Subordination Agreement Form Explained
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What Is a Subordination Agreement?
A subordination agreement is a contract signed between two parties:
The contract is used to prioritize senior debt over junior debt. Prioritizing debts is critical in cases of debtors declaring bankruptcy. Lenders need to ensure the debtors will repay them even in such cases, and that is where a subordination agreement comes in.
This agreement will acknowledge that the lender’s claim (senior debt) is superior to the debt owed to the other party (junior debt) when the borrower’s assets get liquidated. The contract will protect the lender's interests in case the borrower places additional liens.
How a Subordination Agreement Works
To show how a subordination agreement works precisely, we’ll illustrate it with an example. Let’s say that a business has $670,000 in senior and $460,000 in junior debt, while the total asset value is $900,000. When the business files for bankruptcy, its assets will be liquidated at market value, which is $900,000.
The senior debtholder will receive their payment in full amount, while the remaining amount will be distributed among the junior debtholders.
Junior debts are riskier than senior debts, so higher interest rates are usually required from the lenders.
What a Subordination Agreement Form Must Include
If you want to write a subordination agreement by yourself and you’re looking for contract forms online, you should be careful. The contract forms and templates can often be incorrect and unreliable.
We suggest checking the list below to see what the crucial points that every legally binding agreement should include are:
- Personal information of the parties—The full legal names and addresses of the relevant parties
- Terms and conditions—All the duties and responsibilities of the parties specified
- Consideration—An item of value exchanged for money or an alternative item
- Offer and acceptance—An offer made by one party and accepted by the other
- Intention—A clear intention of making the agreement legally enforceable
- Signatures—The signatures of everyone involved
Subordination Agreement Types
There is more than one type of subordination agreement. These are the two common ones:
|Subordination Agreement Type||
How It Works
|Executory subordination agreement||The subordinating parties accept to subordinate their interests to the security interests of another lender’s claim. This type of subordinating agreement is only a promise of the future agreement, so it may be challenging to prove it in court|
|Automatic subordination agreement||The main and subordination agreements are recorded and executed simultaneously. The agreement will state that a party signing it agrees to become a secondary debtholder|
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