Taking security over patents
Without being able to offer suitable security, a business may find it difficult to borrow, or at least the terms of secured borrowing will be more favourable than those of unsecured borrowing. Intellectual property rights, including patents and patent applications, are assets that potentially can be used as security for loans or other credit. Indeed, for some research-based businesses, the patent portfolio may be their most valuable asset. In this article, the person who creates the security is referred to as ‘the chargor’ and the person who takes the benefit of the security — who could be a lender or even a supplier trading on credit terms — is referred to as ‘the chargee’.
So how is security taken over patents and what are the potential consequences? There are two basic methods of creating security over patents under English law.
While in principle it is possible to mortgage patents, a mortgage requires an assignment of the patents to the chargee, subject to the chargor’s right to have the patents re-assigned on repayment of the loan and a licence back to the chargor. Although the safest for a chargee, a mortgage is often considered too cumbersome for lenders and an equitable charge is generally preferred by both parties. For an equitable charge, while there needs to be a valid and enforceable contract between the chargor and the chargee that sets out an intention to create a security interest, no transfer of title to the relevant patents is required. While an equitable charge is often more convenient for both parties in practice, if patents subsisting in certain jurisdictions are offered as security, a lender may still insist on the first method simply because the law of the country in which the patent is registered permits mortgage assignments but does not recognise charges…
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