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?



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.