Subordination Agreement

Subordination Agreement

A Subordination Agreement is a legal document that establishes the priority of debts or claims against a debtor’s assets. This agreement is commonly used in real estate transactions and financing, particularly when multiple loans or liens exist against a property.

In a Subordination Agreement, one creditor agrees to subordinate their claim to the claim of another creditor, meaning that in the event of a bankruptcy or liquidation, the subordinated creditor will be paid only after the primary creditor has been satisfied. This arrangement is crucial in determining the order in which debts will be repaid, which impacts the risk profile for lenders.

For example, if a property owner has an existing mortgage (the primary loan) and subsequently takes out a second mortgage (the subordinated loan), the first mortgage lender will have the first claim to the proceeds from any sale of the property or from the liquidation of assets should the owner default. Should the owner default on both loans, the proceeds from the sale of the property will first be used to pay off the primary mortgage lender, while the subordinated lender will only receive payment if there are remaining funds after fulfilling the primary debt.

Subordination Agreements are often used in commercial real estate financing and can also play a role in personal loans, allowing borrowers to refinance or obtain additional financing by changing the priority of existing debts.