Subordinated debt is riskier than priority loans, so lenders typically charge higher interest rates to offset the risk. In addition, all creditors are superior to shareholders in the preference for claims in the event of liquidation of a company`s assets. However, loans follow a chronological order in the absence of a subordination clause. It implies that the first recorded act of trust is considered higher than any subsequent recorded act of trust. A subordination agreement is a legal document that establishes that one debt is ranked behind another in priority for the recovery of a debtor`s repayment. Debt priority can become extremely important when a debtor is in arrears with payments or goes bankrupt. A subordinated loan agreement typically allows property owners to finance improvements to their property at times when general priority rules would not allow the owner to do so. Many mortgage lenders will not offer a mortgage unless they have a first right of pledge on the collateral. The subordinated loan agreement allows a new lender to take a first right of pledge, while the lender was not the first in time. The signed agreement must be confirmed by a notary and registered in the official county registers in order to be enforceable.
Real estate rights and interests usually boil down to timing and priority. The subordinated loan agreement allows interest rate holders to change the general priority rules by allowing a second-stage lender to take precedence over a prime-in-time lender. In essence, the subordinated loan agreement reverses the general rules of mortgage priority for a given piece of land. The „junior“ or second guilt is referred to as subordinated debt. . . .