What does an after-acquired property clause do in a security agreement?

A security agreement over a business’s assets can cover what the business owns on the day it is signed. With an after-acquired property clause, it can also cover assets the business obtains later, such as new inventory or equipment. If you are selling and taking back a note secured by the business’s assets, this clause decides whether your security keeps pace as the buyer’s assets change. This page uses Ontario’s Personal Property Security Act (PPSA); other provinces have their own Acts.

What the Act permits

Section 12(1) of the Ontario PPSA says a security agreement may cover after-acquired property. Subject to s.11.1, a security interest, including one in the nature of a floating charge, attaches to collateral only when value is given, the debtor has rights in the collateral or the power to transfer rights in it to a secured party, and one of the further conditions in s.11(2) is met. So the interest does not attach to a later asset before the debtor acquires those rights in it. Section 13 also allows a security agreement to secure future advances.

Where the clause stops

Section 12(2) lists exceptions. No security interest attaches under the clause to crops that become such more than one year after the security agreement is executed, subject to an exception for crops given in conjunction with a lease, purchase or mortgage of land. It also does not reach consumer goods, other than accessions, unless the debtor acquires rights in them within ten days after the secured party gives value. Alberta’s PPSA has its own provision limiting attachment to after-acquired property.

Why ranking still matters

Covering later assets does not decide who is paid first. A change of control clause is a separate protection. Under the Ontario Act, if no other provision applies, priority between security interests perfected by registration follows the order of registration (s.30(1)), and purchase-money interests have separate rules (s.33). The federal Canada Small Business Financing Program shows the practical effect. Its guidelines say that where a prior charge flows from an after-acquired clause in a security document, such as a general security agreement, held by the lender or another creditor, the lender must obtain postponements of rank so its security in the financed asset is first rank.

What to ask

• Does the clause cover all present and future assets, or only listed classes?
• Which other creditors have registered, and would any of them need to postpone?
• Does the buyer’s lender expect you to postpone your rank?