A subordination agreement is a legal document that outlines the hierarchy of liens or claims against a property. In simpler terms, it is an agreement between two or more parties that defines which party holds the superior claim, and which holds the subordinate claim, in the event of a default or foreclosure.

In real estate transactions, a subordination agreement is common when a property owner takes out a second mortgage or home equity loan. The lender of the primary mortgage will have the superior claim, while the lender of the second mortgage will have the subordinate claim. This means that in the event of foreclosure, the primary mortgage lender will be paid first, followed by the subordinate lender.

Subordination agreements are also common in business loans. If a company takes out multiple loans to fund different aspects of the business, a subordination agreement may be necessary to determine which lender has priority in the event of bankruptcy.

Without a subordination agreement in place, it can be difficult to determine which lender is entitled to repayment first. In these cases, a judge may have to intervene and make a ruling based on the specific circumstances of the case.

It is important to note that subordination agreements only apply to secured loans, where the collateral (i.e. the property or assets) is used to secure the loan. Unsecured loans, such as credit cards or personal loans, do not involve any collateral and therefore do not require a subordination agreement.

In summary, a subordination agreement is a legal document used to clarify the hierarchy of claims or liens against a property or asset. It is commonly used in real estate and business loans to determine which lender has priority in the event of a default or foreclosure. By understanding the definition of a subordination agreement, borrowers and lenders can ensure that their interests are protected and that they have a clear understanding of their legal obligations.