Intercreditor Agreements Explained: When Senior and Mezzanine Lenders Clash

An intercreditor agreement (ICA) is a contract between two or more lenders that defines their respective rights, priorities, and obligations in relation to a shared borrower. In development finance, the most common intercreditor arrangement is between a senior lender (who provides the primary development facility) and a mezzanine lender (who provides additional debt to bridge the gap between the senior facility and the developer's equity). The intercreditor agreement governs what happens when things go right — how repayments are distributed — and, critically, what happens when things go wrong — who has priority, who controls enforcement, and who bears losses.

The need for an intercreditor agreement arises because both lenders have security over the same development, but their interests are not perfectly aligned. The senior lender, whose facility ranks ahead of the mezzanine debt, wants to protect its priority position and ensure that the mezzanine lender's actions do not prejudice its security. The mezzanine lender, whose facility ranks behind the senior debt and therefore carries higher risk, wants to ensure it has sufficient information, influence, and rights to protect its investment. The intercreditor agreement balances these competing interests through a set of detailed provisions.

For developers, understanding the intercreditor agreement is essential because it directly affects your ability to manage the project, make decisions, and respond to problems. The intercreditor agreement may restrict your ability to draw mezzanine funds, require you to obtain consent from both lenders for certain actions, and determine the sequence of enforcement if the project defaults. In our experience, developers who understand their intercreditor agreement are better equipped to navigate the complexities of a dual-lender capital structure.

The most important provision in any intercreditor agreement is the payment waterfall — the agreed order in which proceeds from the development are distributed. In a typical development finance ICA, the waterfall provides that all proceeds from unit sales or refinancing are applied first to repay the senior lender's facility in full (including interest, fees, and costs), then to repay the mezzanine lender's facility, and finally to return any surplus to the borrower. This means the mezzanine lender receives nothing until the senior lender is repaid in full, which is why mezzanine finance carries higher interest rates (typically twelve to twenty percent per annum) than senior debt.

The second key provision is the standstill or non-action clause, which restricts the mezzanine lender's ability to take enforcement action. A typical standstill clause provides that the mezzanine lender cannot enforce its security, demand repayment, or appoint a receiver for a specified period (usually ninety to one hundred and eighty days) following a default, during which time the senior lender has exclusive control of the enforcement process. This prevents the mezzanine lender from taking actions that could disrupt the senior lender's recovery strategy.

The third key provision is the cure right, which gives the mezzanine lender the option to remedy a senior default by paying the overdue amounts to the senior lender. This right is important for mezzanine lenders because it allows them to prevent a senior enforcement that might result in a fire sale of the development at a price that recovers the senior debt but leaves nothing for the mezzanine lender. By curing the senior default and keeping the project alive, the mezzanine lender protects its position — although it is effectively injecting additional capital at risk.

Other important provisions include: information rights (the mezzanine lender's right to receive copies of monitoring surveyor reports, financial covenants tests, and default notices), consent rights (matters on which both lenders must agree, such as changes to the build programme or budget exceeding a specified threshold), and release provisions (the conditions under which individual units can be released from the lenders' security to enable sales). Each of these provisions can have a significant impact on the developer's ability to manage the project, and they should be understood before the capital structure is finalised.

From a developer's perspective, the intercreditor agreement creates an additional layer of complexity in managing the project. Decisions that would require consent from one lender in a single-lender structure may require consent from both lenders in a dual-lender structure. For example, if you need to change your main contractor, vary the build programme, or adjust the specification, you may need approval from both the senior and mezzanine lender. This can slow down decision-making and create frustration, particularly when the two lenders have different views on the appropriate course of action.

The drawdown mechanics for mezzanine finance are also governed by the intercreditor agreement. Typically, the senior facility is drawn first (on a day-one land advance and then staged construction drawdowns), with the mezzanine facility drawn either on day one (to supplement the developer's equity for the land purchase) or later in the build programme when the senior facility is fully drawn and additional funds are needed. The sequencing of drawdowns affects the developer's cash flow and the total cost of finance, because interest accrues from the date of drawdown.

Perhaps most significantly, the intercreditor agreement determines what happens to the developer's position if the project defaults. If the senior lender enforces and appoints a receiver, the mezzanine lender is typically subject to a standstill and cannot take any action to protect its position (other than exercising its cure right, if it has the resources to do so). The developer is caught between two lenders with potentially conflicting interests — the senior lender wanting a quick sale to recover its debt, and the mezzanine lender wanting to maximise the sale price to preserve some recovery for itself. The developer's equity is at the bottom of the waterfall and is the most vulnerable in a default scenario.

We always advise developers to be actively involved in the negotiation of the intercreditor agreement, even though it is primarily a contract between the two lenders. Your solicitor should review the ICA and ensure that the developer's interests are protected — for example, that the developer has the right to receive copies of all notices exchanged between the lenders, that the developer's consent is required for certain actions by the receiver, and that the developer has the opportunity to propose an alternative resolution before enforcement proceeds. Contact our deal room if you need help structuring a capital stack that includes both senior and mezzanine debt.

Disagreements between senior and mezzanine lenders are most common in default scenarios, where the two lenders may have fundamentally different views on the best course of action. The senior lender, whose debt ranks first and whose recovery is more likely to be achieved in full, may favour a quick sale of the development — even at a discount to market value — to crystallise its recovery and deploy its capital elsewhere. The mezzanine lender, whose recovery depends on achieving a higher sale price, may prefer to hold the development, complete any outstanding works, and market it more aggressively to achieve a premium price.

The intercreditor agreement resolves this tension through the priority and control provisions. In most ICAs, the senior lender has the right to control enforcement and make decisions about the disposal of the property during the enforcement process. The mezzanine lender's remedies are limited to its cure right (paying off the senior default), its right to purchase the senior debt (effectively stepping into the senior lender's shoes), and its right to receive the surplus proceeds after the senior debt is repaid.

In practice, we have seen situations where the tension between lenders creates opportunities for developers. If the senior lender and mezzanine lender are in disagreement, the developer may be able to propose a solution that satisfies both — for example, refinancing the entire capital structure with a single new lender, or injecting additional equity to cure the senior default and restructure the mezzanine facility. Developers who are proactive and creative in default situations can sometimes navigate a path through the intercreditor dynamics that preserves their equity position.

It is worth noting that some intercreditor agreements contain dispute resolution mechanisms, such as a requirement to refer disagreements to an independent expert or a mediation process. These mechanisms can be valuable in avoiding the deadlock that sometimes occurs when two lenders with conflicting interests are unable to agree on a course of action. If your capital structure includes both senior and mezzanine debt, ensure the intercreditor agreement contains a workable dispute resolution mechanism.

The cure right is one of the most important provisions in the intercreditor agreement from the mezzanine lender's perspective. It allows the mezzanine lender to remedy a default under the senior facility by paying the overdue amounts directly to the senior lender. This prevents the senior lender from enforcing its security and allows the development to continue, preserving the mezzanine lender's prospect of recovery.

In practice, exercising the cure right is a significant decision for the mezzanine lender. Curing a senior default means injecting additional capital into a project that is already in difficulty. If the underlying problems (cost overruns, programme delays, or market softening) are not addressed, the mezzanine lender may find itself curing repeated defaults and escalating its exposure without improving its recovery prospects. A prudent mezzanine lender will only exercise its cure right if it believes the development can still be completed and sold at a price that recovers both the senior debt and a meaningful portion of the mezzanine debt.

The intercreditor agreement typically specifies the procedure for exercising the cure right: the mezzanine lender must notify the senior lender within a specified period (usually five to ten business days) of receiving the default notice, and must pay the curing amounts within a further specified period (usually ten to fifteen business days). If the mezzanine lender fails to cure within these timeframes, the senior lender is free to proceed with enforcement. The amounts paid by the mezzanine lender to cure the senior default are typically added to the mezzanine facility balance and rank behind the senior debt in the payment waterfall.

For developers, the mezzanine lender's cure right can be a lifeline in a default situation. If your mezzanine lender is willing and able to cure the senior default, it buys time to address the underlying issues and avoid enforcement. However, developers should be aware that mezzanine lenders who exercise their cure right will typically demand additional protections in return — such as a higher interest rate, additional security, or greater control over the project. The relationship between the developer and the mezzanine lender becomes even more important when the mezzanine lender is effectively propping up the capital structure. For more on the overall default process, see our guide on what happens when a development loan defaults.

Developers should not treat the intercreditor agreement as a document that only concerns the lenders. The terms of the ICA directly affect the developer's ability to manage the project, respond to challenges, and protect their equity. When arranging a capital structure that includes both senior and mezzanine debt, the developer should have their solicitor review the draft intercreditor agreement and negotiate provisions that protect the developer's interests.

Key provisions to negotiate include: the threshold for decisions that require dual-lender consent (ideally, this should be set at a level that allows the developer to manage day-to-day operations without constantly seeking approval from both lenders — a threshold of ten to fifteen percent of the build budget for variations is common), the notice provisions (ensuring the developer receives copies of all notices exchanged between the lenders), the release price mechanism for individual unit sales (ensuring the release prices are set at a level that allows competitive pricing in the market), and the developer's rights in an enforcement scenario.

The timing of when the mezzanine facility is drawn relative to the senior facility should also be addressed in the intercreditor agreement. If the mezzanine is drawn on day one, the total interest cost is higher but the developer has immediate access to the full capital structure. If the mezzanine is drawn later in the build, interest savings are achieved but the developer must manage cash flow carefully to ensure funds are available when needed. We model both scenarios for our clients and advise on the optimal drawdown strategy based on the specific project economics.

Ultimately, the intercreditor agreement should facilitate the successful delivery of the development, not hinder it. In our experience, the best intercreditor agreements are those negotiated by experienced solicitors who understand development finance and can strike the right balance between protecting each lender's position and allowing the developer the flexibility to manage the project effectively. If you are considering a capital structure that includes mezzanine finance, contact our deal room — we work with both senior and mezzanine lenders and can help coordinate the negotiation of the intercreditor agreement to achieve a workable structure for all parties.

When a development project needs to be restructured — whether due to cost overruns, programme delays, or market softening — the intercreditor agreement plays a central role in determining the available options. Restructuring a dual-lender capital structure is inherently more complex than restructuring a single-lender facility, because any changes to terms must be agreed by both lenders, and the interests of the two lenders may diverge.

Common restructuring scenarios include: extending the term of both facilities, increasing the senior facility to fund cost overruns (which may require the mezzanine lender to subordinate to a larger senior debt), converting mezzanine debt to equity (which changes the mezzanine lender's position from creditor to co-owner), and refinancing the entire capital structure with a single replacement lender. Each scenario has implications under the intercreditor agreement, and the consent of both lenders is typically required.

In our experience, the most successful restructurings are those where all parties — the developer, the senior lender, and the mezzanine lender — recognise that the project has value but needs time or additional resources to realise that value. A constructive approach from all parties, supported by realistic financial projections and a credible revised plan, can lead to a restructured capital structure that allows the development to complete and all parties to achieve a reasonable outcome. The alternative — enforcement and forced sale — typically destroys value for everyone, including the senior lender.

If you are managing a development with a senior and mezzanine capital structure and are experiencing difficulties, engage your broker early. We understand the dynamics of intercreditor relationships and can facilitate discussions between the lenders to find a workable solution. The earlier these discussions begin, the more options are available and the greater the likelihood of a positive outcome for the developer. For more on restructuring options, see our guide on restructuring development loans.