What is a Subordination Agreement?

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An agreement by which one encumbrance (for example, a mortgage) is made subject (junior) to another encumbrance. To "subordinate" is to "make subject to," or to make of lower priority.

A Subordination Agreement is a legal document that establishes the priority of liens or claims against a specific asset. It is commonly used in the context of real estate transactions, but can also be applied to other types of assets.

When multiple parties have a financial interest or claim on a particular asset, such as a property, a Subordination Agreement helps determine the order in which those claims will be satisfied in the event of a default or liquidation. The agreement establishes a hierarchy of rights and specifies which party's claim will take precedence over the others.

Typically, a Subordination Agreement is created when a property owner wants to obtain additional financing or refinance an existing loan. In such cases, the new lender may require the existing lender to subordinate their lien position. By subordinating their claim, the existing lender agrees to allow the new lender to have a higher priority lien on the property. This means that in the event of foreclosure or sale of the property, the new lender's claim will be satisfied before the existing lender's claim.

Subordination Agreements are also common in situations where a property owner wants to lease or sell a portion of their property while there is an existing mortgage or lien in place. In such cases, the property owner may need the existing lender to subordinate their lien to the new lease or sale agreement, allowing the new tenant or buyer to have a higher priority interest in the property.

The terms and conditions of a Subordination Agreement may vary depending on the specific circumstances and the parties involved. It is a legally binding contract that must be agreed upon by all relevant parties, including the existing lender, the new lender or creditor, and the borrower or property owner. It is recommended to consult with legal professionals experienced in real estate or lending transactions to draft or review a Subordination Agreement to ensure compliance with applicable laws and to protect the rights and interests of all parties involved.