A subordination agreement is a legal document that outlines the priority of liens and claims on a particular asset or property. It is typically used in situations where a borrower has multiple creditors and wants to obtain additional financing. In simple terms, a subordination agreement establishes the order in which creditors can claim assets during bankruptcy or foreclosure proceedings.
A subordination agreement can take many forms and can be customized to meet the needs of the parties involved. However, there are some common elements that are typically included in the document. These elements include:
1. Identification of the parties involved: The subordination agreement should identify the borrower, the primary lender, and any other parties that are involved in the transaction.
2. Description of the asset or property: The agreement should describe the asset or property that is being used as collateral for the loan.
3. Order of priority: The agreement should clearly state the order in which creditors will be paid if the borrower defaults on the loan. This order is typically based on the date that each creditor’s lien was recorded.
4. Terms of the subordination: The agreement should spell out the terms of the subordination, including the amount of the loan, the interest rate, and the repayment schedule.
5. Conditions for release of the subordination: The agreement should outline the conditions under which the subordination will be released, such as when the borrower has paid off the primary loan in full.
6. Signatures: The agreement should be signed by all parties involved in the transaction, including the borrower, the primary lender, and any other creditors.
In addition to these elements, a subordination agreement may also contain specific provisions that are tailored to the needs of the parties involved. For example, the agreement may include a provision that allows the borrower to obtain additional financing if certain conditions are met.
Overall, a subordination agreement is an important legal document that can help borrowers obtain financing while protecting the interests of creditors. If you are considering entering into a subordination agreement, it is important to work with an experienced attorney who can help you navigate the complex legal requirements involved.