How to Negotiate Intercreditor Agreements

An intercreditor agreement becomes consequential when the capital structure stops performing as modeled. In a stabilized transaction with ample coverage, its provisions may remain dormant. In a lease-up, repositioning, recapitalization, or distressed scenario, however, the document determines who can act, who must wait, who controls cash, and whether the sponsor retains a viable path to preserve value. That is why knowing how to negotiate intercreditor agreements is not merely a legal exercise. It is a central capital-structure discipline.

For commercial real estate sponsors and investors, the objective is not to produce a document that appears balanced in ordinary conditions. It is to establish a workable decision framework for adverse conditions before leverage, liquidity pressure, and competing creditor interests make cooperation difficult.

Start With the Capital Stack, Not the Form Document

Intercreditor negotiations often begin with a precedent agreement supplied by the senior lender or its counsel. That document is useful as a starting point, but it should not dictate the commercial outcome. A sponsor should first identify the actual sources of tension within the proposed stack: senior mortgage debt, mezzanine financing, preferred equity with creditor-like remedies, construction debt, rescue capital, and any future financing capacity.

The governing question is straightforward: if performance deteriorates, which party has economic exposure at each stage, and what rights does that party need to protect its position without unnecessarily impairing the asset or the broader transaction?

Senior lenders will generally seek priority, control over collateral and cash, broad cure rights, and protection against junior interference. Junior capital providers need visibility, meaningful cure and purchase rights, and a practical ability to protect their investment if the senior lender accelerates or exercises remedies. The sponsor needs enough flexibility to operate the asset, address defaults, raise additional capital where permitted, and avoid a creditor dispute that destroys enterprise value.

A well-negotiated agreement recognizes that these interests are not identical. It also recognizes that a senior lender's apparent control may be less valuable if it produces a prolonged enforcement process, tenant disruption, loss of key personnel, or a distressed sale at the wrong point in the cycle.

Define the Decision Rights That Matter Most

The most material terms are rarely the boilerplate provisions. They are the operational rights that apply after a default, during a workout, and in connection with a transfer of control.

Standstill Periods Must Match the Asset's Reality

The standstill provision restricts the junior lender from exercising remedies for a defined period after a senior loan default. Senior lenders use it to preserve an orderly enforcement process. Junior lenders view it as a period during which their collateral, and often their economics, may deteriorate.

The right duration depends on the asset, loan structure, and default profile. A 90-day standstill may be manageable for a stabilized multifamily property with predictable cash flow. It may be commercially unworkable for a transitional hospitality asset, a construction project facing completion risk, or an office repositioning where leasing momentum can be lost quickly.

Negotiation should focus on more than the number of days. The parties should establish when the period begins, whether it restarts following subsequent defaults, what actions remain permissible during the standstill, and whether the junior creditor can pursue protective measures that do not disrupt the senior's remedies. A standstill that resets repeatedly or prevents basic collateral preservation can convert a temporary restriction into a practical loss of control.

Cure Rights Need Notice, Time, and Clear Scope

A junior creditor cannot cure a default it does not know exists. Prompt notice of monetary and nonmonetary defaults is therefore fundamental, along with sufficient detail to understand the amount due, the required action, and the applicable deadline.

The cure period should distinguish between monetary defaults and defaults that require operational remediation. Payment defaults may be capable of cure within a short period. A covenant breach involving insurance, reporting, environmental compliance, leasing, or property condition may require more time and coordination.

Equally important is the scope of a cure. Junior lenders should seek the ability to cure not only scheduled debt service but also protective advances, default interest, reserve shortfalls, and other amounts that could otherwise trigger enforcement. Senior lenders will understandably require that any cure be complete and promptly funded. The agreement should state the mechanics precisely rather than leaving the parties to debate whether a proposed payment fully reinstates the loan.

Purchase Options Are a Control Right, Not a Footnote

A junior creditor's right to purchase the senior loan is often its most meaningful protection. It provides an alternative to watching the senior lender enforce against the borrower while the junior position is impaired or eliminated.

The economics of the purchase option require careful attention. The purchase price may include principal, accrued interest, protective advances, enforcement costs, breakage, and other amounts. The definition of these components should be specific and should exclude disputed charges or speculative damages where appropriate. A purchase right that requires the junior lender to pay an uncertain or inflated amount is less useful than it appears.

The timing mechanics matter just as much. The junior lender needs adequate notice of acceleration, a proposed sale, or an enforcement action, as well as a realistic period to arrange funding and complete diligence. In cross-border or institutionally syndicated situations, internal approvals and funding logistics may require more than a few business days.

Negotiate Cash Management as a Workout Tool

Cash control is frequently where creditor priorities become most visible. Lockbox arrangements, cash sweeps, reserve accounts, and lender-controlled accounts can preserve senior debt service. They can also deprive the property of the operating liquidity needed to protect tenants, complete capital work, fund leasing costs, or maintain critical vendors.

The agreement should address who controls collections after a default, which operating expenses may continue to be paid, how reserves are applied, and whether the junior creditor receives reporting on cash movements. A senior lender may insist on broad discretion following an event of default. The sponsor and junior lender should still seek a clearly defined operating budget process, especially where the property is not yet stabilized.

This is an area where rigid senior control can be counterproductive. If every disbursement requires case-by-case approval, a property can lose momentum precisely when its value depends on active management. A disciplined framework for approved expenses, replacement reserves, and leasing or construction expenditures can protect the senior lender while reducing execution risk.

Address Transfers, Foreclosure, and Bankruptcy Before They Become Immediate Issues

The transfer provisions should align with the parties' likely enforcement paths. Senior lenders typically want restrictions on junior debt transfers to avoid dealing with an unknown or adversarial party. Junior lenders need the ability to transfer to qualified institutional investors, affiliates, and controlled funds, particularly if their investment mandate changes or a workout requires additional capital.

Foreclosure rights demand similar precision. If a junior lender forecloses on its collateral, can it assume control of the borrower or equity owner? Does the senior lender have approval rights over the replacement owner? Are there experience, net worth, and bad-act guaranty requirements? These questions are especially significant in mezzanine structures, where a UCC foreclosure can change ownership without directly transferring the real estate.

Bankruptcy provisions also warrant close attention. Senior lenders may seek broad waivers of junior rights to object to debtor-in-possession financing, cash collateral use, or a reorganization plan. Some limitations may be commercially acceptable. Others can leave junior capital without a meaningful voice in a proceeding that determines recoveries. The appropriate balance depends on the leverage profile and the parties' relative economics, but blanket waivers deserve careful scrutiny.

How to Negotiate Intercreditor Agreements With a Clear Process

The most effective negotiations are prepared before the first markup. The sponsor, capital advisor, lender group, and counsel should agree on a short list of non-negotiable commercial points, secondary priorities, and provisions that can be traded for value elsewhere. Without that alignment, the junior lender may win a drafting point while the sponsor inadvertently gives up a more consequential operating right.

A practical process should include a downside case. Model a payment default, a covenant breach, a delayed stabilization, and a maturity shortfall. For each scenario, determine who provides notice, who controls cash, whether junior capital can cure, how long it must wait, and what happens if the senior lender elects to sell or foreclose. If the answer is unclear on a one-page scenario analysis, it is unlikely to become clearer in a live workout.

Negotiations should also distinguish between rights that sound protective and rights that can actually be exercised. A purchase option is of limited value without sufficient notice and financing time. A cure right is limited if it excludes default interest or protective advances. Reporting rights are insufficient if they arrive after remedy deadlines have passed.

For sponsors, the central discipline is to resist treating the intercreditor agreement as a matter solely between lenders. Its restrictions can affect distributions, budgets, future financing, ownership transitions, and the ability to execute a rescue recapitalization. The document should be negotiated alongside the loan documents, not after the principal economics have been treated as settled.

In complex financings, certainty of execution comes from making control rights explicit while the parties remain aligned. A carefully structured intercreditor agreement will not eliminate distress, but it can preserve the time, information, and decision-making capacity required to protect value when conditions become less cooperative.