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Subordination Agreement
"I need a subordination agreement where a junior lender agrees to subordinate its loan of £50,000 to a senior lender's loan of £200,000, with a term of 5 years, ensuring the senior lender has priority in repayment in case of default."
What is a Subordination Agreement?
A Subordination Agreement lets one creditor voluntarily move down the priority line, giving another creditor a stronger claim to get paid first. It's commonly used when companies refinance their debt or when lenders want to change who gets repaid in which order.
Under English law, these agreements help manage complex lending arrangements, especially when dealing with multiple secured creditors. Banks often require them before offering new loans to businesses that already have existing debt, making them crucial tools for corporate financing and debt restructuring in the UK market.
When should you use a Subordination Agreement?
Consider using a Subordination Agreement when taking on new financing while existing loans are still in place. This typically happens during business expansion, when seeking additional working capital, or restructuring company debt. Most UK lenders require these agreements before extending new credit to businesses with outstanding loans.
The agreement becomes essential in debt refinancing, property development projects, and corporate restructuring deals. For example, when a property developer needs extra funding mid-project, or when a company wants to secure emergency financing without disturbing existing lending relationships, a Subordination Agreement helps unlock new credit while keeping all lenders satisfied with their positions.
What are the different types of Subordination Agreement?
- Shares Subscription Agreement: Used when subordinating debt to equity investment, common in venture capital deals
- Fund Subscription Agreement: Addresses complex multi-party fund structures where different investment tiers need priority ordering
- Advanced Subscription Agreement: Handles future investment rights and priority arrangements, often used in startup funding rounds
- Subscription Service Agreement: Covers recurring payment hierarchies in service-based business models
- Subscription Service Contract: Manages payment priorities in long-term service relationships with multiple revenue streams
Who should typically use a Subordination Agreement?
- Primary Lenders: Usually banks or financial institutions agreeing to step back in priority, often in exchange for better terms or relationship benefits
- Secondary Lenders: New creditors seeking priority status for their loans, typically offering fresh capital or refinancing
- Corporate Borrowers: Companies seeking additional financing while managing existing debt obligations
- Corporate Solicitors: Draft and negotiate the agreements, ensuring compliance with UK lending regulations
- Company Directors: Sign on behalf of the borrowing entity and often provide personal guarantees
- Security Trustees: Manage priority arrangements when multiple lenders are involved in syndicated loans
How do you write a Subordination Agreement?
- Existing Debt Details: Gather all current loan agreements, including amounts, terms, and security arrangements
- Lender Information: Collect full legal names and contact details of all involved creditors
- Security Documents: List all existing charges, mortgages, and other security interests
- Priority Rankings: Define the new order of priority clearly for each debt and security interest
- Company Authority: Confirm board approval and any shareholder consents needed
- Signing Powers: Identify authorized signatories and their proof of authority
- Template Selection: Use our platform's intelligent document generation to create a legally sound agreement that includes all required elements
What should be included in a Subordination Agreement?
- Party Details: Full legal names and addresses of all lenders, borrowers, and guarantors
- Debt Identification: Clear description of senior and subordinated debts, including amounts and dates
- Priority Terms: Explicit ranking of payment priorities and security interests
- Standstill Provisions: Rules preventing subordinated creditors from taking enforcement action
- Payment Conditions: Specified circumstances when subordinated debt payments are permitted
- Turnover Provisions: Requirements for redirecting prohibited payments to senior creditors
- Governing Law: Express choice of English law and jurisdiction
- Execution Block: Proper signature sections for all parties, including witness requirements
What's the difference between a Subordination Agreement and a Sublease Agreement?
While a Subordination Agreement and an Assignment Agreement both deal with debt and creditor rights, they serve distinctly different purposes in English law. A Subordination Agreement changes the priority order of existing debts, while an Assignment Agreement transfers rights or obligations from one party to another.
- Purpose: Subordination Agreements rearrange payment priorities between creditors; Assignment Agreements transfer legal rights or receivables entirely
- Timing: Subordination typically happens during refinancing or new lending; Assignment occurs during debt sales or corporate restructuring
- Party Relationships: Subordination keeps original creditors involved but changes their ranking; Assignment completely replaces one party with another
- Legal Effect: Subordination modifies existing rights; Assignment creates a complete transfer of rights and obligations
- Documentation: Subordination requires ongoing monitoring of payment priorities; Assignment needs one-time transfer documentation and notice to relevant parties
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