Real Estate / 6 min read
In a perfect world, tenants promptly pay their rent and uphold all of their obligations under the lease. However, as we know tenants do not always hold up their end of the bargain. This makes landlord's liens an effective tool to secure a tenant's obligations under a lease. They can also prevent a landlord from having to eat the expense of a tenant's default.
A landlord's lien is a security interest in the property of a tenant. When a tenant fails to pay, a landlord's lien allows a landlord to take possession and dispose of a tenant's property to cover the tenant's default. The two types of landlord's liens, statutory and contractual, are discussed in further detail below.
Statutory vs. Contractual Commercial Landlord's Liens
A statutory lien is created automatically pursuant to the Texas Property Code and, so long as it is not waived in the lease, will secure the rental obligations of a tenant in all nonexempt property owned by such tenant and placed on the premises. A statutory lien is valid while the tenant is occupying the premises plus an additional month after the tenant abandons the premises, regardless of whether the lease is still in effect.
A contractual lien is governed by the Uniform Commercial Code (UCC) and is typically found in a provision of a lease whereby the tenant gives consent for the landlord to secure the tenant's obligations in the tenant's property. As long as specific filings are maintained, a contractual lien can last until either it is foreclosed on or the secured debts are paid. Those three filings are detailed below.
Perfection and Preservation of Landlord's Liens
Statutory liens automatically perfect in the tenant's property on the premises for succeeding 12-month periods from the date of the lease and will secure rents that are due or will become due over that period. In other words, each anniversary of the lease is treated as a new year for the purposes of a statutory lien. However, a statutory lien is not enforceable for rent that is more than six months past due unless a lien statement is filed with the county clerk in the county where the premises is located. If a succeeding six months of additional missed rental payments accrue, a landlord must then file another lien statement to preserve that period of rent. Thus, landlords must be diligent in ensuring that periods of missed rental payments are covered by timely filed lien statements.
Perfecting a contractual lien requires filing a UCC-1, also known as a financing statement, with the Secretary of State in the state where the premises is located. If the property is a fixture, the statement must also go to the county clerk's office in the county where the premises is located. The UCC-1 must contain the tenant's name and address, landlord's name and address, and a description of the collateral (which can be specifically described or described by categories found in section 9.108 of the UCC). A UCC-1 filing will perfect the security interest in the tenant's obligations for 5 years, following which the landlord must file a UCC-3, also referred to as a continuation statement, to perfect for an additional 5 years.
Priority of Landlord's Lien Against Other Security Interests
A statutory lien is valid against all other recorded security interests in the tenant's property perfected after the property is placed on the premises. If any security interest is perfected by another party prior to entering the premises, the statutory lien will be subsequent to those security interests. Upon the anniversary of the lease, any security interests in the property perfected in the previous 12-month period will then have priority over the statutory lien for subsequent 12-month periods.
Priority of contractual liens governed by the UCC follow a simpler rule: the first interest to attach and perfect has priority. For both statutory and contractual liens, a properly perfected lien will prevail against all unperfected security interests held by other parties.
Foreclosing on a Landlord's Lien
Unfortunately, foreclosing on a statutory lien can only be done by judicial process, which can take time and result in costly fees. One mechanism the Texas Property Code has to combat this burdensome foreclosure process is the ability of landlords to file a distraint warrant to ensure the tenant does not remove the subject property from the premises. However, this mechanism requires the landlord to post a bond in an amount required by the court. Tenants may also recover property held by a distraint warrant by paying a replevy bond sufficient to cover the amount in dispute.
Contractual liens provide landlords with a far less burdensome process to foreclose on their security interest. Once a tenant has defaulted on an obligation under the lease, a landlord may take possession of the tenant's personal property without the need to involve the court. Once in possession of the property, there are numerous disposition methods at the landlord's disposal, the most common being disposition by sale. Under this method, the landlord, after giving notice to the tenant and other parties secured by the property with details of the sale (such as time, place, and method), the landlord may sell the property in a commercially reasonable manner. It is worth noting that, should a landlord not properly abide by the UCC procedures when disposing of the property, a court may reduce the landlord's recovery from any sale by the amount that would have likely been recovered if the procedures were properly followed.
Although it is suggested that you discuss any foreclosure on a landlord's lien with an attorney prior to taking action, foreclosing on a contractual lien provides far greater flexibility to a landlord and eliminates the need for judicial involvement, absent a legal challenge of the foreclosure by the tenant.
Subordination of a Landlord's Lien
Often, where a tenant is financing the purchase of personal property that will be placed on the premises or that is otherwise covered by a statutory or contractual lien, a lender will ask the landlord to subordinate its lien to the lender's lien. This will often be in the form of a subordination agreement provided by the lender containing various terms covering the lender's rights in the property and the mechanisms available to the lender to recover the property in the event of the tenant's default on the loan.
It is important that you read this agreement carefully, and object to any terms that may have an undue effect on your landlord's lien or the operation of business at the premises. For example, a landlord should require that the lender (1) provide notice before entering the premises to recover any property, (2) not conduct a sale of any property or operate any business on the premises, (3) remove any property in a timely manner (and require rent from the lender if the property remains on the premises after a certain time), and (4) repair all damages caused by the removal of any property from the premises.
Landlord liens can be a useful tool to ensure that a tenant's obligations under a lease are secure in case of a default. However, navigating the processes and procedures needed to utilize these liens can frustrate a landlord's ability to fully enjoy the benefits of this tool. It is best to speak with an attorney to see how you can take advantage of landlord's liens to better protect your investment.