The term 'Deed of Priority' is included in the Banking edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Check for lowest price here...
Deed of Priority refers to a deed or other form of contract where two or more creditors concur between themselves on the order that their security for a debtor in common will rank. In other words, they set out the rights which each of them will have pertaining to recovering the debts which the specific debtor in question owes them all should said debtor choose to default.
Many times in practice this phrase is interchanged with the similar term inter-creditor agreement. It is true that both kinds of documents look to arrange the order of precedence rank between a group of creditors. There are important differences between these two types of documents though. For one, the inter-creditor agreement is usually a more complicated document. It tends to detail equity and debt provider rights as well as the rights to obtain payments in advance of a debtor going insolvent and the rights to seize security.
Deeds of Priority are also referred to as Waiver Arrangements in Britain, and as Ranking Arrangements in Scotland. Both businesses and consumers have opportunities to source finance from multiple sources. Each lender will want some form of security with which to back the loan naturally. This might amount to any business assets or only specific ones. The second lender will also wish to obtain security in the form of some of the business assets regarding the loan they are issuing.
It is critical for every lender involved in the project, both original ones and new ones, to be aware of the different security arrangements which have already been made between the customer and earlier lenders. In other words, the various lenders will need someone to act as liaison between them so that each lender is able to ascertain and confirm its part of the secured assets, as well as its ranking for them. They will require such assurances before they actually issue the funds in the agreed upon loan.
There are a means by which they could attempt to effectively do this. One of them is the waiver arrangement. Another is using the deed of priority discussed in this article. The deed of priority is usually preferable since it spells out clearly and concisely the terms which pertain between each and every lender in the case of this specific borrower. It helps them all to understand how the various company or personal assets will be fairly and equitably distributed and shared out in the case of a default on one or more of their repayment agreements with the borrowing customer.
These scenarios will most commonly arise when a business already had a financing arrangement in place with a traditional bank. The business may then open negotiations with what is known as an alternative lender to borrow additional capital. Naturally this alternative lender will then want an arrangement hammered out with the other lender so that it can be sure of obtaining some level of collateral security over assets which are already pledged in part or whole to the original lender.
They will then sit down to fine tune the priority ranking of the various securities of the business, or to establish a release of assets from the existing security in play with the original lender. Paperwork must be drawn up, legalized, and signed off on by all lenders involved typically as swiftly as possible.
Fortunately for British- based businesses, there is a protocol in place to handle these matters. The British Bankers Association (or BBA) has compiled a PDF document called the “Deeds of Priority and Waivers: What You Need to Know as a Small or Medium Sized Business and What the Major Banks Are Committed to.”
All of the major British banks have signed on to the terms of this protocol, making it far easier for British businesses to work out the deeds of priority arrangements so that they can obtain their supplementary financing from the second institutions.