A subordination agreement is a legal document that claims the position of a certain group or party to a deal in favour of another that was originally superior. It thus subordinates the existing party and hands over the first lien status to the one that was originally inferior, with proper legal consent from the first party or the higher lien-holder. These types of agreements are framed particularly under such cases that involve mortgaging of property or cash. The conditions that arise lead to the decision of signing a subordination agreement, the clauses of which are to be framed clearly and revised thoroughly before final approval, as it involves several legal jargons and procedures which are often complex and difficult to understand for a layman.
The subordination agreement thus transfers the lien of a certain official order or contract to a second party, rather than keeping it as the responsibility of the original party, for several reasons, most of which are related to security aspects. A number of factors need to be considered and incorporated in the document, irrespective of the nature of the particular contract, the extent of lien offered, position of the original lien-holder as well as the new one and such other issues. Some of those points have been stated below:
- The agreement number and other serial numbers or identification numbers of the loan, mortgage, etc. is to be included in the introductory portion of the subordination agreement.
- The term of the agreement is again a very significant part of the document and should be presented with complete details of the same, which would thus include the exact date of commencement and that of completion, as well as a record of the entire term of validity of the agreement.
- All the parties involved in the subordination agreement are to be introduced and described in the document. The proprietor, lien-holder and all other members will be included here, but will be represented with legal terms such as “owner”, “beneficiary”, lender, etc. and the corresponding details are to be provided alongwith.
- The subordination agreement would definitely involve a set of terms and conditions, which need to be mentioned and described in a clear, concise, and understandable pattern(1).
- An agreement that defines the subordination of the original lien-holder to another one very often includes the term “Whereas”, which needs to be used very carefully and appropriately as this is one special term that has a lot of importance in this particular document.
- The agreement is to be signed by all involved parties to keep an evidence of their approval. Generally, it is advisable for all parties to thoroughly read and understand the clauses of the subordination agreement and contact an expert or advocate, if need be.