Subordination Clause

Subordination Clause Defined

Subordination clauses, also called subordination agreements, establish the priority order of debt payments from a note holder by making one debt “superior” to the other. The subordination clause becomes vital if the owner can’t pay the mortgage or files for bankruptcy.

For more information, see this article about subordination clauses.

Subordination Clause Explained

A mortgage contract’s subordination clause makes the debtor promise to pay this debt before all others in the event of default. These other loans become subordinated. Subordinated debts only get paid after a release of lien to the primary lender, which increases the debt risk for the second lender.

Subordination Clauses in Real Estate

Lenders typically use subordination clauses in real estate when taking out a second mortgage or refinancing a property. The second mortgage takes lesser priority than that of the primary loan. Once the debtor pays off the primary loan, the second loan is eligible for payment.

Other clauses used in real estate include:

• Defeasance clause
• Alienation clause
• Partial release clause
• Acceleration clause

Here is another article about subordination clauses in real estate.

Purpose of Subordination Clause

The purpose of a subordination clause is to protect the primary lender. The primary lender covers the cost of purchasing or refinancing a home. Subordination clauses give lenders some reassurance in getting paid if the debtor becomes financially insolvent.

Subordination Clause Examples

Subordination clause examples include:

• Example 1: Buying a house
• Example 2: Taking out a second mortgage
• Example 3: Leasing a property
• Example 4: Refinancing your home
• Example 5: Using your home’s equity

Subordination Clause Samples

Sample 1 - Loan Agreement:

Subordination. Guarantor covenants and agrees that, after the occurrence and during the continuance of an Event of Default, all indebtedness, claims and liabilities then or thereafter owing by Borrower or any of its Subsidiaries to Guarantor, whether arising under any Loan Document or otherwise, are subordinated to the prior payment in full of the Guaranteed Obligations and are so subordinated as a claim against Borrower or any of its Subsidiaries or any of their assets, whether such claim be in the ordinary course of business or in the event of voluntary or involuntary liquidation, dissolution, insolvency or bankruptcy, so that no payment with respect to any such indebtedness, claim or liability will be made or received while any Event of Default exists. Notwithstanding the foregoing, to the extent Guarantor receives any such payment, such amount shall be held in trust for the benefit of Lender and shall forthwith be paid to Lender to be credited and applied against the Guaranteed Obligations and expenses of collection, whether matured or unmatured, in accordance with the terms of the Loan Agreement or, as applicable, other Loan Document.

Reference:

Security Exchange Commission - Edgar Database, EX-10.31 19 dex1031.htm LOAN AGREEMENT, Viewed March 31, 2021, < https://www.sec.gov/Archives/edgar/data/1471443/000119312511153384/dex1031.htm >.

Sample 2 - Credit Agreement:

Subordination. 

(a) Notwithstanding any provision of this Agreement to the contrary, all rights of the Guarantors and Grantors under Sections 5.01 and 5.02 and all other rights of the Guarantors and Grantors of indemnity, contribution or subrogation under applicable law or otherwise shall be fully subordinated to the indefeasible payment in full in cash of the Obligations. No failure on the part of any Borrower, any Account Party or any Guarantor or Grantor to make the payments required by Sections 5.01 and 5.02 (or any other payments required under applicable law or otherwise) shall in any respect limit the obligations and liabilities of any Guarantor or Grantor with respect to its obligations hereunder, and each Guarantor and Grantor shall remain liable for the full amount of the obligations of such Guarantor or Grantor hereunder.

(b) Each of the Guarantors and Grantors hereby agrees that all Indebtedness and other monetary obligations owed by it to, or to it by, any other Guarantor, Grantor or any other Subsidiary shall be fully subordinated to the payment in full in cash of the Obligations.

Reference:

Security Exchange Commission - Edgar Database, EX-10.1 2 creditagreement.htm EXHIBIT, Viewed March 31, 2021, < https://www.sec.gov/Archives/edgar/data/1166126/000116612614000039/creditagreement.htm >.

Sample 3 - Credit Agreement:

SUBORDINATION AND LEASE AMENDMENT

(a) Subject to the non-disturbance obligations set forth in subsection (b) below, this Lease will be subject and subordinate to any underlying land leases and/or mortgages which may now or hereafter affect this Lease or the real property of which the Premises form a part and to all renewals, extensions, supplements, amendments, modifications, consolidations and/or replacement of the underlying land leases and/or mortgages. Tenant promptly shall, at Landlord’s request, execute and deliver such further instruments as may be desired by any holder of a mortgage or by any lessor under any such underlying land leases. In the event Landlord’s mortgagee shall reasonably require any changes in or additions to this Lease, Tenant hereby agrees to amend this Lease to effect such changes or additions and Landlord shall bear the full expense of the preparation and recording of the necessary written instruments; provided, however, nothing in this Paragraph 16 shall obligate Tenant to agree to any change in the amount of Rent required of Tenant hereunder, or to any change in the term of this Lease.

(b) As a condition to Tenant’s subordination of this Lease to any future land leases and/or mortgages, Landlord shall deliver to Tenant a non-disturbance agreement in a form attached as Exhibit E hereto (the “SNDA”). Concurrently with the execution of this Lease, Landlord shall cause any current holders of interests superior to this Lease to execute and deliver an SNDA to Tenant.

(c) At any time and from time to time but on not less than ten (10) business days prior written request by Landlord, Tenant will execute, acknowledge and deliver to Landlord, promptly upon request, an estoppel certificate certifying:

1. That this Lease is unmodified and in full force and effect (or, if there have been modifications, that this Lease is in full force and effect as modified, and stating the date and nature of each modification);
2. The date, if any, to which Rent and other sums payable hereunder have been paid, and the amount of security deposit and prepaid rent, if any;

iii. That no notice has been received by Tenant of any Event of Default which has not been cured except as specified in such certificate;

1. That to Tenant’s actual knowledge, without investigation, Landlord is not in default hereunder, except as to default specified in such certificate;
2. Such other matters as may be reasonably requested by Landlord or any actual or prospective purchaser or mortgage lender. Any such certificate may be relied upon by any actual or prospective purchaser, mortgagee or beneficiary under any deed or mortgage of the Building or any part thereof.

Reference:

Security Exchange Commission - Edgar Database, EX-10.1(B) 3 d441942dex101b.htm LEASE AGREEMENT, Viewed March 31, 2021, < https://www.sec.gov/Archives/edgar/data/79282/000119312513087664/d441942dex101b.htm >.

Common Contracts with Subordination Clauses

Common contracts with subordination clauses include:

• Refinancing agreements
• Second-mortgage agreements
• Lease agreements
• Equity agreements

Subordination Clause FAQs

Subordination clauses are complicated. These are a few subordination clause FAQs to help you understand them better:

What is subordination in real estate?

Subordination in real estate prioritizes one loan repayment over the other, usually in refinance and lease transactions. The “subordinated” loan only gets paid when the primary lender’s subordination provisions are satisfied by the borrower.

Who benefits from a subordination clause?

The primary lender stands to benefit from a subordination clause more than other parties. If the borrower can’t repay the debt, then the primary lender is guaranteed first rights to repayment.

For more information about who benefits from a subordination clause, read this article, or speak with real estate lawyers for advice.