Want first right to security proceeds? Make clear drafting your priority
In this issue
- Lending to borrowers who have another lender can help businesses to meet staged cash flow needs, for example on property developments.
- In these scenarios, intercreditor or priority arrangements typically need to be documented to reflect who can be paid what and when, both pre and post borrower default.
- But as a recent case demonstrates, if imprecise wording is used, it may lead to disputes and undesirable consequences.
About the author
Stephan Smoktunowicz is a banking & finance partner at the London office of the international law firm, gunnercooke. He helps businesses & people in the UK and across the world to achieve their commercial objectives and safely navigate issues that arise throughout any transaction lifecycle. He also provides training and mentoring to businesses, professionals and students on related topics.
Introduction
Where multiple lenders make advances to the same borrower and that borrower grants the same or similar security to each lender, an intercreditor agreement or deed of priority is typically needed to establish:
- when the borrower can make payments pre and post default; and
- when security can be enforced and how security proceeds are divided amongst lenders.
How the ability to make payments to lenders and the security are dealt with are two separate strands which each need to be carefully considered in any intercreditor agreement or deed of priority.
Furthermore, these strands are typically dealt with by use of terminology such as ‘ranking’, ‘subordination’, ‘postponement’, ‘permitted payments’ and ‘payment waterfalls’.
However, the drafting of that terminology can sometimes be prone to confusion, in particular where the base template/precedent document on which the drafting is based does not cater for the commercially agreed position, unless it is amended.
A recent case and drafting risks
In the 2025 English law judgment of JAK Property Jersey Limited v Together Commercial Finance Limited [2025] EWHC 2442 (Ch), the High Court decided that:
- where one clause of a deed of postponement (Clause 1) ranked the first lender’s security ahead of the second lender’s security up to a capped amount;
- the inclusion of another clause (Clause 2) , which provided that:
- if the term of the second lender’s loan agreement came to an end before the term of the first lender’s loan agreement,
- all sums due and payable by the borrower under the second loan agreement will be paid in accordance with the second loan agreement;
- notwithstanding the priority of the first lender’s security,
did not change the priority under Clause 1, as argued by the second lender – so if the first lender’s security was enforced, it was entitled to the enforcement proceeds up to the capped amount.
This raises important points for lenders and their internal teams when dealing with priority or intercreditor arrangements.
Mitigating priority drafting risk
So, how can lenders look to mitigate the drafting risks identified by the above case?
- Use a term sheet: Using an intercreditor term sheet which clearly identifies who can be paid when, both in pre and post default scenarios and in enforcement scenarios can provide a clear template from which intercreditor arrangements can be drafted.
- In-house agreement templates: Always consider whether template or specimen intercreditor, postponement or priority agreements fit the scenario. If not, consider whether you are clear on what changes are needed to protect your position. If in doubt, seek specialist legal advice.
- Carefully review the draft against the term sheet: Reviewing the draft intercreditor/priority agreement clause by clause against your term sheet will help to identify whether the ‘ranking’, ‘subordination’, ‘postponement’, ‘permitted payments’ and ‘payment waterfalls’ regimes accurately reflect what is needed commercially. Always think, do any clauses potentially cover the same or similar ground? If yes, consider whether the drafting is sound or needs to be qualified or amended. If in doubt, seek legal advice.
- Don’t be tempted to delegate solely to AI for review: Whilst AI tools can assist with reviewing agreements, they are by no means foolproof and extreme care is needed when using them to consider intercreditor arrangements and their precise legal effect. The risk of hallucination could leave a lender seriously out of pocket.
Don’t leave your drafting to chance
Intercreditor and priority agreements can be relatively straightforward , particularly where the second lender is fully subordinated and postponed behind the first lender.
However, many commercial scenarios are more nuanced and complex, requiring careful thought and careful adaptation of templates or precedents.
Whether you are a lender advancing monies for the first time or the millionth time, identifying your commercial requirements in as much detail as possible will help to ensure that your drafting is clear and that your intercreditor and priority agreements stay the test of time.
NEED HELP OR ADVICE?
GET IN TOUCH
If you need any help or advice in relation to the matters discussed in this article or any other banking and finance law related matters, please do not hesitate to contact Stephan by email at stephan.smoktunowicz@gunnercooke.com.
You can also find out more about Stephan’s practice and experience here and connect with him on Linkedin here.
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