What Is A Subordination Agreement In Real Estate

Preference for debt repayment is very important when a borrower is in default or declared bankrupt Bankruptcy is the legal status of a human or non-human entity (a business or government agency) that is unable to repay its outstanding debts to creditors. A subordination agreement recognizes that a party`s right to the interest or claim of another party is inferior if the assets of the borrowing party are liquidated. Simply put, a subordination agreement is a legal agreement that states that one debt ranks behind another debt in priority to recover a debtor`s repayment. It is an order that changes the position of privilege. Without a subordination clause, loans have chronological priority, which means that a trust deed for the first time is considered to take precedence over all trust securities registered thereafter. As such, the oldest loan becomes the main loan, with the first call of the proceeds from a sale of a property. However, a subordination agreement recognizes that the claim or interest of one party is lower than that of another party if the borrowing entity liquidates its assets. In addition, shareholders are subordinated to all creditors. The law surrounding subordination agreements is complicated and there are many subtleties that only an experienced lawyer can analyze. If you need help preparing an agreement or need an analysis of the terms of the contract, please contact the experienced lawyers at Bremer, Whyte, Brown & O`Meara LLP for advice.

Therefore, the primary lenders will want to retain the first position in the debt repayment request and will not approve the second loan until a subordination agreement has been signed. However, the second creditor may refuse to do so. As a result, it can become difficult for owners to refinance their assets. Debt subordination is not uncommon when borrowers are working on financing and entering into loan agreements. Subordination agreements are often executed when an owner refinances the first mortgage. .