The Importance of Intercreditor Agreements

What is an Intercreditor agreement?
An Intercreditor agreement outlines the rights and obligations of multiple creditors when lending to the same borrower. These are often referred to interchangeably as Deeds of Priority, however, an intercreditor agreement tends to be a more complex document which does not merely order the priority of debt and distribute the proceeds upon a default of the borrower.

Intercreditor agreements also include undertakings between the senior and junior creditors, requiring the subordinate (junior) lender to refrain from taking certain actions, and to prevent the borrower from making payments to the junior lender. The nature and extent of such undertakings will vary between lenders and can often be a point of negotiation.

What is the purpose of an Intercreditor agreement?
These agreements govern the priorities between the lenders and establish the actions that can be taken by each lender. It is usual for the agreement to set out the priorities of the creditors, to dictate the way repayments are to be made and to establish the manner in which any enforcement under each of the legal charges can be taken. An example being that the second lender may need the consent of the primary lender to begin proceedings against the borrower. Intercreditor agreements can also be used to define what borrowing can be secured against a particular property, and whether the priority sum is limited or capped in relation to either lender.

Do I need an Intercreditor agreement?
Where there is more than one creditor involved in a transaction there will likely need to be a contractual arrangement between the parties to establish the inter-play between the parties’ advancing funds to the borrower. This is so that party intentions are clearly defined in advance, attempting to prevent any difficulties being encountered later in the process. In a commercial property transaction, senior lenders will often want an Intercreditor agreement in place so that they can fully compensate their losses and often even gain interest on their investment before a junior lender can think about compensating their losses from the proceeds of sale of the land or property.

What should I look for in an intercreditor agreement as a junior lender?
If you are a junior lender you need to be mindful that you fully understand the agreement, given the senior lender’s superior position. Senior lenders often dictate the terms that are included in intercreditor agreements, and this can lead to issues later down the line. It is therefore important to get the right advice when setting up these agreements and ensure you have a thorough understanding of the rights in the agreement to be certain it is fair for all parties. Please contact us to speak to a member of our Real Estate team.

Rachel Duncan
Partner, Real Estate
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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