In the event of an acquisition, a status quo agreement can be used to terminate a hostile transaction that does not provide favourable conditions for both parties. Since the bidder will have access to the company`s financial documents, a status quo agreement will prevent any possible use. Suppose a small business goes to a bank to apply for a line of credit. The company already has a mortgage through another bank on its office building. If the bank approves the line of credit, it will sign a subordination agreement. The agreement establishes the lender`s receivables on the bank`s guarantees that grants the line of credit in case the company defaults on a loan. When several lenders are involved, inter-signed agreements are needed to define relative rights and priorities between them. The main objective is to explain what happens in the event of a borrower`s default. A few exceptions are included in the agreement, but for the rest, all actions are prohibited. The junior lender can inform the senior of their intention to take action and the status quo agreement expires after 150 to 180 days. If a company obtains another loan against its existing guarantees, it will convince the first lender to submit to the new loan, or receive a new loan subordinated to the first. In both scenarios, lenders use a subordinate agreement to outline the terms and conditions between them.
Some high-level lenders may include a non-status quo clause or a clause protecting their interests. If this is the time, the resulting agreements are called subordination and status quo agreements. Status quo agreements exist not only between the two lenders, but may also exist between lenders and loans. They can ensure that the borrower has a period of time during which no payment is required for them to restructure their debts. In other areas of activity, a status quo agreement can be virtually any agreement between the parties, in which both parties agree to discontinue the case for a specified period of time. This may include an agreement to defer payments to help a company in difficult market conditions, agreements to stop the production of a product, agreements between governments or many other types of agreements. A subordination and status quo agreement defines specific or general guarantees, the rights of the younger lender and the priority of those rights. The agreement contains a detailed definition and description of the conditions of subordination and what happens in the event of default or bankruptcy. In a subordination and status quo agreement, the junior lender agrees to inform the senior in the event of a default of the company`s junior loan. During the negotiation process, the agreement may also find that the various parties can only reach agreements with other parties after the conclusion of the negotiations.