The contract between two lenders to the same borrower or project that fixes priority, payment rights, and who can act when things go wrong.
The longer version
An intercreditor agreement sets the rules between lenders who have claims on the same property or borrower, most often a senior mortgage lender and a mezzanine or subordinate lender. It decides who gets paid first, who can do what in a default, and what each lender can change without the other.
The core provisions are predictable. Payment priority and when the subordinate lender may receive payments. Notice to the subordinate lender of senior defaults and a right to cure them. A right for the subordinate lender to purchase the senior loan at par in a default. Standstill periods limiting enforcement. Limits on amending the senior loan without consent. And the conditions a party must meet to buy the borrower's equity through a foreclosure, usually defined as a qualified transferee.
For the senior lender it protects the collateral from a subordinate lender acting against its interest. For the subordinate lender it preserves a path to protect its investment, usually by taking over the property and keeping the senior loan current.
Much of the agreement is market standard, and the negotiation sits in the definitions, especially what counts as a qualified transferee and how long cure periods run.
Common questions
- What is an intercreditor agreement?
- An agreement between lenders with claims on the same borrower or property, typically a senior and a mezzanine lender, setting payment priority, default rights, cure and purchase rights, and limits on changing each loan.
- Why is an intercreditor agreement needed?
- Because a mezzanine lender's foreclosure on the borrower's equity changes who owns the senior lender's collateral. The agreement controls how that can happen and protects each lender from the other's actions.
- What is a qualified transferee?
- A party permitted under the intercreditor agreement to acquire the borrower's equity through a mezzanine foreclosure, usually defined by minimum net worth, real estate experience or institutional status. The definition is one of the most negotiated terms.
- What is a cure right in an intercreditor agreement?
- The subordinate lender's right to receive notice of a senior loan default and to cure it, for example by making missed payments, within a set period before the senior lender enforces.
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