Simply put, a subordination agreement is a legal agreement that states that one debt ranks behind another debt in priority to recover a debtor`s repayment. It is an order that changes the position of privilege. Without a subordination clause, loans have chronological priority, which means that a trust deed for the first time is considered to take precedence over all trust securities registered thereafter. As such, the oldest loan becomes the main loan, with the first call of the proceeds from a sale of a property. However, a subordination agreement recognizes that the claim or interest of one party is lower than that of another party if the borrowing entity liquidates its assets. In addition, shareholders are subordinated to all creditors. According to California Civil Code Section 2953.3, any subordination agreement must include the following: Subordination agreements can be used in a variety of circumstances, including complex corporate debt structures. A breach of contract may occur if the party refuses to sign the subordination agreement in order to subordinate its security right. The Mortgagor essentially repays it and gets a new loan when a first mortgage is refinanced, so the most recent new loan is now in second place. The second existing loan becomes the first loan. The lender of the first mortgage refinancing now requires the second mortgage lender to sign a subordination agreement to reposition it as a top priority when removing debts.