Overview

Intercreditor agreements are the written rules that multiple creditors use to avoid fights over the same collateral. They commonly appear in deals where a borrower pledges assets to more than one lender—examples include real estate projects with construction loans and mezzanine debt, corporate credit facilities layered with secured term loans and second-lien private debt, or equipment financed by multiple lenders.

These agreements don’t create the liens themselves (those arise from the loan documents and security agreements); instead, intercreditor agreements allocate enforcement rights and repayment priority among existing lienholders. They are practical instruments that reduce litigation risk, speed recoveries, and preserve value for creditors.

Why intercreditor agreements matter

  • They determine which lender is “senior” (paid first) and who is “junior” (paid after the senior claim). This affects pricing, covenants, and recoveries.
  • They set enforcement rules—who can foreclose, when a lender must wait (standstill period), and when proceeds are shared.
  • They often include voting and veto rights over key borrower actions (e.g., amendments, enforcement steps).

Regulatory and bankruptcy contexts change how these rules play out: in a bankruptcy, the automatic stay and the Bankruptcy Code can alter enforcement priorities; properly drafted intercreditor agreements anticipate those realities.

(For background on priority and subordination mechanics, see our guide on loan subordination: Subordination Agreements: What Borrowers Need to Know and How Loan Subordination Works When Taking Multiple Loans Against the Same Asset.)

Core provisions you will see in an intercreditor agreement

  1. Priority / Subordination
  • A clear waterfall: senior lender first, junior lenders subordinate to that claim. This clause explains whether a junior lien remains valid but is contractually subordinated, or whether the junior lien is “primed” or replaced.
  • Subordination language is complementary to perfection steps under the Uniform Commercial Code (UCC) and real property recording statutes—perfection remains important for legal priority (UCC Article 9, state recording laws).
  1. Enforcement and Standstill Rights
  • Standstill: junior lenders often agree not to enforce for a fixed period after an event of default so the senior can act first and maximize recovery.
  • Remedies: who may foreclose and under what conditions; whether proceeds are applied first to senior claims; treatment of costs and expenses.
  1. Collateral Access and Control
  • Control rights for cash, lockboxes, deposit accounts, or receivables can be allocated (e.g., who controls the collection account).
  • Limitations on junior lenders taking control of collateral while senior loans remain outstanding.
  1. Payment Sharing / Waterfall
  • Specifies how proceeds from collateral are allocated among lenders after senior claims and approved costs are paid.
  1. Amendment, Consent, and Voting Rights
  • Who can approve amendments to loan documents, waive defaults, or change collateral treatment. Voting thresholds (e.g., majority of principal amount) are common.
  1. Bankruptcy and DIP Financing
  • Treatment during bankruptcy: clauses that address priming liens, debtor-in-possession (DIP) financing, and intercreditor consequences if the court approves priming of a lien (see U.S. Bankruptcy Code provisions on DIP financing and adequate protection, 11 U.S.C.).
  1. Cure, Reinstatement, and Waivers
  • Whether the junior lender’s rights are reinstated after a cure, or whether certain waivers are permanent.

How these provisions interact with bankruptcy and courts

Bankruptcy can override contractual priorities in limited ways. The Bankruptcy Code’s automatic stay (11 U.S.C. § 362) halts most creditor enforcement actions and gives the debtor an opportunity to propose a reorganization. Courts can authorize DIP financing that effectively primes existing liens if adequate protection is provided; that outcome affects senior and junior claims regardless of pre-petition intercreditor terms (U.S. Bankruptcy Code, 11 U.S.C. § 364 and related case law).

Practical implication: intercreditor agreements should anticipate bankruptcy outcomes and define procedures for seeking court relief, notice requirements, and adequate protection mechanisms that lenders agree are acceptable.

(Authoritative guidance and practice notes are available from the American Bar Association and U.S. Securities and Exchange Commission for larger public deals; see ABA resources and SEC filings for examples.)

Real-world example from practice

In my practice working with middle-market borrowers and lenders, I negotiated an intercreditor agreement where a bank held a first-priority lien on inventory and a private lender held a second lien on accounts receivable. We added a 60-day standstill in favor of the bank, explicit carriage of foreclosure costs to the senior lender, and a shared-proceeds waterfall after collateral sale costs. That structure allowed the private lender to accept a higher interest rate in exchange for junior status and preserved the bank’s ability to pursue a quick workout if the borrower missed payments.

The outcome: when the borrower filed for bankruptcy, the parties already had agreed notice and voting procedures in place. The senior lender obtained court approval for a short DIP facility that preserved the business as a going concern—recoveries were higher than a forced liquidation would have produced.

Practical drafting and negotiation tips

  • Start early: negotiate intercreditor terms at the same time as loan terms. Don’t treat it as an afterthought.
  • Map the collateral: list specific collateral types and perfection steps (UCC filings, mortgage recordings) so there’s no ambiguity about what is covered.
  • Include clear enforcement timing: specify standstill lengths, conditions for acceleration, and notice periods.
  • Define carve-outs: typical carve-outs include preservation costs, indemnities, and fees—decide how these are paid on enforcement.
  • Address future creditors and inducements: if additional lenders might be added later, prespecify how they fit into the priority scheme.
  • Anticipate restructuring: include procedures for workouts, sales, and bankruptcy situations (consent thresholds for sales, releases, and cramdown treatment).

Work with experienced finance counsel—bankruptcy and secured transactions lawyers add significant value when drafting intercreditor language.

Common mistakes and misconceptions

  • Treating subordination as just a label: legal priority depends on perfection and recording, not contract alone. A subordination agreement doesn’t perfect a lien (UCC Article 9). Proof of perfection is still required.
  • Ignoring foreclosure costs: junior lenders can be surprised when enforcement expenses absorb recoveries—define who pays what.
  • Omitting clear notice and cure mechanics: ambiguity here delays remedies and increases litigation risk.
  • Forgetting the bankruptcy context: some parties assume private agreements are absolute—bankruptcy courts can modify outcomes.

Checklist for lenders and borrowers

  • Verify perfection steps and attach UCC/mortgage copies.
  • Confirm agreed standstill periods and enforcement triggers.
  • Spell out payment waterfall and carve-outs in detail.
  • Include bankruptcy procedures and DIP financing treatment.
  • Set amendment and voting thresholds.
  • Have counsel review intercreditor provisions alongside loan documents.

Short FAQs (practical answers)

  • Who benefits most from an intercreditor agreement? Senior lenders benefit from clearer enforcement rights; junior lenders benefit from defined recovery expectations and procedural protections.
  • Can an intercreditor agreement prevent litigation? It reduces uncertainty and the chance of contested actions, but it cannot eliminate litigation risk entirely—especially in complex bankruptcies.
  • Are intercreditor agreements public? Not usually; they are contract documents between lenders and the borrower, but they may be filed or referenced in public financing statements or SEC filings for public borrowers.

Sources and further reading

  • U.S. Bankruptcy Code (automatic stay and DIP financing provisions, 11 U.S.C.)
  • Uniform Commercial Code, Article 9 – Secured Transactions (perfection and priority rules)
  • American Bar Association practice materials on secured finance and intercreditor arrangements
  • U.S. Securities and Exchange Commission — public company financing disclosures

Professional disclaimer

This article is educational and reflects common practice as of 2025. It does not constitute legal or financial advice. For deal-specific guidance you should consult a qualified attorney and your financial advisor.

For more on how subordination affects loans and priority, see our related articles: Subordination Agreements: What Borrowers Need to Know and How Loan Subordination Works When Taking Multiple Loans Against the Same Asset.