Intercreditor agreements explained: what senior and mezzanine lenders agree

An intercreditor agreement is the contract that makes a two-lender structure work. Whenever a development is funded by both senior debt and mezzanine debt, the two lenders share the same site and the same borrower, and they need a rulebook for how they behave towards each other. That rulebook is the intercreditor agreement. It does not involve the developer as a party in the same way, but it shapes the whole structure, so it is worth understanding what it does.

What an intercreditor agreement is

An intercreditor agreement is a legal contract between the senior lender and the mezzanine lender that defines their relative rights over a shared borrower and security. Its central job is to record that the senior lender ranks first and the mezzanine lender ranks second, and then to spell out every consequence of that ranking. The mezzanine lender holds a second charge; the intercreditor agreement is what gives that charge its practical meaning by governing when and how the junior lender can act.

Without one, two lenders secured against the same asset would have no agreed way to resolve a default, no clarity on who is repaid first, and no framework for cooperating. The agreement removes that uncertainty before any money is drawn.

The clauses that matter

Most of an intercreditor agreement is standard, but a handful of clauses carry the weight. These are the ones that decide how the structure behaves under stress.

• Priority and the payment waterfall. The heart of the document. It confirms that the senior lender is repaid in full before the mezzanine lender receives anything, and sets the order in which sale or refinance proceeds flow to each layer.
• Standstill. A period during which the mezzanine lender agrees not to enforce its security even after a default, giving the senior lender time to manage the situation first. It stops the junior lender from acting prematurely and undercutting the senior position.
• Cure rights. The mezzanine lender's right to step in and fix a default under the senior facility, for example by covering a missed payment, to protect its own position rather than watch the scheme fail from below.
• Enforcement. Who can take action against the security, in what order, and with what notice. It typically gives the senior lender control of enforcement while protecting the mezzanine lender's right to be repaid from the proceeds.
• Drawdown priority. The order in which each facility is drawn as the build progresses, so funds arrive in the right sequence and neither lender is over-exposed at the wrong stage.
• Reporting. The information each lender is entitled to receive, and the obligation on the borrower and monitoring surveyor to keep both lenders informed of progress and cost.

Why they rarely need reinventing

Intercreditor agreements have a reputation for being slow, but in practice they usually are not, because the market is small and repetitive. The active senior development lenders and the established mezzanine funders have negotiated these documents with each other many times, so the positions are well understood on both sides. A mezzanine lender that knows the senior market knows what a given senior lender will and will not accept, which turns a potential negotiation into a form-filling exercise.

This is one of the quiet advantages of using a mezzanine lender that operates in the same market day in, day out. The intercreditor terms are not a fresh fight on every deal; they are a known quantity that can often be agreed in days. Where the senior and mezzanine lenders are unfamiliar with each other, the same document can drag, which is a good reason to pair lenders who already work together.

How it plays out in a shortfall

An illustrative example shows why the clauses matter. Suppose a scheme funded by a senior loan and a mezzanine loan runs into trouble: sales stall and a senior interest payment is missed. Without an intercreditor agreement, both lenders could move against the security at once and collide. With one, the sequence is orderly. The mezzanine lender, bound by the standstill, holds off enforcing its second charge for the agreed period. During that window it may exercise its cure rights, covering the missed senior payment out of its own pocket to keep the facility performing, because losing the scheme would wipe out its junior position anyway. If the situation cannot be salvaged and the site is sold, the waterfall applies: the senior lender is repaid in full, the mezzanine lender takes what is left, and only a severe shortfall reaches the senior layer. Every party knew that order before a penny was drawn, which is precisely the point of the document.

What developers should check

You are not usually a direct party to the negotiation, but the outcome affects your scheme, so it pays to check a few things:

• That the two lenders know each other. A senior and mezzanine pairing that have transacted before will agree terms faster and with less friction.
• Drawdown sequencing. Make sure the order in which the facilities draw down matches your build programme and cash flow, so funds are available when you need them.
• Cure rights and standstill. Understand what happens if a payment is missed. Sensible cure and standstill provisions give the scheme room to recover rather than tipping straight into enforcement.
• The timeline. Ask your mezzanine lender how quickly they expect to agree the intercreditor with your chosen senior lender. A confident, specific answer is a good sign; vagueness is not.
• Reporting load. Check what both lenders will require through the term, so the monitoring and reporting obligations are realistic for your team.

Where the intercreditor fits

The intercreditor agreement is the connective tissue of a senior plus mezzanine structure. It is why the two layers of the capital stack can coexist safely, and it is a standard feature of any structure that reaches high leverage, as set out in our guide to structuring a 90 percent plus LTC stack. If you are new to the layer that sits behind it, start with our primer on mezzanine debt.

We lend the mezzanine layer ourselves and work with the active senior lenders regularly, so the intercreditor is rarely the thing that holds a deal up. Send us your scheme and your senior terms, and we will tell you how the structure and its documents will come together.