A subordination agreement is a legal document that outlines the priority levels of various creditors in case of borrower bankruptcy or default. It is an essential document in the lending industry, especially in situations where there are multiple loans involved.
The subordination agreement enables a borrower to take out multiple loans while ensuring that each creditor`s rights and claims are clearly defined, and their priorities established. The terms of a subordination agreement play a crucial role in determining the enforceability and validity of the agreement. As such, it is vital to understand the key terms involved in a subordination agreement.
1. Senior Creditor
The senior creditor is the lender with the first priority in the event of the borrower`s default or bankruptcy. The senior creditor`s claim is high in priority than that of the junior creditors, thus giving them an advantage in recovering their funds. The senior creditor`s position is critical and must be defined and agreed upon in the subordination agreement.
2. Junior Creditor
The junior creditor`s claim on the borrower`s assets is secondary to that of the senior creditor`s in case of default or bankruptcy. This means that the junior creditor will only receive their payment after the senior creditor has been fully repaid. Junior creditors can include banks, credit unions, and other lending institutions.
3. Subordinated Debt
Subordinated debt refers to the loan or credit facilities that are subordinate or lower in priority to the senior creditor. Subordinated debt is usually extended to the borrower, knowing that it is subject to the senior creditor`s priority claims in case of default. This type of debt typically attracts higher interest rates than secured debt.
4. Non-Disturbance Agreement
A non-disturbance agreement is a legal agreement between the tenant or borrower, the landlord or senior creditor, and the junior creditor. The agreement allows the junior creditor to step into the shoes of the senior creditor in case of default, without any disturbance or interference from the senior creditor. The non-disturbance agreement is essential for tenants or borrowers who have long-term leases or loan agreements.
5. Intercreditor Agreement
An intercreditor agreement is a legal agreement between the senior creditor and the junior creditor. The agreement outlines the priority of the senior creditor`s claims and the extent to which the junior creditor can assert their rights. The agreement is typically used in situations where there are multiple loans involved, and the lenders want to ensure that their rights are fully protected.
Conclusion
Subordination agreement terms are essential in clarifying the priority of claims and rights of various creditors in case of default or bankruptcy. As a borrower, it is essential to understand these terms before signing a subordination agreement. As a lender, it is crucial to ensure that the terms reflect your interests and provide adequate protection for your investment. A knowledgeable professional can help ensure that your subordination agreement terms are clear and well-articulated.