Intercreditor agreements play a pivotal role in establishing the rights and obligations between multiple creditors. These agreements are essential for ensuring a clear approach to debt management where multiple lenders are involved. The following points list five key issues that every borrower and lender should consider when negotiating an intercreditor agreement.
1. Priority of Liens and Payments: Intercreditor agreements must clearly define the priority of liens and the order of payments among the various creditors. This is crucial for determining which lender has the first claim on the borrower’s assets in the event of default. It is also crucial for a borrower to understand which lender is the highest priority to receive payments of limited funds. When knowledge of priority is coupled with understanding any standstill provisions (point 4), a debtor knows who to fight to see another day.
2. Enforcement Rights and Remedies: While creditors generally state they have all remedies available to them vis-a-vis the other creditors and debtors waive all potential remedies, making note of specific claims or statutes further affirms the debtor’s understanding of the parade of horribles it faces upon a default.
3. Information Sharing and Cooperation: Regular information sharing among the creditors and established protocols for cooperation between the creditors will avoid complaints that certain documents were not shared. It also protects the debtor from accusations it was hiding documents or information when documents and information were provided to one creditor that failed to share the information,
4. Standstill Provisions: These standstill provisions can temporarily or permanently restrict the ability of certain creditors to take independent enforcement actions. The more senior the creditor, the greater the interest in maintaining control
5. Amendments and Waivers: Although most documents require amendments and waivers to be in writing, including additional terms and conditions will further preclude the possibility that an oral amendment or waiver can be asserted by any party.
By addressing these key issues, intercreditor agreements can help mitigate potential conflicts, protect the interests of all parties involved, and facilitate the successful management of complex financing arrangements.
David Seidman is the principal and founder of Seidman Law Group, LLC. He serves as outside general counsel for companies, which requires him to consider a diverse range of corporate, dispute resolution and avoidance, contract drafting and negotiation, and other issues. In particular, he has a significant amount of experience in hospitality law by representing third party management companies, owners, and developers.
He can be reached at david@seidmanlawgroup.com or 312-399-7390.
This blog post is not legal advice. Please consult an experienced attorney to assist with your legal issues.
