Definition
An intercreditor agreement is a contract entered into between two or more lenders holding different positions in a single deal's capital stack, most commonly a senior mortgage lender and a subordinate mezzanine lender, establishing how they will interact both during the normal course of the loan and in a default scenario. Because both lenders have a stake in the same underlying property but different levels of risk and priority, the agreement addresses several key issues. Payment subordination confirms the senior lender is paid first from property cash flow and any recovery. Standstill provisions typically prevent the subordinate lender from exercising remedies, such as foreclosing on its ownership pledge, for a defined period after a default, giving the senior lender the first opportunity to act. Cure rights give the subordinate lender the opportunity, but not the obligation, to cure a default on the senior loan to protect its own position. Purchase option rights sometimes allow the subordinate lender to buy out the senior loan at par under certain conditions. Without an intercreditor agreement, two lenders with competing claims on the same property could take conflicting or uncoordinated actions in a default, creating chaos and reducing recovery for everyone involved.
How It Works
When a mezzanine loan or other subordinate financing is added to a deal alongside existing or simultaneously closing senior debt, both lenders' counsel negotiate the intercreditor agreement as a condition of closing. The senior lender typically has significant leverage in these negotiations, since the mezzanine lender needs the senior lender's cooperation to close at all. Key negotiated points include the length of any standstill period, the scope of the subordinate lender's cure rights, whether the subordinate lender can purchase the senior loan at par following a default, and how the subordinate lender's foreclosure on ownership interests, if it occurs, affects the senior lender's rights. Once signed, the agreement governs the lenders' relationship for the life of both loans, becoming especially important if the borrower defaults, at which point each lender's rights and required notices to the other are dictated by its terms rather than negotiated in real time.
Example
For example, a $20,000,000 senior loan and a $3,000,000 mezzanine loan close simultaneously on the same property, with an intercreditor agreement specifying a 90-day standstill period before the mezzanine lender can exercise remedies following any default, and granting the mezzanine lender the right to cure a monetary default on the senior loan within 10 business days of receiving notice. When the borrower later misses a senior debt payment, the senior lender is contractually required to notify the mezzanine lender, who cures the default by advancing the missed payment on the borrower's behalf, protecting its subordinate position while the parties work through a broader resolution.
Why It Matters
Intercreditor agreements are essential wherever a capital stack includes more than one lender, because they establish clear, pre-negotiated rules for a scenario, default, that is inherently chaotic and time-sensitive. Without this agreement, resolving a troubled loan with multiple lenders could devolve into costly litigation over who has priority and what actions each party can take. For subordinate lenders, the specific terms of the intercreditor agreement, particularly standstill length and cure rights, directly affect how much practical protection their position actually provides, making it one of the most heavily negotiated documents in any deal with layered debt.
In depth
How Senior Lenders Approach Intercreditor Negotiation
A senior lender typically treats the intercreditor agreement as a defensive document, aiming to preserve maximum control over any workout while giving the subordinate lender only the protections needed to make the mezzanine or subordinate financing viable at all. Senior lenders commonly push for a long standstill period, limited cure rights, and restrictions on the subordinate lender's ability to purchase the senior loan, since each concession narrows the senior lender's flexibility if the deal runs into trouble.
The senior lender's negotiating leverage comes from the fact that the subordinate loan usually cannot close without the senior lender's cooperation and signature, which is why senior lenders often present a largely non-negotiable form intercreditor agreement to smaller or less experienced subordinate capital providers, reserving real negotiation for larger, more established mezzanine funds. A subordinate lender considering multiple potential deals often weighs how negotiable a given senior lender's standard form has been in past transactions, since that history signals how much real flexibility exists beyond the printed document.
Typical Standstill Periods and Cure Rights
Standstill periods in typical intercreditor agreements often run 90 to 180 days, though the length varies with property type, deal size, and the relative negotiating strength of each lender. During this window the subordinate lender is barred from exercising its own remedies, such as a UCC foreclosure on the pledged ownership interests, even if the borrower is in default on the subordinate loan alone, giving the senior lender room to work through a resolution first.
Cure rights typically give the subordinate lender notice of a senior default and a defined window, often 10 to 15 business days, to cure a monetary default by advancing the missed payment. Cure rights for a non-monetary default, such as a covenant breach, are less standardized and often narrower, since curing something like a reporting failure is harder to define than simply paying a missed installment.
Where Intercreditor Terms Create Friction in a Workout
Friction typically surfaces when a senior lender wants to modify its loan, extending maturity or adjusting a covenant, without the subordinate lender's involvement, since a subordinate lender that discovers its senior loan has changed materially after the fact can find its own risk assessment no longer matches the actual deal. Well-drafted intercreditor agreements cap how much a senior loan's principal, rate, or maturity can change without subordinate lender consent, but agreements that leave this open can leave the subordinate lender exposed to changes it never agreed to.
A second common friction point arises when the subordinate lender's cure right and purchase option interact poorly with the senior lender's own workout timeline, particularly if the senior lender wants to move quickly toward foreclosure while the subordinate lender is still within its standstill period and unable to act. Well-negotiated agreements address this by requiring the senior lender to provide the subordinate lender advance notice before initiating foreclosure, even during an active standstill period, so the subordinate lender is never caught entirely by surprise.
- Senior loan modifications made without subordinate lender consent
- A standstill period misaligned with the senior lender's own workout timeline
- Ambiguous cure rights for non-monetary defaults
- Disputes over the purchase option price if the subordinate lender buys the senior loan
- Notice provisions that do not reach the subordinate lender promptly after a default
Worked Scenario: A Subordinate Lender Exercising Cure Rights
As an illustration, a $25,000,000 senior loan and a $4,000,000 mezzanine loan close with an intercreditor agreement specifying a 120-day standstill and a 10-business-day cure right for monetary defaults. The borrower misses a $145,000 monthly senior debt service payment. Under the agreement's notice provisions, the senior lender must notify the mezzanine lender within five business days of the missed payment.
The mezzanine lender receives notice on day three and advances the $145,000 payment on day eight, within its 10-day cure window, preserving its subordinate position and avoiding a scenario where the senior lender could otherwise begin exercising remedies that would jeopardize the mezzanine lender's collateral, the pledged ownership interests, entirely. Had the mezzanine lender missed the ten-day window, even by a single day, the senior lender would have been free to pursue its own remedies without further regard for the subordinate lender's cure rights.
Negotiation Points for the Subordinate Lender
A subordinate lender's negotiating priorities typically center on shortening the standstill period where possible, broadening cure rights to cover a wider range of default types, and capping the senior lender's ability to modify loan terms without consent. Because the senior lender typically holds more leverage in this negotiation, a subordinate lender's most realistic wins often come from precision in drafting rather than from securing dramatically more favorable headline terms.
- Standstill period length relative to the mezzanine lender's own risk tolerance
- Scope of cure rights for both monetary and non-monetary defaults
- Caps on senior loan modifications made without subordinate consent
- Purchase option pricing and the window in which it can be exercised
- Notice timing and method to ensure the subordinate lender is not left uninformed
H Equities
H Equities negotiates intercreditor agreements when structuring mezzanine loans alongside senior financing, protecting its subordinate position while maintaining a workable relationship with the senior lender. Learn more
Frequently Asked Questions
What is a standstill period?
A standstill period is the time after a default during which a subordinate lender is contractually barred from exercising its own remedies, such as foreclosing on a pledge of ownership interests, giving the senior lender the first opportunity to address the default or take action.
Can a mezzanine lender cure a default on the senior loan?
Yes, most intercreditor agreements grant the subordinate lender cure rights, allowing it to pay a missed senior debt payment or otherwise cure a default on the senior lender's behalf, protecting its own subordinate position from being wiped out by a senior foreclosure.
Who negotiates the intercreditor agreement?
Counsel for the senior lender and counsel for the subordinate lender negotiate the agreement directly, typically as a closing condition for the subordinate loan. The senior lender generally holds more negotiating leverage, since its cooperation is required for the subordinate financing to close at all.
Related Terms
Senior Debt in Commercial Real Estate
The first mortgage or primary loan on a property, holding the highest priority claim on cash flow and sale proceeds in the capital stack.
Subordinate Debt
Any debt that ranks below senior debt in repayment priority, including mezzanine loans and B-notes, carrying higher interest rates to compensate for greater risk.
Mezzanine Debt in Commercial Real Estate
A subordinate loan that sits between senior debt and equity in the capital stack, typically carrying higher interest rates in exchange for filling the financing gap.
B-Piece or B-Note Participation
The subordinate tranche of a whole loan or CMBS securitization, carrying higher risk and higher yield than the senior (A-note) portion.
Capital Stack in Real Estate
The layered structure of all capital sources used to finance a real estate investment, arranged from lowest risk (senior debt) to highest risk (common equity).