What is Subordination Agreement Drafting?
A subordination agreement is a legal document that outlines how debts are repaid and in what order. A higher priority debt will be paid before a lower-priority one. This arrangement serves to provide creditors with the reassurance that they will be paid.
This contract can be used in various situations, such as refinancing a first mortgage or taking out a business loan that a company wants to make a payment priority over older debt.
If you need to draft a subordination agreement, such as if you’re a lender, you should read the rest of this article. We’ll explore key terms to include in it, how to draft it accurately, and how a qualified lawyer can assist you with the process.
What are Key Terms in a Subordination Agreement?
A subordination agreement usually contains core components, such as:
- Parties. Define all the parties involved, such as the senior lender, junior lender, and borrower. Include their full legal names and addresses.
- Subordination. The junior lender agrees that they will only be paid after the senior lender has been paid.
- Amendments. If changes are made to the agreement, they should be done in writing and signed by all involved parties.
- Notices. If there are any notices required, these must be given in writing and delivered to the parties’ addresses, which are included in the agreement.
- Standstill provision. This can be included in a subordination agreement. It states that the junior lender is prohibited from demanding payment or foreclosing.
- No payment clause. This prevents the borrower from paying the junior lender if the senior debt is not paid.
- Solvency condition. This can be included to explain what financial milestone triggers the lifting of the subordination order so that regular repayment rights can be resumed.
- Irrevocability. The subordination remains binding until the senior debt is fully paid off.
How Do You Draft a Subordination Agreement?
When writing a subordination agreement, it’s important to provide some additional information so that parties have clarity.
Explain the Background
You should write some background to give the agreement context. This includes mentioning the existing loans and the reason why priority payments are being selected.
Clarify the Debt Instruments
The agreement must clearly detail both loans, such as by including their exact dates and original principal amounts. This provides clarity for both parties and prevents ambiguity that can lead to disputes.
Write it in Present Tense
It’s important to write the subordination clauses in present tense instead of agreeing to subordinate in the future. This will prevent misunderstandings or disputes over if the subordination has occurred.
Establish a Standstill Period
A standstill period refers to the number of days the junior lender must wait before being allowed to take enforcement action after notifying the senior lender of a default. It usually is around 60 to 180 days.
Make sure that the standstill period matches the cure period in the senior loan documents so that it’s reasonable.
Execute the Agreement
All parties involved in the subordination agreement must sign and date it. Depending on the local requirements and jurisdiction, the document might need to be witnessed or notarized. A lawyer can assist you with the legal requirements.
Do You Need a Lawyer for Subordination Agreement Drafting?
It’s usually a good idea to hire a lawyer to draft your subordination agreement so that all the information is accurate and legally enforceable. Drafting it with a legal professional can help you to protect your legal and financial interests.
Here’s what a lawyer will do during the drafting of your subordination agreement:
- They’ll check all related documents, such as a mortgage or loan, so that there’s consistency across contracts.
- They’ll consider what creditor or lender should have priority to make the agreement fair and balanced.
- If required, they can negotiate key terms to make the agreement favorable.
- They’ll draft the agreement with clear, simple language to prevent ambiguity.
- They’ll include appropriate clauses, such as regarding limitations, to protect your legal and financial interests.
- They’ll ensure the agreement is well coordinated and closed, such as by providing supporting documents if required.
- They can review your final document to ensure all clauses are clear and legally valid. This is a great way to give you peace of mind if you’ve already drafted the agreement.
Where to Find a Lawyer for Subordination Agreement Drafting
If you need to hire a lawyer to help you draft a subordination agreement, you don’t have to feel stressed about where to find one. On online legal platforms, you can access a network of qualified lawyers who are experienced to help you.
ContractsCounsel is one of the largest online legal marketplaces that connects you to a network of vetted lawyers. All lawyers on the platform have years of experience in contract drafting and review.
Here are the easy steps to follow to request that a lawyer from the platform drafts your subordination agreement:
- Go to the ContractsCounsel marketplace.
- Post your project for free. You can mention a few details to help you find the most suitable lawyer.
- Receive multiple bids from lawyers directly on the platform who have the experience to help you. This prevents you from having to find a lawyer.
- Review the lawyers’ profiles. Go through the platform’s lawyer data, such as their location, client ratings for previous projects, expertise, and credentials. This will help you to find the right lawyer.
- Connect with a lawyer you think is best suited to your requirements and hire them to draft your subordination agreement for a flat fee.
