A Blanket Subordination Agreement: What You Need to Know
A Blanket Subordination Agreement is a legal document that specifies which debt takes priority in the event of a borrower defaulting on multiple loans. This agreement is commonly used in commercial real estate transactions where multiple lenders are involved in financing a property.
In essence, the agreement establishes a hierarchy of lenders, ensuring that each lender receives a proportional share of the proceeds in case the borrower defaults. This is an important safeguard for lenders, as it helps minimize financial losses and ensures that all parties involved in the transaction are protected.
How Does a Blanket Subordination Agreement Work?
A Blanket Subordination Agreement typically includes provisions detailing how each lender`s interest in the property is secured, including the order of priority in case of default. It also outlines how proceeds from the sale of the property will be distributed among the lenders.
For example, if a borrower obtains three loans to finance a property – a first mortgage, a second mortgage, and a line of credit – the Blanket Subordination Agreement would define which of these loans would receive priority if the borrower defaulted. Usually, the first mortgage would receive priority, followed by the second mortgage and the line of credit.
The reason for this hierarchy is that the first mortgage is the most senior lien on the property, meaning that it has priority over any other liens. In other words, if the property is sold, the proceeds from the sale must first be used to pay off the first mortgage before any other debt is repaid.
Why is a Blanket Subordination Agreement Important?
A Blanket Subordination Agreement is important because it clarifies the order of priority in which lenders will receive payments. This provides lenders with a level of protection against financial losses in case of borrower default or bankruptcy.
For example, imagine that a borrower defaults on a property with multiple loans outstanding. Without a Blanket Subordination Agreement, each lender would have to fight over their share of the proceeds, which can be a lengthy and costly process. However, with a Blanket Subordination Agreement in place, the order of priority is established, making the process much smoother and reducing the likelihood of disputes.
In conclusion, a Blanket Subordination Agreement is a critical legal document that establishes the hierarchy of lenders in case of borrower default. It provides lenders with a level of protection against financial losses and ensures that all parties involved in a commercial real estate transaction are protected. As with any legal document, it`s important to consult with an experienced attorney to ensure that the agreement is drafted and executed correctly.