Lesson 9 of 25 · 6 min
Notice: what it is and what it is not
A notice records a failed test; it does not create the right to sell, which you granted at signing.
A notice looks like the beginning of the process and is closer to a receipt for something that already happened. The breach occurred when the prices printed. The right to act on it came from the agreement. The notice communicates both.
Delivery is usually deemed rather than proven. A clause commonly provides that a communication is effective when sent to the address, email or message centre on file, whether or not it is read. So the clock that matters starts at 07:41 when the message left, not at 19:00 when it was opened. Where the lender sells at 11:05 the same morning, notice was given three hours and twenty-four minutes earlier by the agreement's own definition, and the fact that nobody saw it changes nothing in that definition.
Put the numbers alongside. Collateral value $318,000, threshold 76 percent, permitted balance $241,680, balance $251,020, shortfall $9,340. The cure by sale is $9,340 ÷ 0.24 = $38,916.67. That figure exists whether or not a notice is generated, and it is the notice that is optional in many agreements, not the sale.
Four things a notice is commonly not:
- A precondition for selling, where the agreement reserves the right to sell without prior notice.
- Proof that the message was received, since delivery is deemed effective on sending.
- A statement of the full amount that will be sold, which the lender usually determines itself.
- An invitation to negotiate the amount, the deadline or the holdings.
The authority to sell was granted once, at signature. A notice tells you the condition for using it has been met.
Key terms
- Deemed delivery
- A term making a communication effective when sent to the details on file, regardless of whether it was opened.
- Notice of shortfall
- A record that the test failed and by how much. It reports the event rather than authorising the response.
- Waiver of notice
- A clause allowing the lender to act without notifying first, typically where markets are moving quickly.
Worked example
The three hours between sending and selling
Collateral value $318,000, threshold 76 percent, balance $251,020. Notice sent 07:41; sale executed 11:05.
- Permitted balance
- $241,680
- Shortfall
- $9,340
- Cure by sale
- $38,916.67
- Notice effective
- 07:41
- Elapsed before the sale
- 3 hours 24 minutes
- Elapsed before it was read
- Not a term of the agreement
$318,000 × 0.76.
$9,340 ÷ 0.24.
On sending, under deemed delivery.
Two of these timestamps appear in the agreement and one does not. The one that does not is the one the borrower experienced.
Check yourself
A notice is sent at 07:41 to the email address on file. You read it at 19:00. The lender sold pledged shares at 11:05. Was notice given?
Saved in this browser only. No account, nothing sent anywhere.
Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.