terms and conditions of the borrower's repayment obligation, such as the amount due, the interest rate accruing on the amount due, and the timing of payments required by the borrower. An amended note is a note that has some term or condition that is different from the original note. For example, the principal balance may reduce, the interest rate may go down, or the time for repayment may be extended.

Restatement

A restated note is a note that entirely replaces the original note. In practical affect, a restated note makes it as though the original note never existed. A borrower and lender may agree to enter into a simple amendment agreement that changes just one, or a select few, provision of the original note. But a restated note does more than that. The restated note contains all of the provisions of the note moving forward, not just the provisions that have been amended. The original terms in the original note are completely irrelevant after execution of a restated note.

References

  • "Real Estate Finance Law"; Grant S. Nelson and Dale A. Whitman; 2008

Photo Credits

  • Stockbyte/Stockbyte/Getty Images