If you`re involved in the world of finance or lending, you`ve likely heard the terms “deed of subordination” and “intercreditor agreement” thrown around. While they both involve the prioritization of debt, they have significant differences in their purpose and implementation. In this article, we`ll explore the distinctions between these two financial instruments.
A deed of subordination is a legal document that allows a lender to prioritize their loan repayment over other loans that may have been taken out by the same borrower. This is often used in situations where a borrower needs to obtain additional financing to complete a project, such as real estate development. The lender providing the additional financing will want to ensure that their loan is repaid first, in the event that the borrower defaults on their debts.
The deed of subordination is a contract between the borrower and the lender, and it establishes that the additional financing takes priority over any existing loans. This allows the borrower to get the necessary funding while also ensuring that the new lender`s interests are protected. The deed of subordination does not, however, affect the rights of any other parties involved in the financing, such as guarantors or other lenders.
An intercreditor agreement, on the other hand, is a contract that establishes the priority of debt between multiple lenders. This is often used in situations where there are multiple lenders involved in a single project, such as a large infrastructure or real estate development. The intercreditor agreement sets out the order in which each lender will be repaid in the event of default.
The intercreditor agreement is a complex document that can involve multiple parties, including the borrower, senior lenders, mezzanine lenders, and subordinated lenders. It establishes the priority of repayment for each lender, and it can also include provisions such as restrictions on the borrower`s ability to take on additional debt or sell the property.
In summary, a deed of subordination establishes priority between a borrower and a single lender, while an intercreditor agreement establishes the priority of debt between multiple lenders. Both types of instruments are important in securing financing for large projects and protecting the interests of lenders, borrowers, and other parties involved in the financing. Whether you`re a lender or borrower, it`s important to understand these financial instruments and seek the advice of legal and financial professionals when navigating complex financial arrangements.