Get Rent Protection with Contractual Lien

If you are like most owners, you've experienced an increase in vacancies and have probably resorted to taking on smaller, non-traditional tenants to fill your buildings and centers. While this strategy works in the short term, it carries a substantial amount of risk, as many of the smaller tenants often have a limited—or sometimes nonexistent—financial track record.

One way to protect your interests against the unknowns of the small tenant population is to get your tenant to agree to give you the right to file a contractual lien against its personal property, says Tennessee attorney Justin W. Leach. By securing this right, you can go after the tenant's personal property if it decides to run out on its lease obligations or stops paying rent. Ideally, you want your lien to have first priority over any other liens. To secure priority, you'll need to add the lien right to the lease and file the lien at the time of the lease signing.

Add Lien Right to Lease

To secure your right to file a contractual lien against your tenant's personal property, consider adding a lease clause, like our Model Lease Clause: Get Right to Put Lien on Tenant's Personal Property, to your lease. The clause contains the following:

Description of lien coverage. Get the right to place a contractual lien on all of the tenant's property and inventory kept in the space, says Leach. Be specific—include any and all improvements, equipment, furniture, inventory, fixtures, and merchandise. Also, don't forget to place a lien on the proceeds from the sale of any merchandise, inventory, fixtures, and equipment.

Practical Pointer: Some states may have laws that allow tenants to bypass an owner's contractual personal property lien, so make sure that the tenant waives its right to claim any exemptions to your lien.

Prohibit property removal by tenant. With the exception of the sale of merchandise and inventory during the “ordinary course of business,” require the tenant to get your consent before it moves any of its personal property, inventory, or merchandise from the space. For example, if the lien covers merchandise, the tenant could sell it to customers who wanted to buy it. But if the tenant was selling merchandise in an effort to liquidate the business and move, it would need your approval, explains Leach.

Practical Pointer: Consider granting the tenant's request to be able to remove fixtures and equipment without your consent for the purpose of upgrading, repairing, or replacing them.

Contractual lien is in addition to statutory lien. Contractual liens are governed by the Uniform Commercial Code (UCC) and usually enforceable in every state. But some states also have laws that give the owner the right to take a tenant's property without a contractual lien, says Leach. If your state has a law that allows you to use a “statutory lien” to seize the tenant's property, you can use it. However, to be on the safe side, get both liens and specify in your lease that the contractual lien is in addition to the statutory lien. This way you'll have a couple of different approaches to seizing the tenant's property if it defaults.

Obtain signed UCC-1 from tenant when signing lease. To make the lien in your lease enforceable in court, you need to file UCC financing statements—a UCC-1—and both you and the tenant need to sign it. Because it's difficult to get a tenant to sign the UCC-1 after it has signed the lease, Leach suggests obtaining the tenant's UCC-1 signature at the same time you get its signature on the lease.

UCC-1 statements are usually filed with the Secretary of State's office and the county clerk, but confirm the correct filing process with your local officials. Once you file the statement, your lien on the property can't be disputed. The only exception is if someone filed his lien on the property prior to your filing. So, before you file on the tenant's personal property, check to make sure that no others have filed, warns Leach.

Practical Pointer: In some states, if a lender's lien has ties to a loan used to buy the tenant's personal property, that lien may take priority over yours—even if you filed first.

Get tenant to sign continuation statements. There's a possibility that, for whatever reason, you may need to enforce the lien beyond the time that you had originally planned. If that's the case, the tenant will have to sign a “continuation statement.” To ensure that you can get the signature when you need it, add a clause to your lease requiring the tenant to sign a “continuation statement.”

Practical Pointer: It's also a good idea to get the tenant to agree to let you sign on its behalf. That way, if the tenant fails to sign any documents—UCC-1, the continuation statement, or any other document—you can sign for it, says Leach.

State lien rights clearly in lease. Add language to the lease that describes, in great detail, exactly what your lien rights are, says Leach. For example, have the lease say that if you decide to exercise the lien, you can enter the tenant's space, seize its property, and sell it at a public or private sale. Also, be clear that if the tenant's personal property has to be sold, the proceeds will be applied to the money that it owes you and any attorney's fees that you incur while dealing with its personal property.

Practical Pointer: If the proceeds from a sale don't cover the amount the tenant owes you, be sure to make it clear that the tenant has to cover the remaining amount.

Insider Source

Justin W. Leach, Esq.: Attorney at Law, Waller, Lansden Dortch & Davis, LLP, 511 Union St., Ste. 2700, Nashville, TN 37219; (615) 850-8522; Justin.Leach@wallerlaw.com.

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