Examples of Subordination Agreements
Subordination agreements are legal documents that help creditors prioritize their claims on a borrower’s assets or income in case of default. A subordination agreement is a contract between two creditors, whereby one creditor agrees to defer his or her claim to another creditor. In the event of a default, the creditor who has subordinated his or her claim will have less priority over the borrower’s assets or income.
Subordination agreements are common in real estate financing, where a lender who provides the second loan will need to ensure that his or her claim is subordinate to the first mortgage lender. The following are some examples of subordination agreements:
1. Mortgage subordination: When a borrower wants to refinance or take a second mortgage on a property, the second lender will require the first lender to sign a subordination agreement. This agreement ensures that the second mortgage lender has a lower priority claim on the property in case of default.
2. Intercreditor subordination: In this type of subordination agreement, two or more creditors agree to their respective claims’ priorities to prevent conflict when the borrower defaults. An intercreditor agreement is common in project financing, where multiple lenders are involved.
3. Lease subordination: In commercial real estate, a tenant may want to sublease the property to a subtenant, but the landlord may be concerned about the subtenant’s creditworthiness. The landlord may require the subtenant to sign a subordination agreement that ensures that the subtenant’s lease is subordinate to the landlord’s claim on the property in case of an eviction.
4. Vendor subordination: In an acquisition, the acquiring company may require the seller to sign a subordination agreement to ensure that the seller’s claims are subordinate to the acquiring company’s claims. This agreement is crucial in ensuring the acquiring company’s debt serviceability in the future.
5. Priority subordination: In cases where a borrower has multiple debts, a lender may require the borrower to sign a subordination agreement that ensures that the lender’s claim takes priority over other creditors’ claims.
In conclusion, subordination agreements are essential in ensuring creditors’ priorities in case of a borrower’s default. The above examples highlight how subordination agreements are used in real estate, project financing, and acquisition transactions. If you’re considering a subordination agreement, it’s crucial to consult with an experienced attorney to ensure that the agreement is valid and enforceable.