What is a 'Subordination Clause'

A subordination clause is a clause in an agreement which states that the current claim on any debts will take priority over any other claims formed in other agreements made in the future. Subordination is the act of yielding priority.

BREAKING DOWN 'Subordination Clause'

A subordination clause effectively makes the current claim in the agreement senior to any other agreements that come along after the original agreement. These clauses are most commonly seen in mortgage contracts and bond issue agreements. For example, if a company issues bonds in the market with a subordination clause, it insures that if more bonds are issued in the future the original bondholders will receive payment before the company pays all other debt issued after it. This is added protection for the original bondholders as the likelihood of them getting their investment back is higher with a subordination clause.

RELATED TERMS
  1. Subordinated Debt

    A loan (or security) that ranks below other loans (or securities) ...
  2. Subordination Agreement

    A legal agreement which establishes one debt as ranking behind ...
  3. Contingency Clause

    A contract provision that requires a specific event or action ...
  4. Subordinate Financing

    Debt financing that is ranked behind that held by secured lenders ...
  5. Convertible Subordinate Note

    A short-term debt security that can be changed into common stock. ...
  6. Extender Clause

    In real estate, a provision of an exclusive listing agreement ...
Related Articles
  1. Small Business

    Understanding Subordinated Debt

    A loan or security that ranks below other loans or securities with regard to claims on assets or earnings.
  2. Investing

    Corporate Bonds and the Importance of Covenants

    Any type of investor, private or institutional, should be acquainted with the significance of covenants in corporate bond agreements.
  3. Insurance

    Life Insurance Clauses Determine Your Coverage

    Understanding these key parts of your policy will help you to ensure that your family will be covered.
  4. Insurance

    What is a Force Majeure?

    A force majeure clause frees both parties in a contract from fulfilling their obligations in the event of some catastrophic or unexpected occurrence.
  5. Investing

    Contingency Clauses In Home Purchases Contracts

    Real estate contracts often contain contingency clauses, which are conditions or actions that must be met for a contract to be binding.
  6. Investing

    Not All Debt Holders Are Equal

    Senior debt is borrowed money a company repays first if the company goes out of business.
  7. Investing

    Understand the Security Types of Corporate Bonds

    Any investor should be aware of the different security types regarding corporate bonds as well as the direct correlation to potential recovery rates.
  8. Personal Finance

    Soon, You Can Sue Your Bank Again

    Americans are going to regain the right to sue a bank or credit card company – but not in all cases. We explain what changes and what doesn't.
  9. Investing

    Contingency Clauses In Home Purchase Contracts

    Here, we introduce widely used contingency clauses in home purchase contracts and how they can benefit both Buyers and Sellers.
  10. Investing

    The LLC Operating Agreement Template, And Why You Need It

    For some business owners, creating an LLC offers the best of both worlds. But your state's rules might not suit your needs. Hence the Operation Agreement.
RELATED FAQS
  1. What is the difference between subordinated debt and senior debt?

    Understand the difference between subordinated debt and senior debt. Learn what a company is required to do in case of bankruptcy. Read Answer >>
  2. What is an alienation clause?

    Whether used in reference to insurance policies, mortgages or commercial loans, an alienation clause stipulates that should ... Read Answer >>
  3. What is a "force majeure"?

    A force majeure is derived from the French term meaning "greater force" and refers to any natural and unavoidable catastrophe. ... Read Answer >>
  4. Can you ask your landlord to remove a waiver of subrogation clause from your lease?

    Learn how to remove a waiver of subrogation clause from a lease. Find out also why you might not want to strike this clause ... Read Answer >>
  5. How is the consumer price index (CPI) used in market escalation contracts?

    Understand the purpose of market escalation contracts and learn how the consumer price index (CPI) is often used to make ... Read Answer >>
  6. Which terms should be included in a partnership agreement?

    Understand what specific terms should be included in a business partnership agreement and how each affects the partners in ... Read Answer >>
Hot Definitions
  1. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  2. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  3. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  4. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  5. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  6. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
Trading Center