If you’re growing a business, chances are you’ll deal with finance at some point - whether that’s a bank loan, investor funding, a supplier credit arrangement, or security given to a landlord or lessor.
That’s where things can get tricky: when more than one party claims rights over the same assets (or the same cash flow), who gets paid first if something goes wrong?
A deed of priority is one of the key tools used to clearly set that order. It can help protect business relationships, reduce the chance of disputes, and give lenders and investors more confidence to work with you.
In this guide, we’ll break down what a deed of priority is, when you might need one, how it works in practice in New Zealand, and what to watch out for before you sign.
What Is A Deed Of Priority?
A deed of priority is a legal document that sets out the priority order between two or more parties who have (or may have) competing rights, interests, or claims in relation to:
- the same assets (for example, equipment, stock, receivables, or intellectual property),
- the same security (for example, security interests registered on the PPSR),
- the same payments (for example, proceeds from a sale, insurance payouts, or distributions), or
- the same contractual rights (for example, where multiple agreements overlap).
In plain terms, it answers the question:
“If there’s not enough money to satisfy everyone, who gets paid first?”
Although priority can sometimes be determined by law (for example, based on PPSR registration timeframes or other statutory rules), businesses often prefer to agree on priority in writing - because it’s clearer, more flexible, and can be tailored to the commercial deal you’re actually doing.
Why Is It Called A “Deed”?
A deed is a formal type of document that is typically signed and delivered with specific formalities. Unlike a standard contract, a deed generally does not need “consideration” (something of value exchanged) to be enforceable.
This matters because priority arrangements often need to be robust - especially where they support lending or investment.
When Do NZ Businesses Need A Deed Of Priority?
You usually see a deed of priority where your business has multiple funding sources or where a commercial arrangement involves security or competing claims.
Some common examples for small and growing NZ businesses include:
1) You Have More Than One Lender Or Financier
If your business borrows from more than one lender (for example, a bank plus a private lender), each lender may want security over the business’ assets. A deed of priority can confirm which lender ranks first and which ranks second (or whether priority is split in some way).
2) Investors Want Clarity Before They Put Money In
If an investor is putting money in as a loan (or a convertible instrument) and wants security, they’ll usually want to know how their security stacks up against existing security.
This often comes up alongside your company governance documents - for example, if you’re updating a Shareholders Agreement or revisiting your Company Constitution as the business grows.
3) A Supplier Or Creditor Has “Title” Rights Or Security
Some suppliers supply goods on credit and may include retention of title terms (where they say they still “own” the goods until paid). Others may register security interests. If you later use those same goods as security for a loan, a priority issue can pop up.
4) You’re Selling A Business Or Major Asset, And Funds Need To Be Distributed
In a sale context, a deed of priority can help establish how sale proceeds are applied - particularly if there are secured creditors, shareholder loans, or other competing interests.
This can tie in closely with an Asset Sale Agreement (or a broader transaction structure) where proceeds and discharge of security need to be managed properly.
5) Landlords, Lessors Or Other Parties Require Clear Priority
Sometimes leases and financing arrangements overlap. For example, a financier may fund equipment installed in leased premises, while the landlord may have rights under the lease (such as rights to deal with goods left on the premises, or contractual remedies for unpaid rent). Where multiple parties may assert rights affecting the same equipment or proceeds, a priority arrangement may be needed.
If you’re negotiating or reviewing a lease, it’s worth thinking about how these issues interact with the underlying Commercial Lease Agreement.
Not every deal needs a deed of priority - but if multiple parties can realistically argue they’re “first in line”, it’s usually a sign you should consider one.
How Does A Deed Of Priority Work (In Practice)?
A deed of priority works by setting out a clear set of rules the parties agree to follow. This can include ranking, payment flows, enforcement limits, and how disputes will be handled.
While every deed is tailored to the deal, most deeds of priority cover a few core ideas.
1) Priority Ranking (Who Comes First, Second, Third…)
This is the heart of the document.
For example, the deed might say:
- Lender A has first priority security over all present and after-acquired property;
- Lender B has second priority security over the same property; and
- Lender B agrees not to claim priority ahead of Lender A, even if something changes later (depending on the wording).
Priority can also be arranged by asset class. For example, one party might have first ranking over receivables, while another has first ranking over plant and equipment.
2) Standstill And Enforcement Rules
A deed of priority often restricts what a lower-ranking creditor can do if things go wrong.
For example, a “second ranking” secured party might agree that they won’t:
- enforce their security,
- appoint a receiver,
- start debt recovery steps, or
- take possession of secured assets
until the first-ranking secured party is paid out (or until certain conditions are met).
These standstill clauses are a big deal in practice. They can seriously affect your options if you’re the lower-ranking party - and they can shape how your business operates during financial stress.
3) Payment Waterfalls (How Money Gets Distributed)
Where payments flow through accounts or sale proceeds need to be shared, the deed may include a “waterfall” - a strict order for applying money.
This can include:
- paying enforcement costs first,
- then paying the first-ranking lender,
- then paying the second-ranking lender,
- then paying shareholder loans, and
- finally (if anything is left) paying the company.
This is one of the areas where “small wording changes” can have big financial consequences.
4) Turnover Provisions (Handing Over Money)
Some deeds include turnover clauses which require a lower-ranking party to pass on payments they receive if they receive money that should have gone to the higher-ranking party first.
That prevents the “wrong” party being paid first just because they happened to collect the money faster.
5) Consent Requirements And Amendments
A deed of priority may say one party can’t change their underlying finance documents, increase their lending, or release security without the other party’s consent (or without notifying them).
This helps prevent a situation where priority is quietly undermined later.
What’s The Difference Between A Deed Of Priority And Other Common Documents?
It’s easy to mix a deed of priority up with other legal agreements that show up in funding and commercial deals. The key difference is what the document is trying to achieve.
Deed Of Priority Vs General Security Agreement (GSA)
A General Security Agreement (GSA) gives a lender security over a borrower’s assets.
A deed of priority sits alongside security documents (like a GSA) and deals with how different secured parties rank against each other.
In other words:
- the security agreement creates the security interest,
- the deed of priority sets the “pecking order” between multiple security interests.
(If you’re dealing with security, it may also be relevant to consider whether a General Security Agreement is in place, and how it interacts with your funding arrangements.)
Deed Of Priority Vs Subordination Agreement
A subordination agreement is similar in effect, and the terms are sometimes used interchangeably in casual conversation.
Generally, “subordination” focuses on one party agreeing that their debt or security ranks behind another party. A deed of priority is often broader - it may deal with multiple parties, multiple securities, enforcement rules, and payment waterfalls.
Deed Of Priority Vs Deed Of Accession
A deed of accession is commonly used where a new party joins an existing agreement and agrees to be bound by it.
In priority arrangements, that might happen if you bring in a new lender later and they need to be added to an existing priority structure. In that case, the parties might use a variation or accession approach depending on the circumstances.
Sometimes you’ll see this handled using a Deed Of Accession (but it depends on how the original deed was drafted).
Deed Of Priority Vs Shareholder Loan Terms
Founders often fund early growth with shareholder loans. Later, when a bank or investor comes in, that lender might insist the shareholder loan is subordinated (i.e. repaid after the lender).
A deed of priority can document that arrangement clearly - so everyone is on the same page before cash gets tight.
Key Legal And Commercial Issues To Watch Out For
A deed of priority can look “standard” on first read - but it often contains the clauses that matter most when things don’t go to plan.
Here are some of the most important issues to think through (from a small business perspective).
Are You Accidentally Giving Away Too Much Control?
If your deed of priority includes strict standstill clauses, the lower-ranking party may have limited ability to take action even if they’re owed money and you’re in default.
That can be commercially reasonable (it’s often why the first-ranking lender is comfortable funding you), but you should understand the real-world consequences.
Does It Match What Your Finance Documents Actually Say?
Your deed of priority should align with the underlying finance documents, security documents, and any related contracts.
For example, if your business has key supplier agreements or customer contracts, you may have agreed to certain payment processes, termination rights, or set-off rights that could affect the “waterfall” in practice.
This is also why it’s important to keep your contract suite consistent - whether that’s a Service Agreement with customers, a supply arrangement, or other commercial terms.
What Happens If The Business Grows (Or Restructures)?
Priority arrangements should be drafted with growth in mind.
Imagine this: your business starts with one lender, then you bring on an investor, then you restructure into a group with a holding company. If the deed is too narrow, you can end up needing expensive renegotiations later - or worse, unclear priority that scares off future funding.
This is where planning your legal structure early can really help. If you’re still deciding how to set the business up, getting advice on Company Set Up can make later funding steps smoother.
Are There Conditions Precedent (And Are You Actually Able To Meet Them)?
Some deeds of priority become effective only once certain steps are completed - for example:
- security is registered,
- older security is discharged,
- consents are obtained, or
- certain payments are made.
If these conditions aren’t properly tracked, you can end up in a messy situation where each party thinks a different priority position applies.
Does It Deal With Future Debt Properly?
Priority issues often arise because of “future advances” - one lender continues lending later (for example, additional drawdowns) and expects those extra amounts to keep their priority ranking.
A well-drafted deed of priority will be clear on whether priority applies to:
- existing debt only,
- future debt as well,
- interest and fees,
- costs of enforcement, and
- other liabilities.
This is the kind of detail that can feel tedious while you’re doing the deal - but it’s exactly what prevents disputes later.
Priority deeds sometimes include obligations to share information (like default notices, financial updates, or enforcement steps) between secured parties.
If that information includes personal information (for example, about guarantors, directors, or individual customers), your business may also need to think about compliance with the Privacy Act 2020 and your Privacy Policy.
This isn’t always a major issue - but it’s worth checking, especially if information will be exchanged regularly.
Key Takeaways
- A deed of priority sets the order of priority between parties with competing claims over the same assets, security, or payments, so everyone knows who gets paid first if things go wrong.
- NZ businesses commonly use a deed of priority when there are multiple lenders, investor funding with security, supplier security interests, or sale proceeds that need to be distributed in a clear order.
- Most deeds of priority deal with priority ranking, standstill/enforcement rules, payment waterfalls, turnover provisions, and consent requirements for future changes.
- A deed of priority can materially affect your options during financial stress, so it’s important to understand clauses that restrict enforcement, require turnover of payments, or lock in consent rights.
- Priority arrangements should be consistent with your wider legal setup (including security documents, finance documents, and business contracts) to avoid gaps, contradictions, and unnecessary disputes.
- Because a deed of priority is highly deal-specific, it’s worth getting tailored legal advice before you sign - especially if the deed affects core business assets or future fundraising flexibility.
Note: This article provides general information only and does not constitute legal advice. If you need advice about your specific circumstances, speak to a lawyer.
If you’d like help drafting or reviewing a deed of priority (or you’re negotiating finance and want to make sure your business is protected from day one), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.
