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What is Subordination?

Subordination A Subordination Agreement changes the priority of existing debt or obligations, often allowing one creditor to take a subordinate position to another, affecting the order of repayment.



Sample template:



SUBORDINATION AGREEMENT


This Subordination Agreement (the "Agreement") is entered into as of the ______ day of _______, 20__ (the "Effective Date") by and between Eastside Investments Inc., a corporation organized under the laws of the United States ("Eastside"), and Oceanview Capital LLC, a limited liability company organized under the laws of the United States ("Oceanview"). Collectively, Eastside and Oceanview shall be referred to herein as the "Parties."

1. PURPOSE AND BACKGROUND

The purpose of this Agreement is to set forth the terms and conditions under which the Parties agree to subordinate certain debt facilities in order to change the priority of existing debts between Eastside and Oceanview.



2. RECITALS

WHEREAS, Eastside and Oceanview have previously entered into certain loans and credit facilities (collectively, the "Debts"), from which Eastside received financing from Oceanview.


WHEREAS, the Parties desire to change the order of priority for repayment of the aforementioned Debts to reflect the new arrangement between the Parties.



3. SUBORDINATION TERMS

3.1. Subordination of Priority


Subject to the terms and conditions of this Agreement, Eastside and Oceanview hereby agree that the order of priority for repayment of the Debts shall be revised as follows:



  1. Debt Facility 1, bearing an original principal amount of $_______, shall rank junior to the Debt Facility 2 listed below;

  2. Debt Facility 2, bearing an original principal amount of $_______, shall rank senior to Debt Facility 1 listed above.



3.2. Application of Payments


Distributions or payments, as applicable, shall be applied to the Debts in the order of their respective priorities as set forth in Section 3.1



4. IMPACT ON REPAYMENT

4.1. No Change in Repayment Terms


Except as expressly provided herein, the priority changes under this Agreement shall not affect the repayment terms, interest, or any other provisions of the underlying agreements governing the Debts.



4.2. No Acceleration of Payments


Nothing contained in this Agreement shall be interpreted or construed as accelerating or otherwise changing the times for the payments of principal and interest on the Debts. The Parties acknowledge and agree that the Debts shall continue to be repaid according to their respective payment schedules.



5. CONSENT OF THE PARTIES

By executing this Agreement, each Party consents to and acknowledges the following:



  1. The terms and conditions of this Agreement, and the subordination arrangement provided for herein, do not violate any other obligation or agreement to which the Party is a party or any laws, rules, or regulations governing that Party;

  2. The Party has sought and obtained any necessary approvals or consents required to effectuate this Agreement;

  3. The Party does not require the consent or approval of any third party to effectuate or perform its obligations under this Agreement;

  4. No event of default, acceleration of payment, or any other event which would entitle the Party to terminate, suspend, or otherwise modify any of its obligations under this Agreement or the Debts has occurred;

  5. All representations, warranties, and covenants made by that Party in connection with the Debts and this Agreement are true, complete, and accurate as of the Effective Date; and

  6. Each Party agrees to execute and deliver any additional documents and take any further actions as reasonably necessary to effectuate and implement the provisions of this Agreement.



6. GOVERNING LAW AND COMPLIANCE

This Agreement shall be governed by and construed in accordance with the laws of the United States of America, without giving effect to any choice-of-law or conflict-of-law provisions to the extent that they would mandate the application of a different jurisdiction's laws.



7. NO ORAL MODIFICATION

This Agreement may not be altered, amended, or modified except in writing and signed by a duly authorized representative of each of the Parties hereto.



8. COUNTERPARTS

This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall constitute an original of the same, but all such counterparts together shall constitute but one and the same agreement.



9. ENTIRE AGREEMENT

This Agreement contains the entire understanding and agreement between the Parties concerning the subject matter hereof and supersedes any and all prior agreements, arrangements, or understandings between the Parties relating thereto.



IN WITNESS WHEREOF, the Parties have executed this Agreement effective as of the Effective Date.

[signature block for Eastside Investments Inc.]
_______________________________

Eastside Investments Inc.

[signature block for Oceanview Capital LLC]
_______________________________

Oceanview Capital LLC

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Sections of a Subordination


In this Subordination, you will see the following sections:

  1. Purpose and Background
  2. Recitals
  3. Subordination Terms
  4. Impact on Repayment
  5. Consent of the Parties
  6. Governing Law and Compliance
  7. No Oral Modification
  8. Counterparts
  9. Entire Agreement


Going indepth - Analysis of each section:

  1. Purpose and Background : This section explains the reason for the agreement, which is to change the priority of existing debts between Eastside and Oceanview.

  2. Recitals : This section provides the context for the agreement, stating that Eastside and Oceanview have previously entered into loans and credit facilities, and now wish to change the order of priority for repayment of these debts.

  3. Subordination Terms : This section outlines the new order of priority for repayment of the debts, as well as how payments will be applied to the debts in accordance with their new priorities.

  4. Impact on Repayment : This section clarifies that the priority changes in this agreement do not affect the repayment terms, interest, or any other provisions of the underlying agreements governing the debts. It also states that nothing in this agreement accelerates or changes the payment schedules for the debts.

  5. Consent of the Parties : This section lists the various acknowledgements and consents each party must provide in order to execute this agreement, such as confirming that the agreement does not violate any other obligations or laws, and that all representations made by the parties are true and accurate.

  6. Governing Law and Compliance : This section states that the agreement will be governed by and construed in accordance with the laws of the United States of America.

  7. No Oral Modification : This section specifies that any changes to the agreement must be made in writing and signed by both parties.

  8. Counterparts : This section allows the agreement to be executed in multiple counterparts, each of which is considered an original, but all of which together constitute one agreement.

  9. Entire Agreement : This section states that this agreement contains the entire understanding between the parties and supersedes any prior agreements or understandings related to the subject matter.

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