Subordination and Intercreditor Agreements: Negotiating Senior Lender Terms in Victorian Private Deals

Subordinated debt positions in Victorian commercial asset deals live and die by the intercreditor agreement. The loan documents matter, of course, but the intercreditor governs what happens when the borrower defaults and the senior lender moves to enforce. Get the terms wrong and your security can become theoretical.

Private lenders and family offices taking second or third positions face a negotiation reality: the senior lender’s counsel will present a precedent they have used before. It will favour their client. That is not hostility, it is efficiency. Your job is to know which clauses genuinely protect the senior lender’s position and which simply shift risk to you without justification. The provisions that warrant close attention in Victorian private deals are set out below, along with a practical framework for negotiating them.

The Structural Choices Before You Negotiate

Before addressing specific clauses, consider the structure. Intercreditor arrangements in private commercial lending typically take one of two forms.

Contractual subordination creates a priority arrangement through agreement. The subordinated lender agrees that its claims rank behind the senior lender’s. This is the most common approach in private deals because it is flexible and does not require registration.

Structural subordination operates through the corporate group. The senior lender takes security over the operating entity that holds the assets, while the subordinated lender lends to a holding company. The subordinated lender’s recourse sits behind the operating entity’s creditors. This structure is cleaner but only works where the borrower group can accommodate it.

Victorian private deals often use contractual subordination because the borrower’s corporate structure is fixed and the parties want speed. That choice makes the intercreditor agreement the operative document, so its terms deserve close scrutiny.

Payment Blocking: The Clause That Defines Your Position

Payment blocking provisions determine whether you can receive payments while the senior lender remains unpaid. The senior lender will want broad discretion to block payments to you. You will want that discretion constrained.

The starting position in most precedents is absolute: while a senior default exists, the subordinated lender receives nothing. The senior lender’s consent is required before any payment can be made. In practice, that consent rarely comes.

Negotiate for a defined payment blockage period. A common compromise is a cap on any single blockage, with a requirement that the senior lender act reasonably in exercising its rights. Some sophisticated senior lenders will accept a formulation that permits scheduled interest payments to continue during a standstill unless the senior lender is itself not receiving its contracted payments.

This is not a minor drafting point. If you are a subordinated lender relying on interest income to service your own obligations, an indefinite payment blockage can create a default in your own funding arrangements. A defined blockage period gives you a fixed horizon to assess your position.

Standstill Provisions: The Enforcement Pause

Standstill clauses prevent the subordinated lender from enforcing its security while the senior lender is working through its own enforcement. The senior lender wants time to realise the assets without your interference. You want a defined period and clear triggers.

Negotiate three things:

• The standstill trigger. Does it commence on the senior lender’s notice of default, or only when the senior lender actually commences enforcement? The former can leave you frozen while the senior lender does nothing.
• The standstill duration. Standstill periods can range from roughly 90 days to a year or more, depending on the type of debt and the lenders’ relative negotiating strengths. Push for a hard cap with extension rights conditioned on the senior lender demonstrating progress.
• What survives the standstill. Your right to prove in any insolvency proceeding, to appear at creditors’ meetings, and to take steps to preserve the underlying assets should remain intact.

In Victorian private deals, the standstill period often runs concurrently with the payment blockage. That is not automatic, so check the drafting. You do not want the standstill clock starting on one event and the payment blockage starting on another, creating a compounded period of inactivity.

Permitted Payments and Carve-Outs

Most intercreditor agreements contain carve-outs that allow the subordinated lender to receive certain payments despite the general blocking provisions. These are often framed as “permitted payments” and typically cover:

• Interest at a specified rate (often capped at the rate originally contracted)
• Payments made from the proceeds of a permitted disposal
• Payments received after the senior lender has been paid in full
• Indemnity payments under transaction documents

The interest carve-out is the most contested. Senior lenders will argue that allowing interest to flow to a subordinated lender during a default reduces the pool available for their own recovery. Your counter is that the carve-out only applies to interest accrued at the contracted rate, and that the senior lender’s position is protected by the subordination of principal.

Where the senior lender resists an interest carve-out, consider offering a cap tied to the senior lender’s own recovery rate. If the senior lender is receiving its contracted payments, the carve-out operates. If not, the blockage applies. This aligns incentives and gives the senior lender a measure of control.

Enforcement Rights and the “No Action” Clause

The no-action clause prevents the subordinated lender from taking enforcement steps independently. It is the enforcement counterpart to the standstill. The senior lender will want a broad prohibition on any action against the borrower or the secured assets.

Your negotiation position should preserve the right to take protective action. That includes:

• Filing a proof of debt in any external administration
• Attending and voting at creditors’ meetings
• Taking steps to preserve perishable assets or prevent asset dissipation
• Exercising rights of set-off where available

These carve-outs do not undermine the senior lender’s priority. They simply ensure you can protect your position without waiting for the senior lender to act. A senior lender that refuses these basic protections is either inexperienced or seeking to extract advantage beyond its legitimate priority.

Release and Amendment Provisions

Two provisions often receive less attention than they deserve.

Release on enforcement. When the senior lender enforces and sells the assets, it will want the buyer to take the assets free of your security. The intercreditor agreement will include a mechanism for releasing your security on sale. Check that the release is conditioned on the sale proceeds being applied in accordance with the priority waterfall. Otherwise your security can be released while the proceeds vanish into costs and senior lender recoveries.

Amendment rights. The senior lender will want the ability to amend the underlying loan documents without your consent. That is reasonable where the amendments do not affect your position. The difficulty is defining what “affects your position” means.

Negotiate a list of material amendments requiring your consent. This typically includes increases in the senior facility amount, extensions of maturity, changes to interest rates, and variations to security. The senior lender will resist a broad consent right, arguing it creates delay. A defined list gives certainty to both parties.

The Victorian Regulatory Context

APRA’s System Risk Outlook from May 2026 indicates that lending at high debt-to-income multiples remains contained, with preliminary data for the March quarter 2026 showing such lending well below the 20 per cent limit and only a small number of banks trending close to the limit. That relative stability in leverage suggests enforcement events, when they occur, may involve fewer layers of debt than in a more highly leveraged environment. The intercreditor agreement remains the document that determines outcomes when asset values decline.

The ABS lending indicators show a softening in new loan commitments in the June 2026 quarter. That cooling market increases the likelihood of enforcement activity. Subordinated lenders who negotiated their intercreditor terms during the upswing may find those terms tested in a down cycle.

Practical Negotiation Points

Effective negotiation in this area comes down to preparation and a clear sense of which terms matter most.

Bring your own precedent. Senior lender counsel will present their document. Having a marked-up alternative prepared in advance signals that you understand the issues and shortens the negotiation. It also anchors the discussion around your preferred formulations.

Focus on the enforcement scenario. Walk through what happens when the borrower defaults. Who notifies whom? What information does the senior lender provide to you? How do you learn about the enforcement timeline? The intercreditor agreement should address information rights, not just payment priority.

Consider the guarantors. Victorian commercial asset deals often involve personal guarantees from directors or principals. The intercreditor agreement should address how guarantor recoveries rank. If the senior lender has taken guarantees, its rights against guarantors will affect the pool available to you.

Cap the senior lender’s costs. Senior lenders will want their enforcement costs paid ahead of your claims. That is standard. But an uncapped costs clause can absorb the entire recovery. Negotiate a cap or a reasonableness standard that requires costs to be properly incurred and documented.

For lenders taking subordinated positions in private commercial loans, the due diligence process should include a review of the proposed intercreditor terms before commitment. The financial red flags that warrant rigorous due diligence in the borrower apply equally to the senior lender’s documentation. A senior lender that refuses reasonable intercreditor protections may signal future enforcement difficulties.

The Information Asymmetry Problem

Subordinated lenders face a structural disadvantage: the senior lender controls the relationship with the borrower. When default looms, the senior lender has visibility of the borrower’s financial position that you lack.

Address this in the intercreditor agreement. Negotiate for:

• Copies of the borrower’s financial statements and compliance certificates
• Notice of any default under the senior facility
• Notice of any enforcement action, including the proposed timeline
• Access to information about the secured assets during enforcement

Senior lenders will resist broad information rights, arguing confidentiality. A middle ground is a provision that requires the senior lender to provide information that it has already prepared for its own purposes, without an obligation to prepare new reports. This gives you visibility without imposing additional burden.

When to Walk Away

Some senior lender terms are not worth accepting. If the intercreditor agreement allows the senior lender to:

• Block payments indefinitely without any defined period
• Amend its facility documents without notice to you
• Release your security without applying proceeds to the priority waterfall
• Extend the standstill indefinitely at its discretion

…then your subordinated position is closer to an equity investment than a secured debt. Price it accordingly, or decline the deal.

The accountability structures that apply in other areas of commercial practice have a parallel here. The intercreditor agreement allocates accountability for enforcement outcomes. If the senior lender holds all the cards, it also holds responsibility for the outcome. Make sure the document reflects that allocation.

Subordinated lending in Victoria can be profitable when structured properly. The intercreditor agreement is where that structure takes shape. The intercreditor agreement warrants careful negotiation, and the terms that protect your position when the borrower’s circumstances change are worth fighting for. The senior lender’s precedent is a starting point, not a final position.

About Blaine HattieBlaine Hattie is a Principal in Commercial Transactions at Sutton Laurence King Lawyers. He advises businesses on transactions and finance with a special interest in technology, cybersecurity, digital media, defamation, and artificial intelligence.