Subordination Definition and Legal Meaning
On this page, you'll find the legal definition and meaning of Subordination, written in plain English, along with examples of how it is used.
What is Subordination?
(n) Subordination is the acceptance of new charges, claims or mortgages on a property held by the lender in priority to the claim, charge or mortgage held by him on that property. On subordination the first lender looses his priority on the property and is eligible for the residuary rights in the event the property is attached to recover the new claims
History and Meaning of Subordination
Subordination refers to the process of rearranging debts or obligations by rearranging prioritization. The term has specific application in property law where an existing mortgage or charge could be pushed below another one. A subordination agreement is very common with property where there are two or more claims over the same real estate.
Property owners can use subordination for the property that they want to sell to add new chattels to the asset. A subordination agreement is often used in different financial transactions where the lender would prefer to take the second position among the mortgage holders of a property, thereby making it easier to secure funding. The primary reason for subordinating one claim to another is to provide the obligated person with additional financing or credit.
Examples of Subordination
John has a $100,000 mortgage on his property. He applies for a home equity line of credit for $50,000. In order to get the HELOC, he must sign a subordination agreement allowing the lender of the HELOC to jump ahead of his current mortgage lender.
A commercial property is being sold, and the buyer wants to add a new mortgage to the property. The primary lender will need to agree to subordination to maintain his current loan-to-value ratio.
A business owner is selling his business and has a UCC financing statement in place for equipment financing. Without the subordination of this statement to a new buyer, the buyer would have to pay off the equipment loan or arrange new financing.
Legal terms similar to Subordination
Priority: The state or condition of being ahead of others in ranking, dignity, or importance.
Collateral: Property or other assets that a borrower offers a lender to secure a loan.
Mortgage: A legal agreement by which a bank or other creditor lends money at interest in exchange for taking title of the debtor's property, with the condition that the conveyance of title becomes void upon the payment of the debt.