How do we negotiate the block period and trigger events in an intercreditor agreement to ensure our subordinated seller note is not indefinitely frozen if the buyer has a minor covenant breach with their senior bank?

Question

Tyler Smith · Accepted Answer

When you accept a subordinated seller note, the senior bank will require you to sign an intercreditor agreement that contains a standstill or block period. If the buyer defaults on their bank loan, this clause allows the bank to block all payments to you. To protect your cash flow, you must negotiate strict limits on these block provisions. First, limit the length of any payment block period to a maximum of ninety or one hundred and twenty days. Once this period expires, if the bank has not accelerated its loan or filed for foreclosure, payments to you must resume automatically. Second, ensure that only a payment default on the senior loan can trigger a block period. Do not allow the bank to freeze your payments for minor, non-financial covenant breaches, such as failing to deliver a quarterly report on time or missing an operational target. Third, limit the number of times the bank can initiate a block period to once in any twelve-month period. This prevents the bank from indefinitely rolling over block periods to keep you frozen out. Negotiating these parameters ensures that your seller note remains a reliable income stream and prevents the senior lender from using minor operational issues as an excuse to redirect your money.