Pledge Agreement

Banks and legal entities that issue loans and establish a standing line of credit, bear great risks. It makes them significantly interested in protecting their economic interests.

Often, such methods of securing the fulfillment of an obligation as a fine, penalty, guarantee and liability in the form of interest for using someone else's money are ineffective and cannot cover losses incurred in connection with violation of the terms of agreement by the other party.

Therefore, in addition to the main transaction between entities, a pledge agreement is often concluded additionally. It contains a reference to the main agreement.

The advantages of a pledge agreement over the other ways of ensuring the fulfillment of an obligation are:

·         The lender has an advantage over other entities in meeting the value of the mortgaged property (Art. 315 of the Civil Code)

·         An agreement should indicate the real value of the property;

·         Both an item, and rights to it can be a pledge;

·         Mostly, the property remains with the pledger to use it for business, which helps to fulfill the obligation under the main agreement;

·         A property transfered for use (rent) to other entities may be a pledge.

What can be used as a pledged item?

·         Real and personal property;

·         Property rights.

Real property is a building, structure, isolated premises and other objects in accordance with Art. 130 of CC. It is important to remember that a real estate pledge agreement should be registered with the state.

Personal property includes everything else, including money and securities. A pledge agreement for personal property does not require state registration.

A pledge agreement must be done in a written way. Without this, an agreement is considered invalid.

Property rights may be a subject of a pledge:

·         Debt claim. It means that the subject of the pledge may be the right of the pledger to demand from third parties the payment or transfer of items. The exception is debt claim that is connected with the identity of the creditor, for example, the right to alimony.

·         Property rights, e.g. leasehold interest.

·         Exclusive rights, which include rights to the results of intellectual activity (Art. 983 of the Civil Code).

Please pay attention that trademarks, as means of individualization, are also related to intellectual property and may be a pledge (Art. 1022 of the Civil Code).

A trademark may have a sufficiently high value, which may be a valuable asset, if nothing else cannot be pledged.

Determining the real value of a trademark in order to include it in a pledge agreement is a rather difficult task, therefore, the cost must be agreed upon by the parties.

Thus, the pledge agreement makes it possible, on the one hand, to ensure the proper fulfillment of obligations under the agreement, and on the other hand, allows the pledger to continue to use the pledged property and rights until the full performance of the main agreement.