Subordination Clause Real Estate:
How They Work

Clients Rate Lawyers on our Platform 4.9/5 Stars
based on 4,036 reviews

Jump to Section

Need help with a Real Estate Contract?

Post Project Now

Post Your Project (It's Free)

Get Bids to Compare

 Hire Your Lawyer

Lenders take on several risks when issuing mortgages. Due to the complexity of the real estate market, property transfers, liens, and other financial issues can arise at a moment’s notice. Instead of leaving their financial interests to chance, they can use a subordination clause in real estate to ensure that their repayment rights take priority over other agreements.

The article below discusses what you should know about subordination clauses in real estate:

What Is A Subordination Clause In Real Estate?

Subordination clauses in real estate, also called dependent clauses, are contractual agreements used to indicate that current debt claims will take precedent over others made in the future. In effect, subordination is the action of one party yielding deferring priority to another party. They’re primarily used within the context of mortgage notes and commercial real estate agreements.

Real Estate Subordination Clause Meaning

Real estate subordination clauses generally refer to the liens that are placed on a property. They assign a chronological priority to one party that then trickles down to the next in line. You can adjust a lien’s priority by requiring that borrowers and lessees sign a subordination clause with your other agreements.

Subordination Clause Examples

Subordination clauses are complicated. There are state and federal regulations that govern their use. They can also be very powerful when used correctly, which is why you should always seek legal advice before incorporating them into your strategy.

Let’s take a look at subordination clause examples to help you better understand how they work:

Meet some lawyers on our platform

Jonathan M.

1 project on CC
View Profile

Michael K.

70 projects on CC
View Profile

Albert M.

9 projects on CC
View Profile

Daniel R.

11 projects on CC
View Profile

Subordination Clause in Mortgage Note

Subordination clauses in mortgage notes set the conditions around your mortgage agreement that states the lender’s lien takes priority over any other property liens. The most vital thing to remember is that if the borrow defaults on the mortgage, the first lienholder receives repayment first.

In most cases, the first priority generally originates from the primary lender. Here’s an example of how subordination clauses in mortgage notes work for a better understanding:

  • John decides to buy a house
  • John’s bank agrees to lend him the money to purchase a home on the condition that they take repayment priority
  • John’s bank uses a subordination clause to secure its rights
  • In three years, John defaults on several credit cards
  • John’s credit card companies successfully pursue a civil claim against him for repayment
  • The civil court issues a lien on John’s house
  • John must repay his lien to the lender before repaying creditors pursuant to the subordination clause

Subordination Clause in Commercial Real Estate Lease Agreement

Subordination clauses in commercial real estate lease agreements set the priority of the lease versus the mortgage. If the commercial property owner defaults on their mortgage, the tenant will undoubtedly face severe business disruptions as a result. If the lease is subordinate and second to the mortgage, then a lender has the right to evict the tenant at will.

Here’s an example of subordination clauses to solidify your understanding:

  • ABC Company rents a property from XYZ Corporation
  • At the time of the lease, XYZ Corporation included a subordination clause in the lease that states it’s second in priority over the mortgage
  • XYZ Corporation is still making mortgage payments to its bank
  • After one year, XYZ Corporation defaults on the mortgage, and the bank repossesses the property
  • Since the lease is a second priority, the bank terminates the lease
  • ABC Company must now find a new location

Keep in mind that it’s generally in the lender’s best interest to continue leasing commercial properties. Doing so allows them to collect money on an otherwise vacant, unmortgaged property. However, lenders may not have the resources to engage in this type of relationship, so outcomes may vary.

Who Benefits From A Subordination Clause in Real Estate?

The party that primarily benefits from a subordination clause in real estate is the lender. However, if you decide to pursue a second mortgage, then the subordination clause prioritizes the first lender’s repayment and contract rights.

The most common application of subordination clauses is when refinancing a property. Refinancing occurs when the original loan is paid in full, and a new loan provider structures the agreement under a new interest rate. Instead of leaving the new lender at the priority’s list end, they can use subordination clauses to ensure that they are first in line for repayment.

As such, the claim holder must agree to them before the refinancing process can begin.

Get Free Bids to Compare

Leverage our network of lawyers, request free bids, and find the right lawyer for the job.

Get Bids Now

Other Important Real Estate Clauses

A subordination clause is just one of the many terms that you will find in real estate contracts, including purchase agreements , purchase and sale agreements , real estate purchase agreements , and land contracts . A complete real estate contract generally contains other provisions designed to protect the rights of the lender, borrower, and insurer.

From subrogation clauses to release clauses, other important real estate clauses may include the following:

Subrogation Clause

Subrogation clauses give one party the right to pursue another party’s claim. They generally pertain to insurance companies within the context of real estate. With a subrogation clause, insurers are free to pursue a third party if they caused property losses, such as a fire or water damage, while still paying for the property on a mortgage note.

Acceleration Clause

Acceleration clauses permit lenders to speed up a mortgage’s repayment when the terms and conditions go unmet. They outline the triggering events, such as non-payment, bankruptcy filings, and unauthorized property transfers, and the remedies by which the lender has to demand acceleration. Lenders must send a letter to mortgage holders when the acceleration clause is triggered.

Alienation Clause

Alienation clauses, also called due-on-sale clauses, require that the mortgage noteholder repay the full balance with interest before a property is transferred to another buyer. They describe the terms and conditions associated with contractual obligations by the borrower and their release. Lenders primarily benefit from alienation clauses since it prevents unapproved property ownership transfers.

Defeasance Clause

Defeasance clauses are provisions that state the mortgage borrower will receive the property title or deed of trust upon satisfying contractual obligations. They generally summarize the finalization of the mortgage and how secured collateral will be handled. Most states don’t require you to include a defeasance clause for it to be legitimate.

Prepayment Clause

Prepayment clauses authorize the lender to penalize a borrow for significantly paying down their mortgage within the first five years of the transaction. These clauses primarily benefit lenders since it offers some form of interest income protection. They must also explicitly disclose prepayment penalties when the borrower is closing on the mortgage.

Release Clause

Release clauses are the terms and conditions if the mortgage holder pays off a proportional amount of the mortgage. They can also be used in brokerage transactions if a release is required after accepting a specific offer. The release clause is what gives the lender full legal rights over a property, including foreclosure, financial, and insurance rights.

Get Legal Help with Real Estate Subordination Clauses

Real estate subordination clauses and the laws surrounding them are complicated. There are several considerations and nuances that you should consider with a legal professional. If you need legal help with subordination clauses in real estate, speak with real estate lawyers for advice and guidance. Post a project now on ContractsCounsel.

How ContractsCounsel Works
Hiring a lawyer on ContractsCounsel is easy, transparent and affordable.
1. Post a Free Project
Complete our 4-step process to provide info on what you need done.
2. Get Bids to Review
Receive flat-fee bids from lawyers in our marketplace to compare.
3. Start Your Project
Securely pay to start working with the lawyer you select.

Meet some of our Lawyers

Sarah K. on ContractsCounsel
View Sarah
5.0 (13)
Member Since:
June 21, 2021

Sarah K.

General Counsel (Commercial, Tech & IP Focus)
Free Consultation
Get Free Proposal
New York, New York
11 Yrs Experience
Licensed in NY
New York University School of Law

Seasoned attorney with over 10 years of experience in legal leadership across business functionalities. Specialization in tech, product, IP, data and commercial but well versed in all transactional and operational advisory matters.

Michael K. on ContractsCounsel
View Michael
5.0 (35)
Member Since:
June 28, 2021

Michael K.

Associate Counsel
Free Consultation
Get Free Proposal
Miami, FL
5 Yrs Experience
Licensed in FL
St. Thomas University School of Law

A business-oriented, proactive, and problem-solving corporate lawyer with in-house counsel experience, ensuring the legality of commercial transactions and contracts. Michael is adept in reviewing, drafting, negotiating, and generally overseeing policies, procedures, handbooks, corporate documents, and more importantly, contracts. He has a proven track record of helping lead domestic and international companies by ensuring they are functioning in complete compliance with local and international rules and regulations.

Roman V. on ContractsCounsel
View Roman
5.0 (1)
Member Since:
July 9, 2021

Roman V.

Trademark Attorney
Free Consultation
Get Free Proposal
Milwaukee, WI
9 Yrs Experience
Licensed in MD
Marquette University Law School

I'm an experienced trademark attorney and enjoy helping clients protect and grow their brand names through trademark registration and enforcement. I've worked with a wide variety of clients in different industries, including e-commerce, software as a service (SaaS), and consumer goods, to register trademarks for product names, logos, and slogans, both in the US and abroad.

Justin A. on ContractsCounsel
View Justin
5.0 (8)
Member Since:
July 7, 2021

Justin A.

Free Consultation
Get Free Proposal
Seattle, WA
6 Yrs Experience
Licensed in NY, WA
The University of Chicago Law School

I am an entrepreneurial lawyer in the Seattle area dedicated to helping clients build and plan for the future. I earned my law degree from the University of Chicago and worked in a top global law firm. But I found advising real people on legal issues far more rewarding. Reach out to discuss how we can work together!

Max M. on ContractsCounsel
View Max
4.9 (17)
Member Since:
July 12, 2021

Max M.

Business Attorney
Free Consultation
Get Free Proposal
Baltimore, Maryland
16 Yrs Experience
Licensed in MD
Georgetown University Law Center

Results oriented business attorney focusing on the health care sector. Formerly worked in Biglaw doing large multi-million dollar mergers and acquisitions, financing, and outside corporate counsel. I brought my skillset to the small firm market, provide the highest level of professionalism and sophistication to smaller and startup companies.

Joshua C. on ContractsCounsel
View Joshua
Member Since:
June 28, 2021

Joshua C.

Free Consultation
Get Free Proposal
Ashland, MA
7 Yrs Experience
Licensed in CA, MA
UCLA School of Law

Attorney Joshua K. S. Cali is a respected business, estate planning, and real estate attorney based in Ashland serving Middlesex County and other nearby areas. Joshua graduated summa cum laude from Bentley University in Waltham, MA, and from UCLA School of Law in Los Angeles. Before starting his own firm, Joshua practiced estate planning for high net worth clients at a boutique law firm in San Diego, CA.

Erin F. on ContractsCounsel
View Erin
Member Since:
June 28, 2021
Drew B. on ContractsCounsel
View Drew
Member Since:
June 30, 2021

Drew B.

Managing Member
Free Consultation
Get Free Proposal
Cleveland, Ohio
25 Yrs Experience
Licensed in MO, OH
Saint Louis University

Drew is an entrepreneurial business attorney with over twenty years of corporate, compliance and litigation experience. Drew currently has his own firm where he focuses on providing outsourced general counsel and compliance services (including mergers & acquisitions, collections, capital raising, real estate, business litigation, commercial contracts and employment matters). Drew has deep experience counseling clients in healthcare, medical device, pharmaceuticals, information technology, manufacturing, and services.

Daniel R. on ContractsCounsel
View Daniel
Member Since:
July 1, 2021

Daniel R.

Managing Attorney
Free Consultation
Get Free Proposal
10 Yrs Experience
Licensed in IL
Gonzaga School of Law

Daniel is an experienced corporate attorney and works closely with corporations, privately held companies, high-net worth individuals, family offices, start-ups and entrepreneurs. Daniel graduated from the Gonzaga University School of Law and is licensed to practice law in Illinois.

Jaroslaw P. on ContractsCounsel
View Jaroslaw
Member Since:
July 20, 2021

Jaroslaw P.

Free Consultation
Get Free Proposal
Warsaw, Poland
16 Yrs Experience
Licensed in AK
Wroclaw University - Law

Attorney - I graduated in Law from the University of Wroclaw and in Economics from the Scottish University of Aberdeen; My legal interests include, in particular: contracts, intellectual property, and corporate law, as well as transactional / regulatory advisory along with related risk management (M&A); The industries with which I have worked most often are: IT, real estate and construction, professional sport, industrial chemistry and medicine, oil & gas, energy, and financial services; I possess many years of experiences working with international entities for which I have prepared and negotiated contracts, as well as (due diligence) reports, analyses, litigation documents, and presentations; Apart from law firms, I have also worked for investment banks and big 4 - thanks to that I also gained financial, technological, and consulting experiences; I shall be described by: accuracy, openness, honesty, concreteness, a broad approach to the problem, and ... a lack of bad manners, along with a good sense of humour :)

Find the best lawyer for your project

Browse Lawyers Now

Want to speak to someone?

Get in touch below and we will schedule a time to connect!

Request a call