The senior bank is willing to let us take a seller note but demands that our payments of principal be suspended if the buyer's debt service ratio falls below 1.25x. How do we negotiate a blockage period limit?

Question

Tyler Smith · Accepted Answer

When a senior lender demands that your seller note be subordinated, they will often include a blockage clause. This clause allows them to stop all payments to you if the buyer misses a debt covenant, such as keeping their debt service coverage ratio above a certain level. Without guardrails, this can suspend your payments indefinitely. Do not accept a blanket blockage clause. Negotiate a strict cap on the length of any payment blockage period, typically limiting it to ninety or one hundred twenty days. Also, limit the senior lender to invoking only one blockage period in any twelve-month period. Insist that if the buyer cures the default, or if the blockage period expires, all missed payments must be caught up immediately. Finally, ensure that while payments of principal may be blocked, interest continues to accrue on your note. This structures the risk fairly and prevents the senior bank from using minor, temporary covenant breaches to permanently starve you of your exit proceeds. Keep these parameters clear in your negotiation prep so your team knows exactly where to draw the line.