When First in Time Is Not First in Right: Managing Priority in Ontario Debt Deals

By Jide Babalola

In commercial financing transactions, a lender advances funds to a borrower for a defined purpose and takes security to mitigate the risk of non‑recovery. That security is usually over personal property and/or real estate. Security over personal property is generally perfected pursuant to the provisions of the Ontario Personal Property Security Act, subject to its attachment and perfection rules, while security over real estate is generally taken by way of a mortgage or charge and registered in the land registry system. The default rule is that priority is determined by statute and, in the case of real estate, by order of registration. However, in some transactions, an existing security interest or the repayment of an existing debt may need to be subordinated or postponed to allow a later transaction to proceed. This commonly arises where a subsequent creditor requires first‑ranking security, or where the repayment of one debt is to be deferred in favour of more senior debt. In other instances, an easement holder or a party holding a different interest in land may require that an existing mortgage be postponed to preserve its interest. As a result, parties frequently contract around default priority rules. This article highlights the primary agreements used to reorder priorities in Ontario.

Subordination Agreements

Using a subordination agreement, one creditor contractually agrees that its security interest will rank behind another creditor’s interest, even if the usual statutory or registration priority would provide otherwise. This can apply to PPSA security interests, mortgages, or both.

Subordination agreements are commonly used in refinancing structures or where two creditors hold security over the same assets and agree that one will rank first while the other will hold a second‑ranking position. It is also not uncommon for subordination agreements to, in addition to contractually setting the priority of security interests among creditors, extend to addressing payment priorities among those creditors. Subordination agreements are effective as between the contracting parties but, in the context of real estate, do not by themselves alter registered priority unless implemented through a corresponding postponement of interest duly registered on title.

Postponement Agreements

In a general finance context, postponement agreements are used where one creditor defers or postpones its payment rights in favour of another creditor. However, in Ontario real estate practice, a “postponement” is the instrumentality by which a registered interest holder agrees to subordinate or postpone the priority of its interest in land in favour of another interest. Unlike contractual subordination, a postponement of interest in land must generally be registered on title to effectively reorder priorities under the Land Titles Act. Postponements are also used in development contexts to ensure that certain interests such as easements, access rights, or development agreements registered after a mortgage survive the mortgagee’s enforcement. Without such postponement, those later interests would rank subordinate and could be extinguished upon enforcement of the prior registered mortgage by power of sale or foreclosure.

Intercreditor Agreements

Intercreditor agreements can achieve similar results to subordination or postponement agreements, but they are typically used to address a broader range of issues where two or more creditors have competing claims against the same debtor. From a contractual perspective, they are the most comprehensive form of creditor priority agreement.

Intercreditor agreements are especially common where a borrower’s capital structure includes multiple layers of debt, such as senior debt, mezzanine/junior debt. In addition to setting out security and repayment priorities, these agreements typically address enforcement rights, standstill periods, the distribution of proceeds, release mechanics, and purchase or cure rights among creditors.

Combining Priority Arrangements

It is not unusual to see these concepts addressed in a single agreement, often titled a “Postponement, Subordination and Intercreditor Agreement” or a “Priority, Postponement and Standstill Agreement.” Ultimately, the name of the document is less important than its substance. The critical issue is not what the agreement is called, but rather what it actually accomplishes through its specific terms and conditions.

Final Thoughts

In structuring an appropriate creditor priority arrangement, numerous factors must be carefully considered, and it does matter how a change in creditor priority is documented. Key questions include: What do the parties need to achieve? What interests or obligations are being subordinated or postponed? What collateral is affected, and to what extent? What enforcement rights are impacted? Is registration required under the land registry system or the PPSA to achieve the intended result? Would a simple confirmation of no interest or estoppel letter from an existing creditor be sufficient to address the parties’ requirements?

These and many other questions must be addressed thoughtfully. Given the potential consequences of priority arrangements, it is imperative to work with experienced counsel to ensure that the parties’ objectives are accurately reflected, properly structured, and effectively documented.