Published
30 July 2025As the traditional lending market tightens, it is becoming commonplace for multiple private lenders to be involved in construction deals. While this benefits both borrowers and lenders, it also increases the complexity of lending arrangements, particularly when it comes to intercreditor dynamics.
Each lender in the construction project may have different priorities and security interests. There are several ways to assert your priority in an asset including subordination and intercreditor agreements. These may define the rights, priorities, and obligations between lenders. Understanding the legal framework to determine priority is essential to managing risk and ensuring you can enforce your rights.
Securing the security
Taking security for a construction loan is nothing new but not all securities are created equal. For private lenders, it’s critical to understand not only the value of the security but how much equity is within that value. Equity is particularly important for lenders who are not the holder of the primary debt. This is because the amount you may recoup will depend on where you fall in the priority list of all other creditors.
To assess the equity in an asset, conduct a detailed review of the borrower’s financial position, including the assets and liabilities they have. An independent valuation will also provide an indication of the market value of the asset.
Secured creditors will generally have priority over unsecured creditors. Senior debt, being the first mortgage over a security, will generally have priority above other creditors. Subordinated debt then falls behind this, and may include second mortgages, unsecured debts and preferred equity arrangements. Subordinated debt is often used in construction financing to meet the funding gap left by a senior lender.
If the security can be registered on a land title, then it is imperative to do this as soon as possible as the principle of indefeasibility may apply. This means if you have a registered interest in a property, like land registration, then you have priority over unregistered interests. However, there are some exceptions to this, such as fraud, as was established in the High Court case of Breskvar v Wall.
Generally, the order of priority in insolvency will be determined on the basis of when interests were registered on the title.
If the security is personal property, like a vehicle, you may be able to register an interest through the Personal Property Securities Act 2009 (PPSA). Generally, priority over the security is given in the order the interests are registered on the PPSR. There are some exceptions to the PPSR such as where the security holder has a purchase money security interest (PMSI). A PMSI may arise in the following situations:
- Where the money is lent to purchase specific property and there is a specific security agreement in place;
- Where there is a retention of title arrangement in place. This occurs where the lender is selling the asset, like building materials, and gives the borrower possession before the full amount has been paid;
- Where there is a PPS lease or bailment arrangement with a business that enters into an agreement for over two years. This may occur in equipment hire arrangements for example, provided the arrangement meets the specific requirements of the PPSA; or
- Where there is a commercial consignment under the PPSA. This generally occurs where someone is selling property on consignment, like an auctioneer.
Secured creditors may also find their claims to an asset are contested on the basis of a lien. A lien is a claim against an asset to secure a debt. In construction, this may occur where a contractor claims a right to an asset as payment for work completed. There are several types of liens that can give rise to issues of priority for creditors:
- A common law possessory lien is where the creditor holds onto possession of the property until payment is made;
- An equitable lien which is enforced by the Courts to ensure fairness prevails;
- A statutory lien which is created by legislation and may not necessarily require possession of the property. In some instances, a statutory lien may take priority over a registered interest in the security; or
- A contractual lien which is created by a negotiated contract between the parties.
Depending on the type of lien claimed and the asset it is claimed against, creditors may find themselves needing to prove their priority ranking against unexpected creditors.
Unsecured Creditors
For unsecured creditors, s555 of the Corporations Act 2001 provides for all unsecured claims to rank equally if a company is wound up – this is known as the pari passu principle. If the company’s property cannot meet all debts and claims, then creditors are paid proportionately. There are some exceptions to this in s556 of the Act, including employee entitlements.
While there is legislative protection for the pari passu principle, it is prudent to include a clause in unsecured loan documents that reinforces the pari passu principle. This may ensure that the unsecured lender receives an equal share of assets that remain once secured creditors and employee entitlements have been paid.
Documenting priority
Both secured and unsecured creditors may enter into contractual arrangements to determine their order of priority if there is a default or insolvency. There are several different options available to creditors when it comes to documenting their priority arrangements, and these depend on the specifics of the arrangement.
A priority deed is often used where two or more creditors have secured debts over the same asset. The priority deed only comes into effect when the borrower is unable to repay its debt, but it provides clarity for creditors who rank below others in priority.
A subordination deed can outline the priority of two or more creditors who have either secured or unsecured debt. A subordination deed may also apply even if the creditors do not have security over the same assets. The document outlines the order of priority for debt recovery as well as what each creditor needs to do to recover their debts and how the payments may be made.
An intercreditor deed brings together both these documents, outlining the order of the securities and how the debts may be repaid.
These documents all provide private lenders with protection and certainty over where they sit in the order of priority if the borrower defaults or becomes insolvent. There is no standard document for intercreditor priority arrangements, which means that parties must negotiate this between themselves, and the terms can vary significantly.
There are several options available for lenders to negotiate that may stand them in good stead. Some of these include:
- Drag rights: This requires subordinate lenders to go along with decisions made by the senior lender;
- Standstill periods: Generally, a subordinate lender cannot enforce their rights until the senior lender has taken action. Negotiating a standstill period gives the subordinate lender the ability to give notice to the senior lender that they will take enforcement action once a specified standstill period has ended. This effectively forces the senior lender to act when the borrower defaults;
- Cure rights: This is where a lender has the ability to “cure” a default by injecting additional debt or equity. While this may attempt to fix the problem, it can also prolong the pain by simply adding more debt and delaying insolvency. For subordinate lenders, it may also mean that they rank further behind even more debt.
- Buy out rights: This is where a subordinate lender has the ability to purchase the senior lender’s debt. While this releases the senior lender from the transaction, it also means they will not benefit from any potential gains if the construction project is realised.
- Step-in rights: This is where a senior lender is allowed to take control. While this may protect the asset, it can interfere with subordinate lender’s rights to enforce their claim.
The area of priority interests in intercreditor relationships has been the subject of many court cases, and can be quite complex. Often the slightest change in facts, type of security, registration and contractual rights can change the priority of a creditor. If you are considering entering into a lending arrangement for construction projects, either as a borrower or lender, our team is available to help. Our experts at Madison Branson Capital can also provide corporate advisory and capital raising solutions. For a confidential discussion, contact us today.
