The Perils of Charging Clauses

Article by Mark Davidson

What is a Charging Clause?

A charging clause is the specific wording in an agreement or contract that allows a creditor a charge over your interest in an asset. Essentially the creditor gains the status of a secured creditor or equitable mortgagee. This means that the creditor may be able to lodge a caveat or a mortgage over your property, such as the following:

  • Your house;
  • Debtors of your business;
  • Your investment in shares or stock;
  • Your motor vehicle; and
  • Plant and equipment of your business.

How is a Charging Clause applied?

There is no standard or set wording to apply a charging clause. The precise wording can differ for terms of trade, lease, guarantee, cost agreement, mortgage or commercial contract.
An example of a charging clause would be “I charge all of my property now and in the future for the payment of any moneys that I may owe you at any time”.
Note, it is important to provide sufficient description for a grantor of the charge to manifest a present intention to charge an asset specified as security. The charging may also apply to after-acquired property so long as the property was identifiable at the time of enforcement of the charge.

Who may ask you sign a charging clause?

Any third party that you enter into a formal agreement with may ask that you sign a document that includes a charging clause. Common third parties that ask that you provide a charge over your property are:

  • Banks;
  • Landlord; and
  • Suppliers.

What can you do about them?

You need to carefully review a document before you sign with another party to determine if a charging clause is included. If included, then the next step is to determine what assets or property has been charged to the third party.
It’s also relevant to note that you can only provide a charge over interests in property you own and not interests that might be beneficially held, for example, on trust.
Before signing the document, you may want to negotiate the charging clause with the creditor. There may be other options to consider such as a bank guarantee or a limited personal guarantee.

You should consider obtaining legal advice if you are concerned about a charging clause and its effect. It’s not uncommon for charging clauses to be disputed.

How can we help?

If a claim as a result of a charging clause is being pursued against you, then you should consider the amount of equity you hold in the asset to satisfy the creditor’s claim.
If the asset is important to you, then you may be able to refinance the asset with a more favourable payment arrangement and extinguish the liability to the creditor.
If there is no equity because there is already a financier, then the charging clause is unlikely to provide any benefit to the creditor. Typically, that first financier will realise the asset by a sale. With the sale of the asset, that charging clause will provide little benefit to the creditor who holds the benefit of it.

Where can you get advice and assistance?

If you are about to sign, or are concerned that you have signed an agreement with a charging clause and would like to better understand the potential consequences, please contact Pearce & Heers at our Brisbane or Gold Coast offices for an for an initial, obligation-free consultation.


We’re happy to answer any questions you may have, so please don’t hesitate to call us and schedule a consultation.



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