REALWorld Law

Real estate finance

Priority of security

Is it possible for existing secured debt to become postponed to newly created debt in any circumstances in this country, whether by agreement or otherwise? If so, how does this happen?

Angola

Angola

Lenders and borrowers do not have the right to postpone an existing secured debt due to a newly created debt. 

Australia

Australia

The Personal Property Securities Act 2009 (PPSA) regulates the priority position in relation to competing security interests in personal property (as defined under the PPSA) unless otherwise agreed between the relevant lenders. Generally, if an existing secured debt and a newly created debt are both secured by way of registered security interests in all of the borrower’s assets (ie a general security agreement), the existing secured debt will not be postponed if it was registered first in time on the Personal Property Securities register (PPS register).

However, the PPSA also provides that in some very specific circumstances, newly created debt, can take priority over existing secured debt. For example, if a lender has provided funds to a borrower to purchase a specific piece of equipment, that lender may obtain first priority in relation to the piece of equipment for which it has provided finance.

A further exception to the general position relates to statutory charges (for example, charges to secure payment of unpaid land tax), which take priority over existing securities.

The PPSA should always be carefully considered in determining priority.

Priority in relation to existing debt secured by land (which is largely excluded from the PPSA regime) can be postponed by agreement between the security provider and the new and old security holders.  These arrangements are usually documented in the form of a priority deed or inter-creditor deed.  In the absence of such agreement, priority is generally determined by reference to the time of registration of the relevant interest on the title to the land.

Belgium

Belgium

Yes, in Belgium it is possible for existing secured debt to become postponed to newly created debt.

The most common technique is contractual subordination.

During the existence of a debt, a creditor can agree to subordinate its security interest to that of another creditor.

Bosnia-Herzegovina

Bosnia-Herzegovina

This can happen only by agreement where the creditor holding the secured debt agrees to the arrangement. Tax liabilities owed to the local tax authorities (even if not registered) may in certain cases have priority over secured debt.

Canada

Canada

A creditor can agree to subordinate its security interest to that of another creditor by agreement. The applicable agreement will regulate the subordination of the debt as well as the security and will cover matters such as rights of enforcement as between the two contracting parties.

Liens resulting from a property owner’s failure to pay real estate taxes or common area or strata charges due under a condominium regime may have 'super-priority' over liens for mortgage debt, notwithstanding the fact that such mortgage lien may have been granted and registered prior in time to the filing of such tax or condominium lien. In addition, local laws may vary as to the priority given to a mechanic’s or builder’s lien filed as a result of an owner’s failure to pay contractors making improvements to a property.

China

China

The priority of mortgages can be changed with the agreement of the mortgagee and mortgagor, and the corresponding mortgage registration should be updated to reflect the change. Such change, however, does not have an adverse impact on the other mortgagees (if any) unless written consent is obtained from them.

If the same property is mortgaged to two or more mortgagees, their claims will be prioritized in light of the sequence of registration. Accordingly, a newly created mortgage will not be able to affect the priority of the existing mortgage, unless the existing mortgage has not yet been registered or consent is obtained from its holder.

Croatia

Croatia

It is only possible for existing secured debt to be postponed to lower ranking newly created debt with the agreement of both the security holders themselves and the owner of the secured asset.

Czech Republic

Czech Republic

The parties may agree to subordinate an existing debt to another by a subordination agreement in which one creditor agrees that claims of another creditor must be fully paid before there is any payment to the subordinated creditor.

The parties may also agree to a second-ranking mortgage over real estate assets.

Denmark

Denmark

If the lender does not register its security at the Land Registry, all newly created security that is registered at the Land Registry in good faith will take priority over the previous unregistered security.

In some cases, the loan document can also provide for newly created debt to take priority over existing debt.

If the lender has registered the security at the Land Registry, it can only take priority over existing security if the existing lender agrees.

Please note that according to the Danish Land Registration Act, certain taxes, duties and contributions to fire insurance that rests with the property have priority right regardless of any already registered rights. The same goes for certain payments due to supply measures carried out by or on behalf of a public authority.

France

France

A creditor can agree to subordinate its security interest to that of another creditor in a priority agreement or an intercreditor agreement. The agreement will regulate the subordination of the debt as well as the security and will cover matters such as rights of enforcement. Such agreements, however, are not necessarily recognised by a court in bankruptcy proceedings.

Germany

Germany

A debt is subordinated either pursuant to a contractual agreement or because it constitutes a shareholder loan.

A creditor can agree to subordinate its debt/security to that of another creditor by means of a priority agreement; either an agreement on priority or an intercreditor agreement. The agreement will regulate the subordination of the debt as well as the security and will cover matters such as rights of enforcement. The subordination of one real estate security holder to another must be registered in the land registry.

Loans made by shareholders to the company and other arrangements equivalent to shareholder loans are subordinated to the claims of all other creditors by law. There are two exceptions to this rule:

  1. Shareholders who are not directors of the company and do not hold more than ten percent of the registered capital (minority privilege - Kleinbeteiligtenprivileg)
  2. The ‘restructuring privilege’ (Sanierungsprivileg) which applies to shareholders who have acquired shares for the purpose of rescuing the company from insolvency

When a public auction of a property takes place in the course of insolvency proceedings, outstanding debts due to public authorities such as real estate tax and compensation payments for the removal of contamination enjoy priority over secured loans. Any auction proceeds will be used first to satisfy these obligations to the state.

Hong Kong, SAR

Hong Kong, SAR

A creditor can contractually agree to subordinate its security interest to that of another creditor by a priority agreement, being a Deed of Priority or an Intercreditor Deed. The agreement will regulate the priority of the competing securities and will cover matters such as rights of enforcement.

Hungary

Hungary

Yes, it is possible that a secured creditor subordinates its pledge or mortgage to that of another secured creditor, by way of an agreement on the swap of the ranking position of their mortgages in the Land Registry or of their pledges in the Credit Collateral Registry (HBNY) or other applicable registry. These require the agreement of all parties affected by such subordination, including the mortgagor (or pledgor), even if different from the borrower. In addition, the parties may also sign agreements on contractual subordination of ranking of payments (including, for example, payment of proceeds upon security enforcement or liquidation), such agreements are not binding on third parties and the obligations under such agreements may not necessarily be specifically enforceable in accordance with their terms.

Ireland

Ireland

A lender can agree to subordinate/postpone its debt and any related security to that of another lender (even where the second lender is subsequent). This is usually done by means of an agreement called an intercreditor agreement. The intercreditor agreement will regulate the interaction between the lenders and their respective debts (including how repayment of those debts is dealt with) and how their respective security interacts (including on enforcement). A borrower will usually join into the intercreditor as a party to acknowledge the terms of the agreement between the lenders and to abide by them.

Italy

Italy

The general rule is that a right created or registered (where that is required) earlier has priority over a right created or registered (where that is required) subsequently.

However, various claims, collectively, referred to as privileges (privilegi) are given statutory priority by operation of law against the claims of other creditors in relation to the proceeds of a debtor’s property, for example the state in respect of direct and indirect taxes.

In principle, pledges prevail over privileges on movables, and special privileges on real estate assets and immovable properties prevail over mortgages.

A creditor can agree to subordinate its security interest to that of another creditor. Contractual subordination created under the terms of an agreement is binding between the parties and it is recognised by Italian market practice. However, subordination provisions, in particular clauses referring to subordination on insolvency, may be disregarded by a receiver or liquidator in bankruptcy or liquidation proceedings, and may be held not to be binding.

Japan

Japan

A creditor can agree to subordinate its security interest to that of another creditor by a priority agreement.  The change of priority with regard to mortgage over real estate may be registered.  

Netherlands

Netherlands

Creditors generally rank pari passu in the Netherlands. On this basis they have recourse to all of the debtor’s assets. A creditor can agree to subordinate its claims towards the claims of a specific creditor or towards all creditors of a debtor. A subordination agreement will regulate the subordination of the debt and usually includes arrangements as to the rights of enforcement of security, turnover of proceeds by the subordinated creditors or the filing of claims during insolvency proceedings.

Secured creditors will have priority over non-secured creditors. If several security interests have been created over the same assets, the ranking of security rights is determined by the time of establishment. The time of establishment is the moment when all statutory requirements necessary for a valid and enforceable right of pledge or mortgage are fulfilled. Rights of pledge and mortgage (in most cases) precede specific and general statutory privileged rights (algemene en bijzondere voorrechten) over property.

Mortgagees can agree to change the ranking of the right of mortgage (provided that all secured creditors agree). Such change of ranking must be registered at the Land Registry. It is doubted in legal literature whether the priority of a right of pledge can be changed. As long as this is not confirmed by legislation or case law, it is our point of view that a change of ranking of rights of pledge is not possible and the time of creation of the rights of pledge will be decisive for their ranking. Consequently, to alter the priority of an existing right of pledge it must be terminated, and new right(s) need to be created as agreed between the parties. Alternatively, an intercreditor agreement containing arrangements in respect of the application of enforcement proceeds will be sufficient to effectuate a de facto change of priority.

Nigeria

Nigeria

Generally, secured creditors rank in priority over unsecured creditors, also a registered security ranks above an unregistered security interest. A secured creditor may by contract take subject to the interest of another secured creditor which was subsequently granted a security interest in the property. This arrangement is typically documented in an inter-creditor agreement or subordination/priority agreement.

Also, under Nigerian law, a fixed charge on any property has priority over a floating charge affecting the same property; however, the floating charge may take priority over any subsequently registered fixed charge where the terms upon which the charge was granted prohibited the Company from granting a later charge having priority over the floating charge and where the latter security holder had actual notice of the prohibition at the time the charge was granted to it.

Norway

Norway

A creditor can agree to subordinate its security interest to that of another creditor by a priority agreement, usually in the form of an intercreditor agreement. The agreement will govern the subordination of the debt as well as the security and will cover matters such as rights of enforcement. If the agreement covers any security rights which are registered (for instance in the Norwegian Land Registry), the ‘reversal’ of or change in priority must be registered for it to be perfected.

The Norwegian Liens Act (panteloven) provides for a statutory, preferential lien, eg in favour of the bankruptcy estate as security for the necessary costs of the bankruptcy proceedings. A security interest is created in any pledged asset belonging to the debtor at the time of commencement of the bankruptcy proceedings and other assets pledged as security for the obligations of the debtor at that time.

The lien amounts to 5% of the value of the asset, but is limited to 700 times the court fee (the current court fee is NOK1,223 from 1 January 2022) for each asset registered in an asset register (eg real property, ships, aircraft). The lien takes priority over other statutory liens and all other encumbrances on the asset and can only be used to cover the necessary costs if no other (unencumbered) assets are available to cover these costs.

Poland

Poland

If there are several mortgages encumbering the same property, the security established later cannot be exercised to the detriment of the earlier security.

However, the priority of mortgages may be changed through an agreement reached between the parties. The change of priority should be registered with the Land and Mortgage Register.

Portugal

Portugal

In Portugal, lenders and borrowers do not have the right to postpone an existing secured debt due to a newly created debt. There are, however, cases of priority of real security in respect of legal expenses incurred directly for the benefit of the relevant creditors, and also those arising from tax debts directly related to the real estate.

The priority of a financial pledge granted for the benefit of the Central Bank or the European Central Bank by a lender in order to collateralize the loans it has contracted with the interbank market does not depend on any registration or notification to the debtor and prevails over any other security, even if previously registered or notified.

Romania

Romania

Under Romanian law, the rank of a secured debt is determined by the timing of its registration with the relevant public registers. Based on the order established by registration, the creditor has the right to recover his debt with priority over the non-registered creditors and over the creditors whose claims were registered subsequently. Existing secured debt may become postponed to newly created debt in some circumstances either by way of agreement or by the operation of law.

Contractual arrangements

A creditor can agree to subordinate its security interest to that of another creditor by means of a subordination agreement. The agreement will regulate the subordination of the debt as well as the security and will cover matters such as rights of enforcement.

In the event of bankruptcy, however, this type of agreement becomes ineffective because Romanian insolvency law lays down the order in which debts are to be discharged.

Subordination by operation of law

The Romanian Civil Code provides that if a lower ranking creditor pays a superior creditor the amount of the debt, it succeeds to the rank of the superior creditor. The lower ranking creditor may wish to do this where the superior creditor decides to sell the asset at a value that would not cover the amount of both debts. Consequently, an agreement between the parties can make it possible for existing debt to be postponed to newly created debt.

Slovak Republic

Slovak Republic

The general rule is that a security created earlier has priority over a security created subsequently and thus the date and time of registration is important.

However, the creditors may agree to subordinate an existing debt to another by a subordination agreement in which one creditor agrees that claims of another creditor shall be fully paid before there is any payment to the subordinated creditor. This agreement becomes effective as of the day of registration of the agreed ranking with the respective pledge register (ie the Notarial Central Register of Pledges, the Commercial Register, the Register of Pledges to Securities of the Central Security Depository or the Cadastral Registry).

If the creditors agree on a different ranking of their pledges and this agreement subsequently causes reduced enforceability of the claim of a creditor who is not party to the agreement, the subordination agreement shall not be held effective towards such creditor.

Spain

Spain

A creditor can agree to subordinate its security interest to that of another creditor by a priority agreement, being a deed of postponement (subject to regional stamp duty over the amount of the postponed security if the eventual postponement was not foreseen in the original postponed security document) or an inter-creditor deed. This agreement will regulate the subordination of the debt as well as the security and will cover matters such as rights of enforcement.

Sweden

Sweden

Yes, by private agreement as to the priority of claims in bankruptcy. Priority is usually agreed by means of intercreditor agreements which are generally recognised and enforceable under Swedish law, although in some instances the priority of claims as between the parties to such an agreement may not be effective against an administrator-in-bankruptcy (konkursförvaltare). The parties in such cases would have to rely on provisions in the intercreditor agreement obliging the parties to the agreement to immediately transfer any sum received from a debtor to the person or entity entitled to it under the terms of that agreement (hence, in effect, assuming a credit risk in relation to the other parties).

It is also possible to change the respective priorities between mortgage certificates issued in relation to a property. This is achieved through an application by the owner of the property. Consent is required from those holders of mortgage certificates whose priority might be prejudiced.

Thailand

Thailand

Yes, as specified by law. The Thai Civil and Commercial Code provides for preferential rights which can be generally divided into the following three categories:

  • General preferential rights
  • Preferential rights in movable assets, and
  • Preferential rights in immovable assets

For each category, existing secured debt may be postponed to newly created debt according to a certain hierarchy. The law in this area is complex and specific advice should be sought.

United Arab Emirates - Abu Dhabi

United Arab Emirates - Abu Dhabi

If a security interest must be registered, the date of registration determines its ranking. The types of security interest that must be registered include mortgages over real property, where failure to register equates to failure to create the mortgage. If two or more applications to register a mortgage against the same property are made at the same time, the mortgages are registered together and rank equally in the distribution of auction proceeds.

If it is not registerable, it will rank in order of the date of creation, but the laws relating to priority are largely untested.

A lender may assign the ranking of its mortgage to another creditor having a security interest in the same property, and this may be effected contractually though a deed of priority. However, the consent of the borrower may be required if a lender wants to assign its rights (rather than its ranking) to another lender.

United Arab Emirates - Dubai

United Arab Emirates - Dubai

If a security interest must be registered, the date of registration generally determines its ranking. The types of security interest that must be registered include mortgages over real property, where failure to register equates to failure to create the mortgage. If two or more applications to register a mortgage against the same property are made at the same time, the mortgages are registered together and rank equally in the distribution of auction proceeds.

If it is not registerable, it will rank in order of the date of creation, but the laws relating to priority are largely untested.

A lender may assign the ranking of its mortgage to another creditor having a security interest in the same property, and this may be effected contractually though a deed of priority. However, the consent of the borrower may be required if a lender wants to assign its rights (rather than its ranking) to another lender.

UK - England and Wales UK - England and Wales

UK - England and Wales

A creditor can agree to subordinate its security interest to that of another creditor by a priority agreement, being a Deed of Priority or an Intercreditor Deed. The agreement will regulate the subordination of the debt as well as the security and will cover matters such as rights of enforcement.

UK - Scotland

UK - Scotland

More than one standard security may be granted over a single piece of real estate at the same time, as well as floating charges. The ranking of securities against one another in that situation determines how much of the value of the real estate is available, on enforcement, for repayment of each lender's debt.

Standard securities rank in priority by reference to their dates of registration in the Land Register unless varied by a separate agreement (ranking agreement) but all Standard Securities registered at the Land Register of Scotland will rank ahead of floating charges unless varied by express agreement.

Ranking will usually be expressly provided for by way of a separate agreement among the borrower and the various lenders although the simple postponement of one security to another may be contained within the security itself. Details of such agreements will vary from case to case and commonly will also deal with related matters such as each creditor's ability to enforce its security.

It should be noted that express ranking agreements must be recorded or registered in the appropriate Scottish Property Register.

If there is no express ranking agreement, standard securities over real estate will rank according to the dates on which they are recorded or registered in the appropriate Scottish Property Register. The earliest to be registered will rank first. In the absence of separate agreement or negative pledge, the first-ranking creditor enjoys priority only to the extent of advances made (or contracted to be made) before it receives notice of the existence of the later standard security, together with interest and expenses. Care must therefore be taken in agreeing to make any further advance and in capitalizing interest.

Normally, a standard security recorded or registered in the appropriate Scottish Property Register before any floating charge affecting the same real estate has crystallized will rank before the floating charge, regardless of the date of the floating charge. However, this will not be so where there is express provision to the contrary (ie in the ranking agreement) between the creditors or where a standard security is granted after a duly registered floating charge which contains an express prohibition against the creation of further securities by the debtor which rank equally with or in priority to the floating charge, without the consent of the holder of the floating charge.

Ukraine

Ukraine

Secured debt can be postponed to newly created debt if the prior written consent of the lender, who holds the existing secured debt has been obtained and relevant amendments have been introduced into the security agreements. In addition, such postponement shall not affect the rights of third parties.

Another technique which is used in practice by Ukrainian banks and investors is contractual subordination of indebtedness. For this purpose,Ukrainian creditors often enter into subordination arrangements in order to change the priority of indebtedness. However, the effect of such arrangements on third parties and their enforceability against such parties in case of debtor's insolvency or liquidation are uncertain because the order of priority of indebtedness and insolvency claims is mandatory and governed by bankruptcy and enforcement laws which override and prevail over the parties' choice of the priority of indebtedness. Thus, due to lack of legislative guidance on this kind of agreement, which is not broadly tested in the practice of Ukrainian courts, there is a legal risk that a subordination agreement may be deemed to be unenforceable in Ukrainian courts.

United States

United States

A creditor can agree to subordinate its security interest to that of another creditor by agreement. The applicable agreement will regulate the subordination of the debt as well as the security and will cover matters such as rights of enforcement as between the two contracting parties.

Liens resulting from a property owner’s failure to pay real estate taxes levied by local authorities or common area charges due under a condominium regime may have ‘super-priority’ over liens for mortgage debt, notwithstanding the fact that such mortgage lien may have been granted prior in time to the filing of such tax or condominium lien. In addition, local laws vary as to the priority given to a ‘mechanic’s lien’ filed as a result of an owner’s failure to pay contractors making improvements to a property.

Zimbabwe

Zimbabwe

This entirely depends on the terms of the agreement or the lender deciding whether the debt should be elevated or subordinated.