Can a bank block vendor take-back payments over an unrelated default?

Ask early whether the buyer’s lender wants the seller’s note to sit behind its loan. BDC’s acquisition financing page says a financing structure may combine the buyer’s own investment, a business loan and seller financing, so the two debts can share one deal. The question is what happens to your payments when the buyer breaks a promise to the bank that has nothing to do with your note. The answer sits in the agreements between you, the buyer and the bank, not in a general rule.

What the statutes say about subordination

Ontario’s Personal Property Security Act says a secured party may, in the security agreement or otherwise, subordinate its security interest to any other security interest, and the subordination is effective according to its terms (s.38). British Columbia’s Act is similar: s.40(1) says a subordination is effective according to its terms between the parties and may be enforced by a third party if that party is the person, or one of a class of persons, for whose benefit it was intended. Each province runs its own security statute, so check the one that governs your deal.

Ranking is not the same as a payment block

Priority rules decide who is paid first from the same collateral. In Ontario, where no other provision applies, interests perfected by registration rank by the order of registration (s.30(1)). That tells you where you stand if the collateral is sold. It does not say whether the buyer may keep paying you while the bank loan is in default. That is a term of the subordination, postponement or intercreditor agreement, if there is one.

What to read before you sign

• Whether payments stop on any default under the bank loan or only on a payment default.
• Whether the bank must give you notice before a block starts, and how long it can last.
• Whether blocked payments are deferred and still accrue interest, or are lost.
• Whether a block can reach principal as well as interest.
• Whether you may still enforce your own security, and when.

If you hold security, compare these answers with what happens when a buyer defaults on the note.