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Where there are multiple layers of financing in a real estate project, there is (or should be) an “intercreditor agreement” that attempts to sort out the potential conflicts between a senior lender — typically, the lender with a mortgage on the real estate — and the junior lender, who may have a second priority mortgage on the property but more typically is a mezzanine lender with a lien on the borrower’s stock. These agreements are attempts to pre-negotiate the dance steps, if both parties are trying to enforce against a defaulting borrower, to help bring about an orderly workout. The hope is to keep them from stepping on each other’s feet, when there’s panic on the dance floor later.

This is tougher than it sounds. Both lenders have a variety of rights directly against the borrower, by contract and by law as lienholders, to which the other may not be a party. Often, for example, the senior lender wants assurance that, if the junior takes over the borrower, the junior will assume (not repudiate) the mortgages and the debt. The junior wants to know that if it does that, and takes over the property and owner to preserve it as a going concern, then the senior won’t accelerate, call the loan or otherwise freak out just because of the change in control. Writing a good intercreditor agreement can be a work of craftsmanship: there are a host of little notice, consent and forbearance steps that must be nailed down, in order for such an agreement to work.

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