Subordination Agreement Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Subordination Agreement, written in plain English, along with examples of how it is used.

What is Subordination Agreement?

(n) A subordination agreement is a contract between the owner of the property and the lender who holds a claim, charge or mortgage on the property, whereby the charge or mortgage holder agrees to subordinate his claims on the property to the new claim, charge, mortgage etc. Such agreements by which a lender or charge holder relinquish his sole right must be acknowledged by a notary and recorded.

History and Meaning of Subordination Agreement

A subordination agreement is typically used in the context of real estate transactions where a borrower wants to obtain a new loan or mortgage but already has an outstanding mortgage on the property. If the borrower defaults on the loan, the lender with the first mortgage on the property gets priority over the lender with the second mortgage. To make sure that the lender with the new mortgage gets the priority, the borrower can enter into a subordination agreement with the first lender. The agreement moves the existing mortgage to a lower priority position, allowing the new mortgage to take first priority.

In short, a subordination agreement is a legal document that outlines who has the first claim on a property in case of default by the borrower.

Examples of Subordination Agreement

  1. Jane wants to build an extension on her house, but she still has an unpaid mortgage. She needs to take out a new mortgage to finance the extension, but the lender won't agree to it unless the old mortgage is subordinated.
  2. John has a first mortgage on his investment property and wants to get a second mortgage to finance a renovation. The second lender would require a subordination agreement to ensure that they are the first in line to collect the proceeds from the property in the event of default.
  3. A company is seeking a loan from a bank to expand its business. However, there is already a lien on the company's assets securing an existing loan. The bank may require a subordination agreement to ensure that their loan will have priority over any other outstanding loans in the case of default.

Legal Terms Similar to Subordination Agreement

  1. Mortgage: A legal agreement by which a lender provides money to purchase property, and the borrower promises to repay the loan with interest.
  2. Lien: A legal claim on a property by a creditor, usually as security for a debt.
  3. Priority: A system under which competing rights to assets are ranked, determining which party has the right to the asset before others.