Subordination Agreement Meaning and Definition

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A subordination agreement is a legal document that outlines the relationship between two or more lenders that are involved in providing financing for a specific project or asset. In this type of agreement, one lender agrees to take a secondary position behind another lender in terms of their right to be repaid if there is a default on the loan.

This document is commonly used in situations where a borrower needs more than one loan to finance a project or asset purchase and where one or more lenders want to take priority over others when it comes to repayment. In these situations, lenders will typically request a subordination agreement to protect their position in the repayment hierarchy.

A subordination agreement can be either general or specific in nature. A general subordination agreement applies to all debts and obligations of the borrower, while a specific subordination agreement will only apply to a specific loan.

Under a subordination agreement, the primary lender will have the right to receive payment first, and the subordinate lender will only receive payment once the primary lender has been fully repaid. This can be particularly important if there is a default on the loan because it ensures that the primary lender is not left without any recourse if the borrower cannot make repayments.

In some cases, the borrower may have to agree to certain conditions in order to obtain a subordination agreement. For example, they may need to agree to provide additional collateral or agree to certain restrictions on their business activities.

Overall, a subordination agreement is an important legal document that can provide a great deal of protection for lenders who are involved in financing a project or asset purchase. By agreeing to take a secondary position, lenders can reduce their risk and ensure that they are still able to recover their investment if there is a default on the loan.

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