Illinois Real Estate Practice Exam

Under a subordination agreement, what does the holder of a superior or prior lien agree to permit regarding the junior lienholder's interest?

1. Annual Sale

2. Appropriation

3. Forfeiture Sale

4. Priority Of Liens

The correct answer is: Priority Of Liens

The holder of a superior or prior lien agrees to permit the junior lienholder's interest to have a priority status under a subordination agreement. This means that the junior lien will take precedence over the existing senior lien in terms of claims against the property. Subordination agreements are often used in refinancing or restructuring deals where a junior mortgage holder agrees to allow another lien to have priority over their own. In transactions involving subordination, it is crucial for both lienholders to have a clear understanding of their rights and the order of claims. The concept of priority is fundamental in real estate because it determines the order in which claims against a property will be satisfied in the event of a sale or foreclosure. The junior lienholder is essentially accepting that their claim will come ahead of the senior lienholder’s claim in the event of liquidation, thereby providing an opportunity for the junior lienholder to secure repayment under certain conditions. The other options do not align with the core function of a subordination agreement, which specifically addresses the hierarchy of claims rather than sales, forfeiture, or appropriation scenarios.