How to Draft a Subordination Agreement (2026 Template and Clauses)

A subordination agreement is a contract that ranks debts, so one creditor agrees that its loan (the subordinated or junior debt) sits behind another creditor's loan (the senior debt) for repayment and, often, for security. It is how lenders decide who gets paid first if the borrower runs short or fails. This guide explains what a subordination agreement does, the clauses that matter, and gives a skeleton you can adapt. It is written for founders, finance teams and anyone dealing with more than one lender. It is general guidance, not legal advice, and in a multi-lender deal the related intercreditor agreement often carries much of this detail. ## What a subordination agreement does When a borrower has more than one creditor, the law and the security documents decide the order of repayment. A subordination agreement changes or confirms that order by contract. The junior creditor agrees that the senior creditor is paid first, and usually agrees not to take enforcement action or accept early repayment while the senior debt is outstanding. Common situations: - Senior and mezzanine lending. A bank lends senior, a fund lends behind it, and the fund subordinates to the bank.

• Shareholder or founder loans. A founder who has lent money to the company subordinates that loan behind a new bank facility, which the bank will usually insist on.
• Refinancing and new money. A new lender requires existing debt to rank behind its facility before it will lend.
• Property finance. A second-charge lender subordinates to the first-charge lender. ## Two things subordination can rank Be clear which of these your agreement covers, because they are different: - Payment subordination. The junior creditor cannot be paid until the senior is paid, or can only be paid while no default exists (a payment blockage).
• Security subordination (lien priority). The junior creditor's security ranks behind the senior creditor's security over the same assets, so on enforcement the senior is satisfied first from the proceeds. Strong subordination agreements address both, plus a turnover obligation: if the junior is paid when it should not have been, it holds the money on trust and turns it over to the senior. ## The core structure of a subordination agreement ### 1. Parties and recitals Name the senior creditor, the junior creditor and usually the borrower (the debtor). Recitals identify the senior debt, the junior debt and the purpose, to rank one behind the other. ### 2. Definitions Define senior debt, junior debt, senior discharge date (when the senior is fully and finally repaid), permitted payments, enforcement action and insolvency event. These definitions drive the whole agreement. ### 3. Ranking State plainly that the junior debt is subordinated to the senior debt, and that the junior security ranks behind the senior security, regardless of the dates the security was created or registered. ### 4. Permitted and blocked payments Set out whether the junior can receive scheduled interest or principal while the senior is outstanding, and the circumstances, usually a senior default or a payment blockage notice, in which all payments to the junior stop. ### 5. Turnover Provide that if the junior receives any payment it was not permitted to take, it holds that money on trust for the senior and pays it over. This is what makes payment subordination bite in practice. ### 6. Standstill and enforcement State that the junior cannot enforce its debt or security, accelerate, or start insolvency proceedings for a standstill period, or at all until the senior discharge date, except in limited agreed cases. Set out who can enforce shared security and how proceeds are applied. ### 7. Insolvency waterfall Confirm how proceeds are applied in the borrower's insolvency: senior in full first, then junior. Deal with voting of claims and who files proofs. ### 8. Protection of the senior creditor Allow the senior creditor to amend, increase or refinance its facility without losing priority, within agreed limits, and say that the junior's subordination survives those changes. ### 9. Undertakings of the junior creditor The junior agrees not to take new security, not to assign its debt except to someone who signs up to the same terms, and to do what is needed to give effect to the ranking. ### 10. Duration, release and boilerplate The agreement runs until the senior discharge date, after which the ranking falls away. Add notices, governing law, jurisdiction and counterparts. ## A usable subordination skeleton ```

1. Parties and recitals
2. Definitions (senior debt, junior debt, senior discharge date, permitted payments)
3. Ranking (payment and security)
4. Permitted and blocked payments
5. Turnover on trust
6. Standstill and enforcement limits
7. Insolvency waterfall and voting
8. Protection of senior creditor (amendments, refinancing)
9. Junior creditor undertakings
10. Duration, release, notices, governing law, counterparts

- **No turnover clause.** Without it, a junior that is wrongly paid simply keeps the money.
- **A standstill with no end.** The junior will resist an indefinite block on enforcement. Agree a defined standstill period and clear exceptions.
- **Senior changes losing priority.** Make clear the senior can amend or refinance without the junior's debt jumping ahead.
- **Silent on new junior creditors.** Require anyone taking an assignment of the junior debt to be bound by the same terms. ## Drafting, reviewing and tracking subordination in one place A subordination agreement sits inside a web of documents: the senior facility, the junior facility, the security documents and often an intercreditor agreement. Its defined terms must match those documents exactly, and its triggers, the senior discharge date, standstill periods and blockage notices, are dates and events someone has to watch. Keeping the draft, the clause-level review and those dates in one workspace keeps the web consistent. [Adira](https://adiralaw.com) is one such workspace, built on frontier AI, where you can draft from a brief, see each ranking and standstill clause marked favourable, neutral or unfavourable to your side, link the subordination to the related facility and security files, and track the discharge date and standstill windows as alerts. The agreement and the documents it depends on stay aligned. Get the ranking, the turnover and the standstill right, and the rest of a subordination agreement follows.