If a business receives another loan against its existing collateral, it will convince the first lender to be subordinated to the new loan or receive a new subordinated loan to the first. In both scenarios, lenders use a subordinate agreement to define the terms between them. Some senior lenders may include a standstill clause or a clause to protect their interests. If it is the act, the resulting agreements are called subordination and status quo agreements. Many subordination agreements with «status quo» provisions allow the subordinated lender to receive monthly payments until there is a default. Some subordination agreements do not allow payments. If the subordinated lender is subordinated to the principal lender and a loan defaults, the lead lender will invoke the «standstill provisions» to prohibit or even siphon off the borrower`s payments from the subordinated lender until the primary lender is paid in full. This puts the subordinated lender in a bad position. This is the recent case of Grice Engineering, Inc.c Innovations Engineering, Inc., 2010 Westlaw 3768107 (Wisc. App., District 4). What is «what`s in a name» turns out a lot.
Although there are no fixed rules on the conditions that a particular agreement contains on priorities, the name of the agreement can give a fairly good indication of the nature of the agreement and the provisions it contains. Don`t forget to read the fine print. From the perspective of the lead lender, standstill provisions should be used to ensure that the lead lender benefits from its arrangement. However, it also makes sense for the lead lender to make this clause visible in order to avoid pretending that the subordinated lender did not negotiate this provision. If the subordinated lender does not want a standstill provision in the subordinate arrangement, it should carefully read the subordinated arrangement from the perspective of the subordinated lender to ensure that the standstill arrangement is not part of the document. Of course, in seller deferral financing, the seller, who is the subordinated lender, is usually happy to be paid a substantial portion of the purchase price at the time of sale and therefore does not read carefully or understand the effect of a standstill arrangement. Whether the lead lender will remove or relax the provision is a matter of negotiation, but if the subordinated lender plays hard with the lead lender, it may lose the loan and sale. Therefore, these negotiations are part of the transaction that all parties must understand. During the standstill period, a new agreement is negotiated, which usually changes the initial repayment schedule of the loan. This is used as an alternative to bankruptcy or foreclosure if the borrower is unable to repay the loan. The standstill agreement allows the lender to recover a portion of the value of the loan.
In case of foreclosure, the lender may not receive anything. By working with the borrower, the lender can improve their chances of getting a portion of the outstanding debt back. A subordination agreement (sometimes called a priority agreement or priority agreement) is issued by one creditor in favour of another and generally deals with the subordination of security rights governed by law and the right of payment of the granting creditor. .