One of the more material provisions in an intercreditor agreement between a mortgage lender and a mezzanine lender is the “payment subordination” provision. A typical payment subordination provision provides that, after the occurrence of a mortgage loan default, senior lender (i.e., mortgage) will have the right to be repaid under its senior loan prior to junior lender (i.e., mezzanine) being repaid any portion of the junior loan with respect to payments from the borrower or any proceeds from the loan collateral.

Lien Subordination Distinguished

Payment subordination should not be confused with lien subordination. Lien subordination establishes the rights between senior and junior secured parties to the same collateral, whereby proceeds from the collateral are first paid to the senior lienholder and any remaining proceeds will be paid to the junior lienholder only after the senior lienholder has been paid in full. Lien subordination is not paramount in the mezzanine loan context because mortgage lenders and mezzanine lenders hold security interests in separate collateral, but payment subordination is a central component of any mortgage-mezzanine intercreditor arrangement. As such, mezzanine lenders and their counsel should be mindful to avoid overbroad payment subordination provisions while negotiating their intercreditor agreements.

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