Subordination clause


Also found in: Legal.

Subordination clause

A provision in a bond indenture that restricts the issuer's future borrowing by subordinating future lenders' claims on the firm to those of the existing bondholders.

Subordination Clause

A clause in some contracts for debt stating that in the event of bankruptcy or liquidation, the debt in the contract will take priority over all other debts. This protects the creditor in the event that the debtor defaults. It is most common in mortgages and bonds. See also: Absolute Priority Rule.
References in periodicals archive ?
To assess the impact of a subordination clause, you first need to understand the general lease priority rules.
Lenders may insist on subordination clauses while prospective tenants are strongly opposed to them.
In light of these rules, lenders often require subordination clauses as a condition of a new loan secured by the property, while tenants may be reluctant to lease mortgaged property without the protection of a nondisturbance agreement.
A subordination clause in favor of a lender would influence the land-lease rate upward, as would low value improvements nearing the end of their economic life, because a tenant would have less incentive to avoid default and a landlord would have less of a value buffer over the land value itself.
These days, however, tenants must consider the risk of entering into a lease without providing for something more than the standard subordination clause without modification.
Depending upon the bargaining strength of the tenant, the standard subordination clause can be modified in several ways to be more palatable to the tenant.
All tenants, however, should at least request the landlord to modify the standard subordination clause to protect the tenant in the event of a foreclosure by requiring the tenant to subordinate its lease nly if certain specified conditions are met, usually including the entering into a non-disturbance agreement.