Definition
An intercreditor agreement is a contract between two or more creditors—most commonly a senior lender and a junior lender (such as mezzanine debt, preferred equity with lender-like protections, or a second mortgage lender). It sets the rules for payment priority and allocates rights, remedies, and control if the borrower defaults, restructures, or enters bankruptcy.
Why It Exists
When multiple layers of capital share exposure to the same asset or borrower, conflicts are inevitable during stress. Intercreditor agreements reduce uncertainty by pre-negotiating who gets paid first, who can enforce, and who controls key decisions. This improves underwriteability for both senior and junior capital.
Where You See It in Real Estate
- Mortgage + Mezzanine: the most common structure in commercial real estate.
- First lien + second lien: two mortgage lenders on the same collateral.
- Construction loan + preferred equity: senior lender requires acknowledgement and standstill by the pref provider.
- CMBS + mezzanine: junior capital must follow senior servicing and enforcement rules.
Core Concepts (What the Agreement Governs)
1) Priority of payments (the “waterfallâ€)
Defines how cash flows and liquidation proceeds are applied: usually senior debt first, then junior claims. It also clarifies how fees, default interest, protective advances, and enforcement costs are handled.
2) Remedies and control on default
Typically gives the senior lender the first right to enforce remedies (foreclosure, receiver, UCC sale, etc.). Junior lenders often accept limits on independent enforcement to avoid competing actions.
3) Standstill periods
A standstill restricts the junior lender from taking action for a defined period after a default, giving the senior lender time to pursue a cure, restructure, or enforcement without interference.
4) Cure rights
Junior lenders may receive the right to cure senior loan defaults (by paying arrears, escrows, or protective advances) to protect their position. Agreements define notice requirements, cure deadlines, and what qualifies as a curable default.
5) Purchase option (buyout of the senior loan)
Some structures allow the junior lender to purchase the senior loan after certain triggers (often after acceleration or during default), usually at a defined price (par + accrued + costs) and within a tight timeframe.
6) Restrictions on amendments and waivers
Limits what the senior lender can change without junior consent—especially changes that materially harm the junior position (e.g., increasing principal, extending maturity, changing collateral, releasing guarantors, or permitting new senior advances beyond caps).
7) Bankruptcy-related provisions
Intercreditor terms frequently address voting, adequate protection, use of cash collateral, plan support, and enforcement of subordination. The goal is to clarify how junior creditors act (or refrain from acting) if a bankruptcy filing occurs.
Investor Uses
- Capital stack underwriting: understand who controls the asset during distress and how outcomes are distributed.
- Risk pricing: junior capital yields often reflect strict standstill and limited remedies.
- Exit and refi planning: assess consent rights and potential friction for modifications or extensions.
- Workout strategy: map who can cure, who can buy out, and what timelines apply in a default scenario.
Example
A property has a $30M first mortgage and a $6M mezzanine loan. The borrower misses a payment. The intercreditor agreement might:
- Require the senior lender to provide notice to the mezz lender.
- Give the mezz lender 10 business days to cure the missed payment.
- Impose a 90-day standstill where the mezz lender cannot enforce remedies if the senior is actively enforcing.
- Allow the mezz lender to buy the senior loan within a defined window after acceleration.
Net effect: the senior lender stays in control, while the mezz lender has defined “save the position†tools (cure or buyout).
Common Pitfalls
- Ignoring control: junior investors focus on yield but underestimate standstill and loss of decision-making.
- Loose amendment rights: senior lender may be able to extend, advance, or restructure in ways that dilute junior value.
- Uncapped protective advances: senior can add costs that prime junior recoveries.
- Ambiguous cure mechanics: unclear notices or deadlines can cause missed cure opportunities.
- Cross-default surprises: defaults under one document may trigger remedies across the capital stack.