SUBORDINATION AGREEMENTS

The priority of liens can be altered by a subordination agreement entered into by the parties involved. A subordination agreement is a contract, and contract law governs it. To be valid, the contract requires valid consideration. Since the contract concerns an interest in real property, it is subject to the Statute of Frauds, and must be signed by both parties. A subordination agreement can be, and should be, recorded in the real property records.

A subordination agreement can concern loans, which exist, at the time of the agreement. For example, two lenders may provide a buyer with part of the purchase price of land. The two lenders may agree between each other which one is senior.

A subordination agreement can also concern a loan, which has not yet been made. For example, a seller will often take back a lien to secure the unpaid balance of his or her sale price. If the land is vacant, or the property needs to be developed, the buyer will sometimes negotiate for an agreement whereby the seller will subordinate his or her purchase money to a possible future construction loan. Such an agreement has a great deal of potential to damage the seller’s interest. It is important to draft such an agreement carefully, to cover all possibilities.

If either the loan which is being subordinated, or which is being subordinated to, is an amount less than $25,000, the subordination agreement must comply with the very specific provisions of Civil Code Section 2953.1 to 2953.5.

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