The buyer's bank is demanding that our seller note be fully subordinated to their senior acquisition loan, which means we could lose our monthly interest payments if the buyer runs into financial trouble. How do we negotiate the intercreditor agreement to protect our right to receive payments?

Question

Tyler Smith · Accepted Answer

Subordination is a standard requirement for senior lenders, but you must fight to keep it from becoming a tool that completely freezes your cash flow. If the buyer's bank demands subordination, negotiate for a clear distinction between deep subordination and payment subordination. Your goal is to secure a subordinated position that allows you to continue receiving regular interest and principal payments under the seller note, as long as the buyer is not in active default on their senior debt. This is known as a permitted payments clause. You must also negotiate a tight block stand-still period in the intercreditor agreement. If the buyer does default on their senior loan, the bank will try to stop payments to you indefinitely. Limit this blockage period to a maximum of ninety or one hundred and eighty days. If the senior lender does not foreclose or resolve the default within that timeframe, your payments must resume. Additionally, ensure that any unpaid interest during a blockage period is capitalized, added to the principal balance of your note, and begins compounding at a penalty interest rate. By bringing these issues to the table early, you force the buyer and their lender to recognize that your seller note is a structured piece of debt, not a soft concession. This protects your exit proceeds from being swallowed by the senior lender's aggressive terms.