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What is the Right to Offset

General Ric Luimes 11 Aug

One of the clauses in my General Security Agreement (GSA) with the lender for my farm reads as follows:  

Without limiting any other rights or remedies of the Bank, the Bank may, without notice to the Grantor or any other person, any notice being expressly waived by the Grantor, set-off and apply all or any of the amounts standing to or for the credit of the Grantor at the Bank or any of the Bank’s affiliates, in any currency, against and on account of all or any part of the Obligations, all as the bank may see fit, whether or not the Obligations or the amounts standing to or for the credit of the Grantor are due and payable.  

AND this paragraph goes on to completely eliminate any rights or recourse I might have as the Grantor to the banks unlimited and sweeping powers granted by the preceding clause.  

As with the majority of legalese clauses, few people signing the bottom line really understand what it means.  I’ll be honest, when I signed this document back in 2017, I didn’t know what it meant either.  This clause is called the Right to Offset or the Right of Set-off and gives the bank the power to freeze all of your bank accounts with them, withdraw the money, and apply the balance to any amount you owe them.  This could include savings accounts, investment accounts, chequing accounts, TFSAs, AgriInvest accounts etc.  The only limitation to this is they will not be able to touch your RRSP accounts.  This clause can have broad repercussions in the event of default.   

There are a couple of points in the clause above that make this particularly problematic.  First, the clause says whether or not the debt is due and payable which means they have the right to do this at any time and at their sole discretion.  Second, this is from my GSA which means this contract applies to all present and future amounts I might owe the bank.  I use the term “amounts” and not debt because this could also apply to late fees, court and legal fees, penalty interest, back taxes, realtor fees, receivership or trustee expenses etc on top of the outstanding principal and interest.  The clause is intentionally broad and sweeping to give the bank the greatest possible recourse in the event of default.    

As I outlined in a previous blog , GSAs combined with personal guarantees are particularly dangerous for older generations looking to retire and let their kids take over the farm (find it here).  In uncertain times, the right to offset makes it even more important to make sure you protect the assets of the retiring generation from the bank’s reach.  Even if you are a parent willing to help your kids out when things get really rough, the more assets you have that are out of reach of the bank gives you more bargaining power.  For most farms this will never matter, but the truth is, you are always better off being prepared and not needing it rather than being caught with your pants down.