A subordination agreement recognizes that one party`s claim or interest is greater than that of another party if the borrower`s assets must be liquidated to repay the debt. Subordination agreements are the most common in the mortgage industry. If a person borrows a second mortgage, that second mortgage has less priority than the first mortgage, but these priorities can be disrupted by refinancing the original loan. The Mortgagor essentially repays it and gets a new loan when a first mortgage is refinanced, which now puts the most recent new loan in second place. The second existing loan increases to become the first loan. The lender of the first mortgage refinancing now requires the second lender to sign a subordination agreement in order to reposition it as a priority when repaying the debt. The priority interests of each creditor are modified by mutual agreement by what they would otherwise have become. Simply put, a subordination agreement is a legal agreement that states that a debt is ranked behind another debt in priority for the recovery of a debtor`s repayment. It is an order that changes the position of the setpoint. In the absence of a subordination clause, loans are a chronological priority, which means that a trust instrument first registered is considered a priority for all trust instruments covered thereafter. As such, the oldest loan becomes a primary loan, with the first call for a product from a sale of real estate.

However, a subordinated agreement recognizes that the claim or interest of one party is lower than that of another party if the borrowing entity liquidates its assets. In addition, shareholders are subordinated to all creditors. Subordination agreements can be used in different circumstances, including complex corporate debt structures. Individuals and companies turn to credit institutions when they have to borrow funds. The lender is compensated if he receives interest on the amount borrowed, unless the borrower is in arrears in his payments. The lender could require a subordination agreement to protect its interests if the borrower takes out additional pledge rights over the property, for example. B if he borrowed a second mortgage. The signed agreement must be confirmed by a notary and registered in the official county registers in order to be enforceable.

The law surrounding subordination agreements is complex and there are many subtleties that only an experienced lawyer can analyze. If you need help preparing an agreement or need an analysis of the terms of the contract, please contact the experienced lawyers at Bremer, Whyte, Brown & O`Meara LLP for a consultation. 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. Debt subordination is not uncommon when borrowers are working on financing and entering into credit agreements. Subordination agreements are often executed when a homeowner refinances the first mortgage. The refinancing terminates the loan and drafts a new one. These events occur at the same time.

Once the bank terminates the primary mortgage, the second mortgage rises to the senior position and, as a result, the refinanced primary loan ranks behind the second mortgage.