What is a subordination agreement? Understanding its importance

A subordination agreement is a legal document that establishes a priority order among creditors regarding claims against a debtor's assets. In this agreement, one creditor voluntarily agrees to subordinate their existing claim or lien on a property to another, typically to facilitate a new loan or refinancing. This means that in the event of liquidation or foreclosure, the subordinating creditor will be paid only after the secured party has received their due amount from the proceeds of the collateral.

View form

Subordination Agreement of Deed of Trust

Subordination Agreement - Lien

Subordination Agreement

Subordination Agreement - Real Estate

Subordination Agreement Form and Variations

Who should use this form

This form is primarily used by creditors and debtors involved in secured transactions. It is particularly relevant when:

A debtor is seeking additional financing and needs to establish a first lien for a new lender.
Existing creditors are willing to accept a lower priority for their claims in order to facilitate the debtor's access to funds.
The real estate involved is subject to multiple liens, and clarity on priority is necessary to mitigate risks in future transactions.

Key components of the form

The subordination agreement includes several critical components that outline the terms of subordination:

Identities of the parties: Clearly states the names and roles of the subordinating creditor and the new secured party.
Description of the collateral: Provides a detailed description of the property or assets that serve as collateral for the loan.
Consent to subordination: A clause confirming the subordinating creditor's agreement to subordinate their interest in favor of the new lender.
Continuity of agreement: Ensures that the agreement remains in effect as long as any obligations under the loan are outstanding.
Modification flexibility: Allows for potential changes to the agreement without requiring approval from the subordinating creditor, enhancing the creditor's ability to manage risk.

Common mistakes to avoid when using this form

When completing a subordination agreement, users should be careful to avoid the following errors:

Inadequate descriptions: Failing to accurately describe the collateral can lead to disputes over the priority of claims.
Lack of signatures: Not obtaining all necessary signatures from the parties involved can render the agreement unenforceable.
Ignoring state-specific requirements: Some states may have particular rules regarding the submission and notarization of such agreements, which must be adhered to for the form to be valid.
Not consulting legal advice: It's important to seek legal guidance to ensure that the agreement is drafted correctly and serves the parties' best interests.

What to expect during notarization or witnessing

Notarization or witnessing is a crucial step in the execution of a subordination agreement. Here are key points to consider:

Identification: All parties must present valid forms of identification to the notary public.
Presence of all parties: Typically, all signers must be present at the time of notarization to sign the document in front of the notary.
Notary's role: The notary public will verify identities, witness the signing, and then affix their seal and signature to the document, providing it with legal validity.
Potential fees: Be prepared to pay a nominal fee for the notary’s services, as this varies by jurisdiction.