Different liens on the same property usually have priorities according to the time of their creation. To achieve the subordination of a prior lien, there must be an actual agreement to that effect.
This form is a generic example that may be referred to when preparing such a form for your particular state. It is for illustrative purposes only. Local laws should be consulted to determine any specific requirements for such a form in a particular jurisdiction.
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A Subordination Agreement is a legal document that establishes the priority of liens or claims against a specific asset.
For example, assume a company has secured senior debt of $60 million and subordinate financing that totals $40 million. If a company liquidates all of its assets in a bankruptcy for $80 million, it first needs to pay off the $60 million amount of its debt held by secured lenders.
A subordination agreement prioritizes debts, ranking one behind another for purposes of collecting repayment from a debtor in the event of foreclosure or bankruptcy. A second-in-line creditor collects only when and if the priority creditor has been fully paid.
When you get a mortgage loan, the lender will likely include a subordination clause essentially stating that their lien will take precedence over any other liens placed on the house. A subordination clause serves to protect the lender if a homeowner defaults.
A lien is a claim or legal right against assets that are typically used as collateral to satisfy a debt. A creditor or a legal judgment could establish a lien. A lien serves to guarantee an underlying obligation, such as the repayment of a loan.
Subordination agreements are written agreements between lienholders to change the priority of mortgage, judgment, and other liens. Under a subordination agree- ment, the holder of a superior or prior lien agrees to permit a later lienholder's interest to take precedence.
The new lender prepares the subordination agreement in conjunction with the subordinating lienholder. Then the parties typically sign the agreement. But in some cases, just the subordinating lender will need to sign the paperwork.
There are two ways to subordinate tranches of debt so that one tranche takes priority over the other. The first is called lien subordination, in which two forms of senior, equally ranked debt share the same collateral, but one is given priority over that collateral in case of liquidation.
