The buyer's senior bank is demanding we sign a standstill agreement on our seller note, meaning we cannot accept any payments if the buyer violates their bank covenants. How do we structure a permitted payments clause so we do not lose our monthly income over minor technical defaults?

Question

Tyler Smith · Accepted Answer

Bank subordination agreements are notoriously aggressive. Senior lenders want to block all payments on junior debt the moment the buyer trips any covenant, no matter how minor. If you sign a standard, unedited standstill agreement, you are allowing the bank to turn off your seller note payments because the buyer filed their quarterly financial statements three days late. This is unacceptable.

You must negotiate a tight definition of default that triggers a payment blockage. Insist on a clear distinction between a payment default on the senior debt and a technical covenant default. Your standstill agreement should state that payments on your seller note can only be suspended if there is an uncured payment default on the senior loan, or if the senior lender has formally accelerated the senior debt.

Furthermore, negotiate a strict blockage period. Limit the bank's ability to block your payments to a maximum of one hundred and eighty days in any twelve-month period. If the bank does not foreclose or take active legal action against the buyer during that timeframe, your payments must resume.

To monitor this risk, write a specific information-sharing covenant into your seller note. This covenant should mandate that the buyer shares their senior bank compliance certificates with you monthly. Your leadership team can review these metrics in your financial reviews. If you see their debt service coverage ratio slipping, you can use your EOS® tools to address the issues with the buyer's leadership team before a technical default occurs.