Lien Priority and Subordination Agreements: Who Gets Paid First

Two lenders can hold a lien on the same collateral and have very different outcomes if the borrower defaults. The difference is priority: the order in which claims are satisfied out of the proceeds when collateral is sold. Priority is not a detail buried in the loan documents. It determines pricing, it determines whether a lender will fund at all, and it is one of the most common reasons a closing slips.

How Priority Gets Established

The general rule is first to perfect, first in line. For real estate, that means the recording date of the deed of trust or mortgage in the county where the property sits. For business assets, it means the filing date of the UCC-1 financing statement with the secretary of state. A lender that records or files earlier generally outranks one that comes later on the same collateral.

Several claims sit outside that ordering. Property tax liens and certain government claims typically take priority regardless of timing. Mechanics liens can, in many states, relate back to when work began rather than when the lien was filed, which is why lenders on construction and renovation deals are careful about the start of visible work.

What a Subordination Agreement Actually Does

A subordination agreement is a voluntary reordering. An existing lienholder signs a document agreeing to sit behind a new lender, giving up a priority it already earned by recording first. It does not release the lien and it does not forgive the debt. The junior lender keeps its claim, it simply gets paid after the senior lender is made whole.

These come up constantly. A refinance where an existing second position lender must agree to stay second behind the new first. An equipment lender with a blanket filing that must carve out or step behind a new working capital line. A seller note that a bank requires to be subordinated as a condition of funding an acquisition.

Intercreditor Terms Go Beyond Position

On larger or more structured deals, the document is an intercreditor agreement, and position is only the opening topic. These agreements typically govern whether the junior lender can receive payments while the senior loan is outstanding, how long it must stand still before pursuing remedies, whether it can cure a senior default, and whether it has a right to buy out the senior debt. Position tells you the order; the intercreditor tells you what you can do while you wait.

Where This Stalls Closings

The pattern is familiar. The deal is approved, documents are drawn, and only then does someone discover an existing UCC filing that has to be subordinated or terminated. The existing lender has no deadline pressure and every reason to review slowly, and it may ask for concessions in exchange. Pulling lien searches early and requesting consent as soon as the term sheet is signed is the cheapest way to protect a closing date.