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Simple English definitions for legal terms
subordination clause
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A quick definition of subordination clause:
A subordination clause is a part of a legal document that says the rules in that document are not as important as the rules in another document. It can also be a promise in a loan agreement that the first loan will still be more important than any new loans that might come later.
A more thorough explanation:
A subordination clause is a provision in a legal document that places certain terms or conditions under the authority of another document or agreement that holds a higher priority.
1. In a real estate transaction, a subordination clause may be included in a second mortgage agreement, which allows the first mortgage to maintain its priority in case of default or foreclosure. This means that if the property is sold or foreclosed, the first mortgage lender will be paid before the second mortgage lender.
2. In a business contract, a subordination clause may be included in a loan agreement, which allows the lender to maintain its priority in case the borrower takes on additional debt. This means that if the borrower defaults on the loan, the lender will have the first claim on the borrower's assets.
These examples illustrate how a subordination clause can be used to establish a hierarchy of priorities in legal agreements. By explicitly stating which terms or conditions take precedence over others, parties can avoid confusion and disputes in the event of default or other unforeseen circumstances.