What Is a Tri-Party Agreement?

A tri-party agreement is a business deal between three separate parties. In the mortgage industry, a tri-party or tripartite agreement often takes place during the construction phase of a new home or condominium complex, to secure so-called bridge loans for the construction itself. In such cases, the loan contract involves the buyer, the lender, and the builder.

Understanding Tri-Party Agreements

Tri-party agreements spell out the various securities and contingencies between the three parties in the event of default.

In particular, tri-party mortgage agreements become necessary when money is being loaned for a property that has not yet been built or improved. The agreements resolve potentially conflicting claims on the property should the borrower—generally the future homeowner—default or perhaps even die during construction.

For example, to ensure timely scheduling of the work as well as quality workmanship, the borrower would not want to pay the builder until work has been completed. But the builder thus risks not getting paid after completing the work, while themselves owing money to subcontractors, such as plumbers and electricians. In this event, a builder can claim what’s known as a construction lien on the property; that is, the right to forfeiture in the event they are not paid. But meanwhile, the bank also maintains a claim on the property if the borrower defaults on the loan.

Subrogation, as spelled out in a typical tri-party agreement, clarifies the requirements for transferring the property, should the borrower fail to pay their debt or pass away.

How a Tri-Party Agreement Works

A tri-party construction loan agreement typically lists the rights and remedies of all three parties, from the perspective of the borrower, the lender, and the builder. It details the stages or phases of construction, the final sales price, the date of possession and the interest rate and payment schedule for the loan. It also specifies the legal process known as subrogation, which determines who, how, and when various securities in the property are transferred between the parties.

For example, in the event of the death of the borrower, the builder may retain the first right to claim what the builder is owed for time and materials; the bank would then retain the lien on the remaining assets—typically, the land itself.

Key Takeaways

  • A tri-party agreement is a deal between three parties. The term can apply to any deal but is commonly used in the mortgage market.
  • With mortgages, the tri-party, or tripartite, agreement, usually happens during the construction phase of a property to secure bridge loans.
  • In tripartite, the three parties are the buyer (or borrower of the loan), the lender and the company building the property.

Other Uses of Tri-Party Agreements

In some cases, tri-party agreements can cover the property owner, the architect or designer, and the building contractor. Such agreements are essentially “no-fault” arrangements in which all parties agree to remedy their own mistakes or negligence, and not to hold other parties liable for any good-faith omissions or errors. To avoid errors and delays, they often include a detailed quality plan and spell out when and where regular meetings between the parties will take place.