Page 32 Spring 2019 Points of Interest continued on page 33 art 1 of this article, published in the Fall 2018 Issue, contained an overview of the general California rules of lien priority and some common priority disputes involving deeds of trust. This Part 2 discusses parties’ voluntaryalterationoftheirprioritiesusing Subordination Agreements and is focused onsubordinationsinloantransactionsonly. Subordination Defined As stated in Part 1, California’s “first in time, firstinright”rule,combinedwiththeeffect oftherecordinglaws,resultsinadocument having priority based on the time of its recording,subjecttocompliancewithother rules regarding notice. Subordination is the act by which a beneficiary that has a senior lien based on the general priority rules, voluntarily agrees, for consideration, that its lien would be junior to a lien that is subsequently recorded. Common Scenarios / Other Relationships Distinguished Subordination Agreements can arise in a variety of contexts in the financing of commercial real estate and present a number of issues. Subordination Agreements are used in many situations including those among leases and as between loans and leases. In the loan scenario,therearethreemaintransactions in which subordinations take place.  The first is seller financing in which the seller agrees that its loan will be subordinated to a construction loan to be later obtained by the buyer/ borrower. Inthesesituations,thelawis highly protective of the subordinating seller.  The second is seller financing in which the seller agrees that its loan will be subordinated to any type of loan to be later obtained by the buyer/borrower.  The last is when any lender agrees that its loan will later become subordinate toanotherloan. Anexampleofthethis wouldbeanagreementbyaHELOCthat it will later subordinate to a refinance loan. There are several other transactions that have characteristics similar to SubordinationAgreementsbutdifferfrom them. In a payment subordination, the parties agree that one (or more) creditor(s) will be paid prior to any payment being made to another creditor(s). Unlike the loan subordination scenario that is the subject of this article, it is the debt claim and not the lien on a particular asset that is being subordinated. Both types of subordinations, as well as other aspects of relationships among creditors, may be addressed in a more complex agreements such as an Intercreditor Agreement. General Classification of Subordination Agreements Subordination Agreements are generally classified as either executory or executed. Subordinations may also be “automatic.” Executory Subordination Agreement/Financing Seller Subordinating to Construction Loan An executory subordination is a promise bytheseniorlenderthatitwillsubordinate its lien to a later created lien. The promise may be in a separate agreement, a clause in a senior lender’s deed of trust, or, in the case of seller financing, a clause in the purchase and sale agreement. In order for theexecutoryagreementtobespecifically enforceable,itmustbesufficientlyspecific, certain and reasonable so that a court can compel the senior lender to execute the later Agreement if it does not do so. The Executory Subordination Agreement is subject to general contract law and must be reasonable and certain. At a minimum, the agreement must specify the maximum principal amount, interest rate, term, and the mode of repayment of the subordinating loan. As stated above, there must be consideration for the agreement. In order to be certain and Priority of Liens 0n California Real Property by Norma J. Williams, Esq. Williams & Associates Part 2: Subordination Agreements