Quick overview

Assignment rights and subordination are common clauses in commercial and consumer lending that affect who holds the loan, who enforces it, and who gets paid first if the borrower defaults. Assignment changes the party on the loan; subordination changes claim order among creditors. Both can materially affect refinancing options, property sales, and recovery outcomes in a default or bankruptcy.

Why these terms matter to borrowers and lenders

  • Assignment can change the terms or servicing of the loan if the new creditor imposes different policies (within contract limits).
  • Subordination determines recovery priority — a subordinated lender gets paid after senior creditors. That affects interest rates, availability of secondary financing, and perceived risk for new lenders.

These outcomes influence borrower strategy: will a buyer accept a property with an assignable mortgage? Can a business obtain a second loan if the first lender refuses to subordinate? These questions appear in most commercial real‑estate and business financing deals.

How assignment rights work

  • Typical parties: Lender assignment (most common), borrower assignment (less common). Lenders frequently include assignment clauses allowing sale or transfer of loan rights or servicing to investors or other banks. Borrower assignments—transferring obligations to a third party—are usually restricted and may require lender consent.
  • Common triggers: sale of the collateral (property or business), securitization, transfer of servicing rights, or corporate restructuring.
  • Consent and notice: Loan agreements often require that the party seeking assignment obtain consent from the counterparty and deliver formal notice. A typical borrower assignment provision says the borrower cannot assign without the lender’s written consent, and an unauthorized assignment may be void.

Practical point from my practice: lenders sell loans and servicing frequently. I’ve seen retail owners assume a mortgage during a sale only after negotiating specific assignment language in the sales contract and getting a written assumption agreement from the lender.

How subordination works

  • Priority and liens: Priority is typically first in time, first in right — the first lien recorded on property usually has priority. Subordination is a contractual agreement to change that order.
  • Types of subordination: voluntary subordination (a lender consents to be junior) and statutory or involuntary subordination (rare; often in bankruptcy or tax lien situations where law sets priority).
  • Use cases: second mortgages, mezzanine financing, construction loans that require different lien priorities, and requests to subordinate a tax lien to a mortgage for refinancing.

In practice, a senior lender may refuse to subordinate unless the senior lien is paid down, or unless the new financing improves property value and reduces overall risk. I frequently advise clients to prepare a clear business case for the senior lender showing that subordination enables refinancing on better terms that benefit all creditors.

Legal and documentary considerations

  • Loan agreement language: Read assignment and subordination clauses closely. Key phrases: “assign,” “assumption,” “consent,” “subordinate,” “priority.” Ambiguities favor litigation risk.
  • Recording and public notice: For real property, lien priority is often determined by what’s recorded in the county records. Even with a subordination agreement, recording the instrument and ensuring it references the correct liens is essential.
  • Tax liens and government claims: Federal tax liens and some statutory liens may not be subordinable without formal procedures (see IRS guidance on subordination or lien withdrawal) — check IRS procedures before assuming a tax lien can be subordinated (IRS lien procedures, 26 U.S.C. and IRS guidance).
  • State law variations: Uniform rules like the UCC influence assignment of security interests, but real property lien rules vary by state. Consult local counsel when priority is at issue. (See UCC §9 via legal resources such as Cornell LII for secured transactions basics.)

Authoritative sources: Consumer Financial Protection Bureau (consumerfinance.gov) for consumer mortgage protections; the Uniform Commercial Code for secured transactions (Cornell Legal Information Institute) for personal property assignments; IRS guidance for federal tax liens.

Negotiation strategies and practical tips

  • Ask early: Raise assignment and subordination questions early in negotiations, before rate locks or closing deadlines.
  • Offer collateral or covenants: If a senior lender is reluctant to subordinate, consider offering additional covenants, cash reserves, or partial paydowns to reduce perceived risk.
  • Draft narrow subordination language: Limit the subordination to a specific loan amount, term, or purpose (e.g., “subordinate to the first mortgage in an amount not to exceed $X for construction financing only”).
  • Use intercreditor agreements: For multi‑lender deals, an intercreditor agreement clarifies rights to foreclosure, standstill periods, cure rights, and payment waterfalls. These agreements reduce litigation risk and are standard in commercial deals.

From my experience: well‑drafted intercreditor agreements make later refinancing or asset sales smoother. I’ve negotiated standstill periods that gave a new lender time to cure defaults before the senior could foreclose — that preserved value for all parties.

Common real‑world examples

  • Sale with mortgage assumption: A buyer assumes the seller’s mortgage. If the loan is assignable and the lender consents, an assumption agreement substitutes the buyer for the seller’s obligations.
  • Refinance with a subordinate lien: A homeowner wants a cash‑out refinance but has a second mortgage. The new lender may require the second lien to be subordinated or paid off to place their new loan in the desired priority.
  • Construction financing: A developer obtains a construction loan that needs to be senior to existing financing. The existing lender must sign a subordination agreement or the project will be blocked.

Checklist before you sign

  • Confirm who can assign and whether consent is required.
  • Verify whether borrower assumption is allowed and under what conditions.
  • Check recording requirements and be sure the subordination agreement will be recorded if necessary.
  • Ask whether government liens (tax liens, special assessments) affect priority and whether the agency’s rules permit subordination.
  • If an intercreditor agreement is proposed, get legal review to understand default remedies, payment waterfalls, and cure rights.

Cost and timeline considerations

Negotiating subordination or assignment consent can add weeks to a closing and may require lender fees. Typical fees include consent/assumption fees, title endorsement costs, and legal fees. Plan for this in your transaction timeline and budget.

Common mistakes to avoid

  • Assuming every loan is assignable: Many borrower assignments are prohibited without lender consent.
  • Overlooking recording: Forgetting to record a subordination agreement (when required) can ruin the intended priority structure.
  • Accepting vague intercreditor terms: Ambiguous cure, foreclosure, or payment waterfall provisions can trigger disputes and expensive litigation.

Frequently asked questions

  • Can a lender force me to accept an assignment? No — a borrower generally cannot be forced to accept a new creditor unless the loan documents or governing law permit assignment without consent. Lenders commonly reserve the right to assign, while borrower assignment is limited.
  • Will subordination change my monthly payment? Not directly. Subordination affects priority, not the payment mechanics, though it can affect interest rates and loan availability which may change payments.
  • Are tax liens subordinable? Sometimes, but federal tax liens follow IRS procedures for subordination or withdrawal, and not all requests succeed. Contact the IRS or your tax attorney for specifics.

When to get professional help

  • If you’re selling/ buying property with an existing mortgage assumption.
  • When multiple lenders require an intercreditor agreement.
  • If a federal or state lien (tax, judgment) may affect financing.

Get an attorney to review assignment or subordination language, and engage your financial advisor early. In my practice, transactions that brought legal review in the first two weeks closed faster and with fewer surprises.

Related FinHelp resources

Professional disclaimer

This article explains common legal and financial concepts and contains examples from professional experience. It is educational only and not legal, tax, or investment advice. Consult a licensed attorney or financial professional for advice tailored to your situation.

Sources and further reading

  • Consumer Financial Protection Bureau — consumerfinance.gov
  • Cornell Law School, Legal Information Institute — Uniform Commercial Code (UCC) Article 9 overview
  • IRS guidance on federal tax liens and subordination procedures