Article on validity of security in relation to release undertakings

Avance Partner Selinda Näse and professor emeritus Jarno Tepora at the University of Helsinki recently co-authored an article on the validity of security in relation to release undertakings for issue 6/2020 of Defensor Legis, a law journal published by the Finnish Bar Association since 1920 and the oldest attorney publication in the Nordics, and issue 6/2020 of JFT (Tidskrift utgiven av Juridiska Föreningen i Finland), the oldest surviving and one of the most respected law reviews in the Nordics. Selinda summarizes the article as follows:

  • In recent years it has been argued that an undertaking by the pledgee to release security assets upon fulfillment of agreed release conditions, i.e., before full discharge of the secured obligations, could jeopardize the validity and enforceability of the security interest. This uncertainty has in practice had an adverse effect on the availability of security arrangements which provide sufficient comfort and flexibility for both parties.
  • Such arguments have been based on the view that a release undertaking may jeopardize the fulfillment of certain prerequisites for the enforceability of the security, namely (i) the pledgee’s power to control the security asset, a more recently established prerequisite which has been derived from two main prerequisites: the specification requirement and the perfection requirement; and (ii) causa, i.e., a minimum requirement with respect to secured obligation.
  • The article analyses whether a release undertaking may affect the fulfillment of the prerequisites for a valid and enforceable security interest, with focus on the prerequisites mentioned above, and the conclusion is that a release undertaking does not affect the fulfillment of such prerequisites.
  • A mere release undertaking should however not be mixed up with so-called ‘soft pledges’ or automatic release arrangements where the security asset is left at the pledgor’s disposal such that the pledgor is able to independently (without cooperation by the pledgee) effect a release of the security asset. Such automatic release arrangements may also fulfill the prerequisites for a valid and enforceable security, but such arrangements are not assessed in the article. A mere release undertaking on the other hand does not enable the pledgor alone to achieve an effective release without the pledgee’s cooperation but only constitutes an obligation for the pledgee to take the actions required for an effective release upon fulfillment of agreed release conditions, and therefore a release undertaking actually constitutes an agreement regarding the security period.

The full article is available here (in Swedish) and here (in Finnish).