Liens subordinate: Overview, definition, and example
What are liens subordinate?
A "lien subordinate" refers to a situation where one lien or claim on a property is ranked lower in priority compared to other liens or claims. In other words, if the property is sold or foreclosed upon, the lienholder of a subordinate lien is paid after the primary or senior lienholders have been satisfied. Subordinate liens are often seen in situations where multiple creditors have claims to the same property, but one creditor’s claim takes precedence over others.
Subordinating a lien is a common practice in financing, especially when a borrower wants to secure additional loans or credit. This process legally ensures that the new lender's lien will be paid after existing debts have been settled.
Why are liens subordinate important?
Liens subordinate are important because they help determine the order in which creditors are paid when a property is sold or foreclosed. Understanding the priority of liens can impact the risk associated with lending and borrowing, as subordinate lienholders may have a higher risk of not getting paid in full if the property’s value doesn’t cover all the claims.
For businesses and individuals, understanding subordinate liens is critical when entering into loans or purchasing property. It helps determine how much risk they take on and which creditors will be paid first in case of default.
Understanding liens subordinate through an example
Imagine you own a commercial property and take out a mortgage loan from a bank. This mortgage is a primary lien, meaning the bank has the first claim on your property if you fail to repay the loan.
Later, you decide to take out a second loan from a different lender to fund a renovation. This new loan creates a second lien on your property. However, because the bank’s mortgage was the original loan, this second lien is considered subordinate. If the property is foreclosed, the bank’s loan is paid off first, and only if there is money remaining will the second lender receive repayment. If the property’s sale doesn’t cover both debts, the second lender may not receive anything.
Example of a liens subordinate clause
Here’s an example of how a liens subordinate clause might appear in a contract:
“The Borrower agrees that any lien or security interest granted under this Agreement shall be subordinate to the existing mortgage held by [Senior Lender’s Name] and shall only be paid after the full satisfaction of the Senior Lender’s obligations. The Borrower further agrees to execute any necessary documents to formalize the subordination of this lien.”
Conclusion
Liens subordinate help define the priority of claims on a property, ensuring that some creditors are paid before others. For borrowers, it’s important to understand how subordinate liens work, as they impact the risk and priority of repayment in case of default. For lenders, subordinating liens can offer opportunities to extend credit, but also comes with the risk that they may not be fully repaid if the property doesn’t cover all obligations. By understanding how subordinate liens operate, both borrowers and lenders can make more informed financial decisions.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.