A subordination agreement is a legal document that establishes the priority of different creditors` claims on an asset or property. This agreement provides clarity to lenders, borrowers, and other interested parties regarding the order in which debts must be repaid if a borrower defaults on their obligations.

In simple terms, a subordination agreement is a contract that reorders the priorities of the different liens that may exist on a property. Typically, the agreement will place the first mortgage lender in the highest priority position, followed by the second mortgage lender and other creditors in descending order.

The main purpose of a subordination agreement is to allow a borrower to obtain additional financing while keeping the original mortgage intact. For example, if a homeowner wants to take out a second mortgage to fund home renovations, the second lender may require a subordination agreement from the first lender. This ensures that the first lender maintains its priority position and will be paid first in the event of default.

Subordination agreements are common in commercial lending and real estate transactions, but they can also be used in other financial arrangements. For instance, a subordination agreement may be required if a business wants to take out a loan secured by its inventory while also owing money to other creditors.

In conclusion, a subordination agreement is a legal document that outlines the lien priority for multiple creditors on a specific asset or property. This agreement is essential for lenders, borrowers, and other involved parties to ensure clarity on the repayment order in the event of default. As such, it is a crucial aspect of sound financial planning and lending practice.