A pari passu mortgage agreement is a legal document that outlines the terms and conditions of multiple loans secured by the same property. The term “pari passu” means “equal footing” in Latin, and it refers to the way in which the lenders are treated equally in the event of default or foreclosure.
In a pari passu mortgage agreement, each lender has a security interest in the property in question and is entitled to a proportional share of any proceeds from the sale of the property if the borrower defaults. This means that if there are multiple loans secured by the same property, each lender has an equal claim on the property and an equal right to repayment.
This type of agreement is commonly used in commercial real estate transactions, where multiple lenders may be involved in financing a large project. By structuring the loans as pari passu, all lenders are assured that they will receive their fair share of the proceeds if the project is successful, and they are protected in the event of default.
In order to create a valid pari passu mortgage agreement, all lenders involved must agree to the terms and conditions of the agreement. This typically involves negotiating the terms of the loans, including interest rates, repayment schedules, and the distribution of proceeds in the event of default.
One potential drawback to a pari passu mortgage agreement is that it can make it more difficult for the borrower to secure additional financing in the future. Since all lenders have an equal claim on the property, any additional loans would be subordinated to the existing loans and would not be on equal footing.
Overall, a pari passu mortgage agreement can be an effective way to structure loans in commercial real estate transactions, providing all lenders with equal protection and an equal share of the proceeds. However, it is important to carefully consider the terms of any such agreement before entering into it, in order to ensure that it meets the needs of all parties involved.