Landlord's Lien: Revised Article 9 and the Slowing Economy– Time to Review Your Leases

11/01/2001

Landlords often assume they have a valid lien on their tenant's property simply because the lease contains a "landlord's lien" provision.  Once the lease is signed, most landlords don't give the lien another thought – until the tenant defaults.  At that point, it may be too late.  In most cases, the landlord could have taken additional steps to secure a valid lien that would trump other creditors.  In this slowing economy, a prudent landlord should review its lease files to ensure that liens were properly documented and are currently effective.
 
Legal Background – The landlord's lien granted in a lease is really a security interest under Article 9 of the Uniform Commercial Code.  The UCC is a comprehensive body of state commercial law.  Virtually all states, including Texas, have recently enacted a significantly-revised UCC.  The revised UCC is thought to be the most dramatic change to U.S. commercial law in 30 years, raising complex transitional issues.  Despite this added complexity, one change gives landlords the opportunity to protect their lien without approaching the tenant for its signature.
 
Nature of Landlord's Lien – When most landlords speak of the "landlord's lien," they are describing this security interest, as opposed to the statutory landlord's lien in Texas.  The statutory lien encumbers the tenant's property to secure rent that is due and owed for the current 12-month period (calculated with reference to the start of the lease).  The statutory lien is disfavored for two reasons.  It secures a limited amount of rent and may be enforced only by judicial process.
 
Basic Steps – For most landlords, obtaining a security interest in the tenant's property is a two step process: (1) attach the lien; then, (2) perfect it.  In UCC parlance, attachment means that the lien affixes to the collateral.  Perfection puts third-parties on notice of the security interest.  An unperfected lien is likely to lose against other creditors' claims. Even worse, the landlord could be demoted to an unsecured creditor in its tenant's bankruptcy.

  • Landlord's Lien Provision in Lease – The lease provision that grants this security interest is actually a security agreement under the UCC.  To be effective, the lease provision needs to comply with the UCC's requirements.  One requirement is that the collateral must be reasonably described. This could pose a problem for lease provisions that grant a lien on "all of tenant's personal property contained in the premises."  For most of the collateral relevant to landlords, the revised UCC permits a description by category (such as, equipment, inventory, and fixtures). A properly drafted provision should constitute a security agreement, and the lien will attach to the collateral.  This means the landlord has a lien in the collateral described in the lease.  Now the landlord must perfect the lien.
     
  • Perfecting the Lien – Under the prior UCC, the tenant was required to sign a financing statement, then the landlord would have filed it in the appropriate records.  Under the revised UCC, a landlord may file an unsigned financing statement if the tenant authorizes the filing in the lease or has otherwise granted its landlord a security interest.  This allows landlords to correct prior missteps without requesting the tenant's signature.
     
    • How to Perfect – Generally speaking, a landlord would complete a financing statement as an initial step toward perfecting its lien.
       
    • Where to File – A significant change under the revised UCC is where to file the financing statement.  There are new rules for determining where to file.  In most cases applicable to landlords, the place to file is the tenant's "location."  Note, however, in the case of fixtures, the landlord would file a "fixture filing" in the appropriate real property records. 

A tenant's location varies depending on the nature of its entity.  For registered entities (e.g., corporation, limited partnership, limited liability company, and others created by a filing with a state), the location is the state where the entity is incorporated, formed, or organized.  For example, if a tenant is a Delaware corporation, then the landlord would file in Delaware.  This would be the case even if the tenant's business was operated solely in Texas.
 
For an entity not created by a filing with a state governmental authority (such as a joint venture), the entity's location is the place of its chief executive office.  For an individual, the person's location is his or her principal residence.  Please note that the law is unsettled if the tenant is a trust.


Landlord's Action Items.  Landlords may want to consider asking these questions and taking these steps:

  • Does the Lease Grant a Security Interest? – Review selected leases for any landlord's lien provisions.  The provisions may be identified by these headings: Lien for Rent, Landlord's Lien, or Tenant's Property.
     
  • Was a financing statement (or UCC-1) Filed? – Determine if there is a signed, file-stamped copy of a financing statement or UCC-1 in the lease file.  If there is, you are ahead of the game but may want to have it reviewed to see if a continuation statement should be filed.  (Financing statements generally must be continued every five years.)  If not, filing now may be advisable, although other creditors could have filed liens on the same property since execution of the lease and, as a result, have a higher lien priority.
     
  • Is a UCC Search Appropriate?  Search the UCC records to see if any other liens are filed against the tenant.  This would show other creditors having a lien on much of the same property the landlord's lien would cover.

Subordination to Tenant's Lender.  A tenant's lender will often require that the landlord subordinate both contractual and statutory liens on equipment, inventory, and other personal property located in the premises.  Many lenders require this subordination as a condition to extending working capital to tenants, so a landlord who is unwilling to subordinate its lien may find that its tenant has difficulty paying rent.  Properly documenting the landlord's lien can maintain the landlord's security interest, although it will have a lower priority than the lender's lien on the same collateral.

Five Things for Landlords to Remember

  • Lease should "reasonably identify" the collateral.  Avoid generic descriptions such as "all of tenant's personal property located in the premises."  A description of collateral by category is sufficient (e.g., equipment, fixtures).
     
  • Lease should require tenant to deliver, upon execution of the lease, its certificate of existence (or other official documentation evidencing tenant's organizational identification number), if tenant is a registered organization (e.g., corporation, limited partnership, limited liability company).  This information is required on the new financing statement.
     
  • Lease should state tenant's chief executive office, if tenant is not a registered organization (e.g., a partnership or other unincorporated entity).  This information is required on the new financing statement.
     
  • FILE A FINANCING STATEMENT. Tenant is not required to sign it, assuming the security agreement is properly drafted.
     
  • If tenant is a registered organization, file the financing statement in tenant's jurisdiction of organization.  If tenant is a partnership or other un-incorporated entity, file the financing statement where tenant's chief executive office is located.
  • We hope this Alert is a helpful summary of the revised UCC and its application to landlords.  The revised UCC contains numerous changes, too extensive to be fully discussed in this context.  Any of our real estate attorneys would welcome the opportunity to assist clients and colleagues in understanding the revised UCC, in greater detail.
     
    For further information regarding these services, please contact the author noted at the top of the page.

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