The buyer's senior commercial lender is requiring a standard subordination agreement on our seller note, including a complete block on our payments if the buyer trips a debt covenant. How do we negotiate payment blockage periods and standstill terms in the intercreditor agreement?

Question

Tyler Smith · Accepted Answer

Senior lenders will always demand priority, but standard subordination language often hands the bank complete discretion to shut off your cash flow while the buyer continues operating. You cannot accept open-ended blockage language that leaves you holding unsecured debt indefinitely.

First, bifurcate payment default blockages from covenant default blockages. If the buyer misses a cash principal or interest payment to the senior lender, a payment blockage is standard. However, if the buyer merely trips an administrative or financial ratio covenant, such as a temporary leverage ratio breach, negotiate a hard limit on the blockage period. The industry standard to fight for is a ninety to one hundred twenty day blockage window.

Second, insist on limitation of blockage notices. The bank should only be allowed to issue one blockage notice in any rolling 360-day period for the same operational event. Otherwise, the bank can simply issue rolling blockage notices to freeze your seller note perpetually.

Third, establish cumulative catch-up mechanics. The agreement must state that all blocked interest and principal immediately become due and payable once the blockage period expires, provided the senior payment default is cured. Any unpaid interest during the freeze must capitalize into the principal balance and accrue interest at a default rate, typically two to four percent higher than the base note rate.

Finally, define explicit standstill expirations. Once the standstill clock runs out, typically ninety to one hundred eighty days, you must retain the legal right to accelerate your note and exercise your remedies, even if the senior lender has not resolved their dispute.