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.