What is an Intercreditor Agreement in Real Estate?

What is an Intercreditor Agreement in Real Estate?

An Intercreditor Agreement is a legal contract between multiple creditors who have lent money to the same borrower, outlining the relationship and terms among them concerning their shared security interests in the borrower's assets. This agreement is crucial in transactions involving complex financing structures where different lenders may hold various types and priorities of debt against the same real estate property.

Here's what it typically covers:

1. Priority of Claims: The agreement specifies the hierarchy of claims on the borrower’s assets, determining which creditors get paid first in the event of a default.
2. Rights and Obligations: It defines the rights and obligations of each creditor, including how they can act regarding the underlying collateral, such as restrictions on seeking additional security or declaring a default.
3. Payment Waterfall: Details the order in which revenue or proceeds from the asset will be distributed among the creditors.
4. Actions in Case of Default: Includes provisions on how the creditors will proceed if the borrower defaults, including any restrictions on individual actions like foreclosure.

Intercreditor agreements help manage risk and clarify the position of each lender, especially in projects involving significant amounts of capital, multiple lending sources, or when subordinate financing (like mezzanine loans) is used alongside senior debt.

Frequently Asked Questions about Intercreditor Agreements

Why is an Intercreditor Agreement necessary in real estate?

In real estate, multiple lenders often provide financing for a project, with each lender having different levels of risk exposure. An Intercreditor Agreement clarifies the priority of claims to the collateral, ensuring smooth operations in case of default or foreclosure. It prevents disputes between lenders regarding repayment rights, control over the property, or enforcement actions.

Who are the parties involved in an Intercreditor Agreement?

Typically, the parties are the senior lender (first mortgage lender) and junior or mezzanine lenders. The borrower is generally not a party but acknowledges the terms of the agreement.

What are the key provisions of an Intercreditor Agreement?

Key provisions often include:

• Priority of Liens: Specifies which lender has priority in case of a sale or foreclosure.
• Payment Waterfall: Determines the order in which loan payments are distributed.
• Standstill Periods: Restricts when junior lenders can take enforcement actions.
• Cure Rights: Allows junior lenders to cure defaults on behalf of the borrower.
• Enforcement Rights: Clarifies which lender controls the enforcement of remedies in case of default.

What is the difference between senior and junior debt?

• Senior debt: This lender has the first claim on the property and is repaid first in the event of foreclosure or liquidation.
• Junior debt: This lender is subordinate to the senior lender and will only receive repayment after the senior debt is fully paid off.

What happens if the borrower defaults?

The Intercreditor Agreement will dictate how the lenders should act in the event of default. Typically, the senior lender takes control of enforcement actions, while junior lenders are often subject to a standstill period, preventing them from taking independent action.

What is a standstill period?

A standstill period is a provision in the ICA that restricts the junior lender from enforcing its rights (such as foreclosure) for a specific period after the borrower defaults, giving the senior lender the opportunity to take action first.

How does an Intercreditor Agreement impact foreclosure proceedings?

The senior lender usually has the first right to initiate foreclosure proceedings. Junior lenders must typically wait until the senior lender has completed its process or must act in accordance with the terms set forth in the Intercreditor Agreement.

Can junior lenders cure borrower defaults?

In many Intercreditor Agreements, junior lenders have the right to cure borrower defaults to prevent the senior lender from accelerating the loan or foreclosing on the property. The terms under which the junior lender can cure defaults are outlined in the ICA.

‍What is the impact of mezzanine financing on Intercreditor Agreements?

Mezzanine financing, which often involves unsecured debt or a pledge of ownership interests in the property-owning entity rather than a mortgage, may require additional provisions in the Intercreditor Agreement to reflect the unique structure and risks of this type of financing.