Pari passu is a term used in some industries that means that the parties or assets in a financial transaction are treated equally. It stems from the Latin meaning of pari passu, “with equal steps,” or “on equal footing.” The parties might include creditors, business partners, securities, or investors.
Commercial real estate investment contracts frequently include pari passu clauses. The legal clause means that partners are treated equally and are paid at the same time, not based on seniority. However, It doesn’t mean the amount paid to each partner is the same. Instead, while the investment is managed pari-passu, or without preference, based on seniority, partners might be paid proportionately, or pro-rata, based on their investment amount or ownership percentage.
For example, say there are four partners involved in a commercial real estate investment. If two partners hold 30% ownership and the other two hold 20% ownership, they will be paid pro-rata distributions according to these percentages. Their payout amounts will not be equal, but based on proportional ownership. However, the payouts will be made at the same time and without preference to seniority.
Pari passu is also common in bankruptcy proceedings with unsecured debts. In pari passu, each creditor of unsecured debt has equal access to the liquidated assets. They are each paid an equal fraction of what they are owed based on the available assets. For example, if the assets don’t cover the debts, a trustee might pay each creditor 30% of the debt the debtor owes.
A will or trust with a pari passu clause means that all named beneficiaries are paid an equal amount of the assets.