Definition
An accommodation party is one who has signed an agreement, such as a promissory note or loan agreement, without receiving value for it. The primary purpose is to facilitate the arrangement by lending their name, thereby allowing another party to secure necessary financing or another business arrangement. The accommodation party assumes liability without direct benefit.
Examples
Example 1: Supporting a Family Member
A father signs as an accommodation party for his daughter’s business loan. Although he doesn’t gain money or services, his involvement helps her secure the loan due to his strong credit history.
Example 2: Business Partner Support
A seasoned business expert signs a promissory note to help a start-up entrepreneur secure financing from a bank. The expert doesn’t get any financial benefit but lends credibility due to their established reputation.
Example 3: Real Estate Transaction
An experienced real estate developer signs a mortgage agreement to assist a young, less experienced developer in obtaining a property loan. The experienced developer has no monetary gain but ensures the deal complements the novice developer’s business interests.
Frequently Asked Questions
Q1: What risks does an accommodation party face?
A1: An accommodation party assumes liability for the debt or obligation as if it were their own. If the borrower defaults, the accommodation party is responsible for repayment.
Q2: Can the accommodation party get any legal relief?
A2: Generally, an accommodation party cannot seek repayment from the borrower unless there is a separate agreement, such as an indemnity contract that specifies such conditions.
Q3: Is becoming an accommodation party a common practice in real estate?
A3: Yes, it is a common practice in real estate, where developers or investors may require additional backing to secure loans for high-value projects.
Q4: What legal protections are available for accommodation parties?
A4: Legal protections mainly revolve around transparent agreements including indemnity clauses. Consulting a legal professional prior to signing can mitigate potential risks.
Q5: Does the accommodation party affect the borrower’s credit?
A5: No, the credit risk remains solely with the borrower. However, should the borrower default, it could adversely affect the accommodation party’s credit standing.
Related Terms
Co-Signer
A co-signer is someone who also signs a loan or credit agreement alongside the primary borrower and assumes equal liability to repay the debt if the original borrower defaults.
Guarantor
A guarantor agrees to repay the borrower’s debt should the borrower default. Unlike an accommodation party, a guarantor typically undergoes less risk and less responsibility unless the borrower defaults.
Promissory Note
A promissory note is a financial instrument containing a written promise by one party (the issuer or maker) to pay a definite sum of money to the other (the payee).
Indemnity
An indemnity agreement offers protection by ensuring that one party will compensate the loss incurred by another party. Often used to protect an accommodation party.
Online Resources
- Nolo: Accommodation Party Legal Definition
- American Bar Association: Co-Signer vs. Accommodation Party
- Investopedia: What Is a Co-Signer
References
- Federal Trade Commission. (2022). Dealing with Debt.
- Black’s Law Dictionary. (2019). Accommodation Party Definition.
Suggested Books for Further Reading
- “Real Estate Law” by Marianne M. Jennings - Offers context and understanding of legal principles in real estate transactions.
- “Credit & Collection Guidebook” by Steven M. Bragg - Provides insights into risk management for creditors and borrowers.
- “Investing in Debt: The ‘How-to’ Book on Buying Paper for Cash Flow” by Jimmy Napier - Discusses strategies for personal and small business finance.
