Blocking Rights

Blocking rights give a senior lender the ability to stop the borrower from making payments to junior creditors — including seller note holders. The trigger is typically a covenant violation or a declared default, but the definition of "default" can be broad enough to include technical breaches like a missed reporting deadline. The practical effect: the buyer may have cash available to pay the founders, but the bank says no. The founders have no recourse against the bank — they're not party to the lending agreement. They can't see the covenants, can't cure a breach, and can't challenge the block. Blocking rights are the enforcement mechanism inside a subordination agreement. Subordination sets the priority. Blocking rights are how that priority gets exercised in real time. Founders negotiating seller notes should push for limits on blocking duration (standstill periods), notice requirements, and caps on the number of times blocking rights can be exercised per year.