In a senior lender/junior lender scenario, the lenders will customarily enter into an intercreditor agreement to establish their respective rights when dealing with a common borrower. The intercreditor agreement will usually provide a restriction on the payments that the borrower can make to the junior lenders upon the occurrence of certain events of default under the senior lender credit agreement. These provisions are referred to as "payment blockage" provisions. If a payment blockage provision is triggered, all payments to the junior lenders will usually be blocked, even the payments the junior lenders may otherwise be entitled to receive, such as scheduled interest or ordinary course fees and expenses.

Payment blockage provisions usually require some negotiation in an intercreditor agreement. The following elements should be considered:

  • Triggering: when payment blockage will occur – eg. more material events of default such as a payment default, a financial covenant default or an insolvency event;
  • Blockage period: length of time the blockage will exist – eg. no more than 180 days in any one year or once per year;
  • Notice: whether or not notice is required to be given by the senior lenders to the junior lenders. Notice is most often required if the triggering event is a relatively less material designated blockage event of default.

It is important to note that, in the event that payments to the junior lenders are blocked, and the borrower makes payments to the junior lenders during the blockage period, the junior lenders will be required to pay any amount received from the borrower to the senior lenders pursuant to the "turnover" clause in the intercreditor agreement.

Danielle completed her LL.B. at Dalhousie University Schulich School of Law. She obtained a Bachelor of Arts in Psychology from Queen's University.

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