Subordination of claims

Subordination refers to a contractual agreement whereby a creditor agrees to subordinate its claim to those of other creditors. In the real estate sector, it primarily arises in the land registry priority of real property liens (land charges, mortgages) as well as in insolvency law, when shareholder loans are subordinated in favor of third-party creditors. Without a clear subordination, existing senior real property liens can significantly limit the financing options for a project.

Subordination in Land Registry Law

In the land registry, the order of priority of registered rights determines the sequence in which creditors are paid in the event of foreclosure (forced sale). Those holding first-ranking rights are paid first; subordinated rights are only satisfied to the extent that proceeds remain after the senior creditors have been satisfied. If an owner wishes to take out a new loan and the bank requires a first-ranking land charge, an already registered first-ranking creditor must agree to a subordination of priority. This is done through a reservation of priority at the time of the original registration or through a subsequent change in priority pursuant to Section 880 of the German Civil Code (BGB), which requires notarization and registration in the land register.

Subordination in Insolvency Law

In corporate law, subordination is an instrument for crisis financing: A shareholder or affiliated company provides a loan to its real estate company and simultaneously declares that the repayment claim will be subordinated to all other creditors and will only be claimed once the company is no longer overindebted. Without this declaration, the shareholder loan would be considered a liability in an over-indebtedness review and could trigger an insolvency filing. The subordination must be declared expressly, in writing, and with the exact terms of subordination, as courts will deny its validity under insolvency law in cases of ambiguity.

Practical Implications for Financing and Sale

For property owners, the priority ranking in the land register has a direct impact on financing terms: Banks offer better interest rates if their land charge is in the first priority. A subordination of a first-ranking creditor in favor of new financing can therefore enable significant cost savings. When selling real estate, on the other hand, the buyer and their financing bank scrutinize the priority ranking closely; registered subordinated land charges from previous financing must be deleted or handled accordingly prior to the transfer. An unresolved priority relationship can significantly delay a sale.

Subordination in Bridge Financing and Project Development

In the financing of project developments or major renovation projects, subordination is a frequently used tool: A subordinated lender (e.g., a mezzanine financier or a shareholder) agrees to place its security in the land register behind the first-ranking bank financing. This structure makes it possible to combine multiple layers of financing and minimize the equity investment. For the subordinated lender, this entails a higher risk, for which they are compensated through an interest premium (mezzanine interest rates typically range from 8-15% p.a.).

In the current interest rate environment (2023-2026), the willingness of subordinated lenders to invest in real estate projects has changed. Higher refinancing costs for senior lenders and more uncertain project returns have made mezzanine financing more expensive and, in some cases, difficult to obtain. Owners and project developers in the Nuremberg metropolitan region should take this market situation into account when planning financing.

Practical Tip for Owners in Nuremberg and Franconia

In Nuremberg and the metropolitan region, we observe that owners frequently encounter unexpected priority issues when refinancing older properties-for example, when old land charges from paid-off loans are still registered. Before refinancing or selling, we recommend obtaining a land registry report from the local court (Nuremberg, Fürth, Erlangen) and having all real estate liens that are no longer valid removed. This saves you from having to deal with potential buyers and banks.

Deletion of a land charge that is no longer valid typically incurs land registry fees of 100 to 300 euros-a manageable amount that is almost always worth the investment when refinancing or preparing for a sale. To clarify complex priority relationships-such as in project developments involving shareholder loans or multiple financing partners-we recommend involving a notary or attorney in the region who specializes in real estate law at an early stage. We are happy to provide relevant contacts.

Frequently Asked Questions

How long does a change in priority in the land register take?

A change in priority under Section 880 of the German Civil Code (BGB) requires the agreement of both creditors (the previous senior creditor and the new senior creditor), notarization, and entry in the land register. The land register entry itself takes two to six weeks, depending on the workload of the land registry office. Notarization and preparation of the documents can take another two to four weeks-so be sure to plan the change in priority into your financing structure well in advance.

Does a subordination by the first-ranking creditor cost anything?

Legally, the first-ranking creditor is not obligated to agree to a subordination. In practice, banks charge a fee (usually €200-500) for a change in priority and verify whether the new overall financing structure still provides sufficient security. A shareholder who declares a subordination under insolvency law receives no direct consideration in return but accepts an increased risk of default.

Can a subordination be revoked?

Under land registry law, a registered change in priority is permanent and can only be reversed by a new change in priority with the consent of all parties involved. A subordination under insolvency law can generally be revoked, provided it was not contractually agreed to be permanent-however, revocation immediately triggers the insolvency law consequences again if the company is still overindebted.

How does the priority ranking in the land register affect financing terms in practice?

The priority of the land charge has a direct impact on the interest rate a bank charges for a real estate loan. Banks accept first-priority land charges-i.e., collateral that is satisfied first in the event of foreclosure-up to the so-called loan-to-value limit, which ranges from 60 to 80 percent of the appraised value depending on the lender. Loans secured by a first-ranking land charge receive the most favorable terms. As soon as a second land charge is applied for in the subordinate category-for example, for a follow-up loan or a second tranche-the interest rate rises significantly, as the default risk for the subordinate creditor is higher. In Nuremberg, we regularly observe that for owners with multiple financed properties, unclear or disorganized land registry situations involving old land charges worsen the terms for new financing. A prior cleanup of the land registry-by deleting rights that are no longer valid and establishing a clear order of priority-saves more overall than the costs for the notary and the land registry office.

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