What is Subordination Agreement?
The Short Answer
Subordination Agreement explained simply
A Subordination Agreement is a legal document that reorders the priority of debts. This means if a borrower can’t pay all their debts, the debt listed as "senior" in the agreement gets paid first. The "junior" debt gets paid only after the senior debt is fully satisfied. This is often used when a property has multiple loans, like a first mortgage and a second mortgage, or when a business owner takes on new financing.
Real-World Example
The Business Expansion Loan
Imagine a business owner has an existing loan from Bank A. They want to expand and need another loan from Bank B. Bank B agrees, but only if their new loan gets paid back before Bank A’s existing loan if the business fails. A Subordination Agreement is signed, making Bank B’s loan senior to Bank A’s loan. This gives Bank B more security.
Why this matters
This agreement is important because it affects who gets paid first if a business or individual defaults on their loans. For lenders, it clarifies their risk. For borrowers, it can help secure new financing by giving new lenders more confidence.
Subordination agreements are common in real estate and business sales. Make sure you understand how they affect your repayment priority, whether you are the borrower or the lender.
Subordination agreements are common in real estate and business sales. Make sure you understand how they affect your repayment priority, whether you are the borrower or the lender.
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