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Technically, this means ‘standing alongside’ – something
which follows from the main contract and is, effectively, part and parcel of that
agreement and tied to it. A collateral agreement is one which could not be fulfilled
independently of the main contract.
The easiest example to cite is a contract
for the sale of stock which is dependent upon the sale of a shop as a going concern.
There
is a secondary meaning to the term collateral – it sometimes means the security
for a loan. Normally a lender takes a mortgage charge to secure the loan of funds
required to finance the original purchase. Where the value of the property is
well in excess of the loan there are no problems and the charge against the title
recorded at the Land Registry will be adequate security.
However, if the
loan is close to the full market value of the property, the bank or building society
may ask for additional collateral before approving the mortgage. This may be a
second charge against another property or some other valuable consideration –
for example, an insurance policy charged to the lender, an undertaking from a
family trust or a lien (q.v.) over shares in family-owned
business. This secondary security stands alongside the main registered charge
as additional collateral.
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