Often, income property and business opportunity sales transactions include the transfer of ownership in personal property in the sales price. When a seller finances any part of the sale of both real estate and personal property with a carryback note, a security agreement and a Uniform Commercial Code-1 financing statement (UCC-1) are required, in addition to the trust deed.
The security agreement and the UCC-1 work in tandem to create a carryback lien on the personal property sold by bill of sale. These forms attach the debt evidenced by the note to the personal property involved. Thus, they provide security for the debt in addition to any trust deed carried back on the real estate interest conveyed. [See first tuesday Form 436-1]
In California real estate sales transactions, two types of security devices are used by carryback sellers and lenders to create liens on collateral. These are:
- trust deeds for interests held in real estate; and
- the UCC-1 for interests held in personal property.
UCC-1 and trust deeds are known as security devices. Each describes the encumbered property, be it personal or real. They provide a source for repayment on a default in either the note or the security devices.
The UCC-1 is used to lien personal property, such as inventory, furnishings, equipment and trade fixtures, just as trust deeds are used to lien a fee or leasehold interest real estate. By using a UCC-1, a creditor (carryback seller or lender) receives a security interest in personal property as collateral for a debt.
The UCC-1 is a security device attaching debt to property, not an agreement to do so. The document granting the security interest under the UCC-1 and defining the terms of the encumbrance is the security agreement, which must accompany the UCC-1 to create the lien. In contrast, a trust deed is both an agreement to create a lien and the security device which attaches property as the lien.
The UCC-1 is requires three pieces of information:
- the debtor’s name and address;
- the creditor’s name and address; and
- a list of the personal property collateralized.
Filing a UCC-1
To protect the priority of the security interest received by the carryback seller from later claims on the property by others, the lien must be perfected. To do so, the UCC-1 is filed with California’s Secretary of State while the trust deed is filed with the recorder for the county in which the real estate is located. However, if the collateral is something tied to a particular piece of real property such as timber, mineral rights, or fixtures, the UCC-1 is also filed with the recorder’s office of the county where the property is located.
Thus, the public is given notice that the described property is held as collateral, security for the carryback debt. If the borrower defaults on the note or security devices, the carryback seller or lender may foreclose and have the property sold. The proceeds of the foreclosure sales are used to reduce or pay off the debt.