May 02, 2018
I. INTRODUCTION
The purpose of this [information] is twofold: (i) discuss collection techniques that landlords can use to ensure tenants continue to pay scheduled lease payments or collect past due lease payments; and (ii) discuss general considerations with respect to how and when to use such collection techniques.
A. General Considerations
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1. Landlord’s Objective
When considering how and when to use a collection technique, the landlord should first decide whether the objective is: (i) to collect all past-due payments from the tenant; (ii) to renegotiate the terms of the lease in a way that ensures the tenant will continue (or restart) making regularly scheduled lease payments; or (iii) a combination of both. The landlord should make this decision after (i) consulting with its legal and financial counsel and (ii) conducting thorough tenant and landlord due diligence (as discussed below).
The landlord may gain short-term benefits from collecting its tenant’s past-due payments (assuming that the landlord can collect such payments quickly). However, the landlord must consider the possibility that by making such past-due payments, the tenant has put itself in a financial position where it is unable to continue or resume making regular rent payments, thus ensuring that the collection process will occur again in the near future. On the other hand, the landlord should assume that renegotiating the tenant’s lease will involve one or more of the following concessions: (i) a reduction of the tenant’s current rent or other lease payments; (ii) a full or partial forgiveness of the tenant’s past-due, current or future rent or other lease payments; or (iii) a deferment of the tenant’s rent or other lease payments. The upside of renegotiating a lease is the fact that the tenant has a better chance of making renegotiated payments on a regular basis, despite the fact that the landlord is likely giving up theoretical proceeds from the original lease.
If the landlord chooses to renegotiate with the tenant, it may be in the landlord’s best interests to keep those negotiations confidential– even to the point of requiring the tenant to sign a confidentiality agreement before entering negotiations. If other tenants discover that the landlord is willing to renegotiate rentals and lease payments, those tenants may attempt to use that information to obtain rent/lease payment concessions of its own, regardless of whether such concessions are necessary.
The landlord should also be aware of the reputational risks associated with being seen as slow to identify payment delinquencies and utilize collection techniques. If the landlord is seen as being slow to identify payment delinquencies and utilize collection techniques, tenants may become incentivized to start making lease payments late or stop making lease payments altogether. If the tenant is delinquent in making lease payments, the landlord should take action quickly - even if the sum of landlord’s actions is to send the tenant a notice of delinquency. It is important that each tenant realize that the landlord is paying attention to its payment practices and will act if necessary.
2. Landlord and Tenant Due Diligence
The landlord should take a proactive approach when determining whether to lease to a particular tenant. Having diversified tenants can help minimize damage caused by a monetary defaulting tenant. Also distinguishing one’s property from competitors can attract financially stronger tenants. The landlord should always have a clear idea of (i) how tenants’ payment practices (amount of payments coming in each month, current status of delinquencies, etc.) are affecting its cash flow and, in turn, (ii) how much it relies upon its tenants’ payments to satisfy its own obligations (such as debt service, overhead or equity returns). The landlord should always have all tenant accountings up to date, monitor those accountings on a regular basis, and keep tabs on when any special tenant payments (such as property taxes and construction costs) come due.
Many leases contain covenants requiring the tenant to provide the landlord with yearly or quarterly financial statements. If the tenant hasn’t provided the most recent set of financials, the landlord should obtain those as soon as practicable. The landlord may also want to look at the tenant’s historic sales data (while keeping in mind that past economic data may not be a reliable indicator of future sales performance). If the tenant is part of a chain, or otherwise has more than one location, the landlord may want to review historic chain sales, as well as average store-level sales.
If possible, the landlord should also take the time to re-familiarize themselves with the tenant’s business. Many third party reporting services (such as Dun & Bradstreet reports, SEC filings, and Hoover reports) prepare and provide regularly-scheduled reports about a multitude of industries. If the tenant’s business is covered by these reporting services, the landlord should obtain recent reports that discuss the general state of the industry and prognosticate about the future of the industry.
Once the landlord has familiarized itself with the tenant’s financial condition and the tenant’s industry, the landlord should then re-familiarize itself with the collection techniques set out in that tenant’s lease. The fundamental question that the landlord should ask itself with respect to each tenant is, “given the financial state of the tenant, the tenant’s payment history, and the state of the tenant’s industry, are the collection techniques in that tenant’s lease adequate to ensure that my necessary cash flow will be maintained?”
B. Collection Techniques
1. Security Deposit
General. A security deposit is the standard collection technique for commercial landlords. In its most common form, a security deposit is a cash deposit that the tenant provides to the landlord as security for the tenant’s performance of its obligations under the lease. If the tenant fails to perform an obligation under the lease, the landlord has the right to apply all or a portion of the security deposit towards the damage resulting from such non-performance. As an example, if the tenant fails to pay its rent for the month of August 2017, the landlord has the right to take an amount equal to the August 2017 rent out of the security deposit. The primary benefit of a security deposit is that, with certain exceptions (see below), the landlord has immediate access to cash on hand and can remedy damages caused by the tenant’s non-performance quickly. Another benefit of using a security deposit is that it is a straightforward collection technique, and – outside of issues of amount and duration (see below) – it is easy to negotiate and draft into a lease.
The primary disadvantage of a security deposit is its finite nature. If the damages resulting from the tenant’s non-performance(s) are greater than the security deposit amount, then the landlord may need to utilize other collection techniques in order to deal with the shortfall.
One way to address this disadvantage is to require the tenant to replenish the security deposit in the amount removed by the landlord following an event of non-performance. This requirement should be a covenant in the lease (and most leases do contain such a covenant). However, this requirement is also problematic in that it assumes the tenant has the cash available to replenish the security deposit by the time set out in the lease and can replenish the security deposit before the landlord needs to access those funds again. If the landlord has to access the security deposit because the tenant has failed to pay its rent, should the landlord reasonably expect the tenant to have cash on hand to replenish the security deposit? Also, if the tenant declares bankruptcy before its landlord has the opportunity to apply the security deposit to unpaid payments, a bankruptcy order may prevent the landlord from doing so. These problems may be mitigated by supplementing the security deposit with another collection technique, such as a letter of credit, which can be used in the event that the tenant is unable to provide the landlord with funds necessary to remedy the tenant’s damages.
When drafting a security deposit provision in a lease, the landlord should consider the following factors:
How much of security deposit? The amount of the tenant’s security deposit is subject to agreement between the landlord and the tenant. There is no “industry standard,” although one to three months’ worth of rent is common. As with all of the other collection techniques described in this teleconference, the landlord’s desired security deposit amount should be based on the results of the landlord’s due diligence. The landlord may be more comfortable asking for a smaller security deposit if the tenant is a well-established company with strong financials and a stable industry. Conversely, the landlord may require a larger security deposit from the tenant who is starting a new business, from the tenant with weak financial statements, or from the tenant who is in a languishing industry. Of course, if the tenant’s financial position is suspect, the tenant may not have additional money to provide towards a security deposit. If this is the case, the landlord may want to supplement the security deposit with another collection technique, such as a letter of credit.
Duration of the Security Deposit? The landlord should also know how long it wants to keep the security deposit intact and whether or not it would consider a “good behavior” refund. A “good behavior” refund is when the landlord refunds all or a portion of the security deposit to the tenant, provided that the tenant has complied with all of the lease terms (including timely lease payments) for a “probationary period” (such as two years following the lease’s commencement date). In theory, a “good behavior” refund motivates the tenant to adhere to the lease’s terms during the “probationary period.” Also in theory, by the time the “probationary period” is over, the tenant’s business is on solid enough ground that the landlord doesn’t need the full security deposit. However, many landlords who added a “good behavior” refund to their leases in the early to mid 2000s became a victim of timing – the refunds kicked in just as the economic downturn got under way. “Good behavior” refund or not, the landlord should ensure that the security deposit amount in effect at all times during the lease term is in an amount sufficient for the landlord to feel its interests are secured adequately.
2. Automatic Deductions from Pre-Existing Sources of Funds (Bank Accounts, Lines of Credit)
Making automatic lease payments from the tenant’s pre-existing funding source (such as a bank account or a line of credit) is a good way for the landlord to ensure that it will receive full lease payments on a regular schedule.
Bank Account.Before agreeing to receive automatic payments from the tenant’s bank account, the landlord should know (i) how the tenant uses that account and (ii) what other payments the tenant makes from that account. In a perfect world, the tenant would have a separate bank account with funds that are used for making lease payments only. More realistically, however, the tenant’s account is not only used for making lease payments, but also for paying other business costs like operating expenses, payroll, and incidentals. The problem with one account serving many purposes is that the landlord has no assurance that there is enough money in that account to pay all of tenant’s expenses (including lease payments) or that the lease payments receive high payment priority.
The landlord’s right to receive lease payments via an automatic deduction from a bank account should be addressed in the lease. With respect to the issues stemming from the tenant using the funds in the bank account to make non-lease related payments, the landlord can also address those issues by having the tenant covenant in the lease (i) to maintain a separate account solely for lease payments and (ii) to maintain a balance in that account sufficient for at least one month’s payment at all times.
A regularly scheduled payment is no replacement for a collection technique that addresses the tenant’s failure to make scheduled payments. Accordingly, automatic deductions from a bank account are more effective when used in tandem with a security deposit, letter of credit, or some other collection technique that address the tenant’s failure to make payments.
Line of credit. The landlord may also arrange to receive the tenant’s lease payments through a regularly-scheduled draw from a line of credit. As with a bank account, the landlord should be concerned about what other expenditures the tenant uses the line of credit for (see additional discussion below). Additionally, the landlord should be concerned about: (i) the line of credit’s term (i.e. will the line of credit expire during the lease term); (ii) how much credit is available to the tenant; (iii) what bank will be the lender under the line of credit; (iv) if the bank will allow the tenant to use proceeds to make lease payments; and (v) if there is a limit to the amount and/or number of draws the tenant can make during a specific period of time.
Similar to a bank account, the landlord should also be mindful of the problems posed by a multi-use line of credit. Ideally, the tenant will establish a new line of credit in conjunction with its entrance into the lease. This new line of credit will have a borrowing limit higher than the tenant’s projected payments over the term of the lease, and the sole purpose of the line of credit will be to fund lease payments. But the reality is that new lines of credit can sometimes be hard to come by, and borrowing limits for existing credit lines can be reduced.
The landlord’s right to receive lease payments via letter of credit draws should be addressed in the lease. When drafting this right into the lease, the landlord should include a series of covenants that: (i) require the tenant to maintain the line of credit with FDIC-approved banks, (ii) require the tenant to notify the landlord immediately if the bank informs the tenant that a material term in the line of credit (such as the amount of credit available or the line of credit’s term) is being modified; and (iii) require the tenant to notify the landlord if or when the tenant nears its borrowing limit. Even with these covenants in place, the landlord should conduct routine diligence of the bank; as this recession has taught us, it doesn’t take long for a financial institution to go from seemingly healthy to non-existent. If the tenant doesn’t establish a new line of credit solely for funding lease payments, the landlord should consider having the tenant covenant in the lease that, in the event the lender reduces the borrowing limit or tenant starts using the line of credit for purposes not approved by the landlord beforehand, the tenant will establish a new line of credit within a certain period of time.
As with an automatic payment from a bank account, automatic payments from lines of credit are best used in tandem with a collection technique like a security deposit.
3. Letter of Credit
The landlord may accept a letter of credit from the tenant in lieu of taking a security deposit. Letters of credit are beneficial to tenants in that they eliminate the need for the tenant to provide up-front cash for a security deposit. Depending on the issuing bank, letters of credit may also be beneficial to landlords if the issuing bank agrees to a letter of credit in an amount higher than the tenant could provide as a security deposit. In addition, many landlords favor letters of credit over cash security deposits because a cash deposit may not be readily available to the landlord if the tenant files bankruptcy prior to the landlord’s application of the cash deposit. Typically, the proceeds of a letter of credit are not property of the tenant’s bankruptcy estate under the independence principal, making the letter of credit an attractive option if the landlord fears a tenant bankruptcy.
The primary issue with letters of credit is the risk that the issuing bank will be placed in receivership. Since 1995, the FDIC has taken the position that it may not honor unsecured letters of credit issued by financial institutions that are placed in FDIC receivership. If the tenant’s letter of credit is issued by a bank that is placed in receivership, the landlord can find itself without access to its security. Regular monitoring of a bank’s financial status can help identify a potential problem, but the landlord likely doesn’t have the time or desire to undertake that type of monitoring.
When drafting the lease to allow for a letter of credit, the landlord should consider adding the following provisions: (i) the landlord will maintain a list of financial institutions that it deems acceptable and will accept letters of credit from those financial institutions only; (ii) if the tenant’s issuing bank is declared insolvent by the FDIC, placed in receivership, or otherwise shut down, the tenant will procure a substitute letter of credit immediately from a bank on landlord’s list of acceptable financial institutions; (iii) the tenant will renew the letter of credit on a yearly basis, on the same terms as the expiring letter of credit (unless different terms are agreed to by the tenant and the landlord in writing); and (iv) the tenant will provide the landlord with written notice of a letter of credit’s pending expiration at least 30 days prior to the letter’s expiration.
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4. Guaranty
A common collection technique is to have one or more guarantors guarantee all or some of the tenant’s lease payments. Typically, a guarantor is a third party with a pre-existing relationship with the tenant. For example, if the tenant is a corporate entity (corporation, limited liability company, etc.) the guarantor may be the tenant’s parent company, sole stockholder, general partner, etc.
Before agreeing to a guaranty, the landlord should conduct due diligence on the proposed guarantor. The scope of due diligence done on the guarantor should be similar to the scope of due diligence done on the tenant – after all, the guarantor is essentially agreeing to step into the tenant’s shoes if the tenant cannot make its lease payments.
The landlord should also be mindful of the relationship between the tenant and the guarantor. If the guarantor’s financial status is tied too closely to the tenant’s financial status, then the overall value of the guaranty may be diminished. For example, say the obligations of Mike’s Flowers LLC, the tenant under a lease are guaranteed by Mike Jones, the sole member of Mike’s Flowers LLC. Mike’s Flowers LLC operates a flower shop at the leased premises, and Mike Jones is the sole proprietor and employee of the flower shop. If the flower shop underperforms and Mike’s Flowers, LLC is unable to make payments under the lease, what assurance does the landlord have that Mike Jones will be able to make those payments instead?
If the tenant is a small independent business, the ideal guarantor is someone whose financial condition is not tied too closely to the performance of the business operated at the leased property.
In drafting a guaranty, the landlord should consider the type of obligations that the guarantor is expected to fulfill in the event the tenant is unable to do so. Many guarantees state that the guarantor is responsible for all of the tenant’s obligations under the lease. However, the landlord should consider if there are some obligations for which the guarantor should not be responsible. If the tenant is obligated to build out the leased premises and fails to do so, does the landlord want the guarantor – who may have no experience overseeing construction – to assume that role? Of course, if the guarantor is not responsible for those obligations, who should be?
Generally, guarantors are expected to assume the tenant’s payment obligations – even if they don’t assume any other tenant obligations. However, in drafting the guaranty, the landlord should, in light of the due diligence information it has on-hand, think through the ramifications of having the guarantor assume this obligation. As an example, some leases provide for the acceleration of lease payments following an event of default. If a lease provides for acceleration of lease payments, the landlord should determine whether or not it wants to hold the guarantor liable for the whole of the accelerated lease payments, or if it wants to hold guarantor liable for only those lease payments owed by tenant at the time of the event of default (assuming that the event of default was caused by failure to make required payments under the lease). While the obvious answer is that the landlord would like to hold the guarantor liable for all accelerated amounts, the landlord should be prepared to have the guarantor reject this request; assuming that rejection occurs, the landlord should have another level of commitment in mind, one that provides the landlord with a sufficient amount of comfort should the tenant breach its obligations.
If the guarantor is obligated to pay for all of the tenant’s lease payments, the landlord should draft this obligation in a way that it includes any amounts the tenant is obligated to reimburse the landlord for under the terms of the lease. If the guarantor is obligated to pay for past-due payments only, and the landlord subsequently agrees to defer any of the tenant’s past due payments, the landlord should draft the agreement (i) deferring such payments in a way that makes it clear if the tenant subsequently defaults, those deferred payments will be considered past-due and payable as of the date of the subsequent default, and (ii) to make clear that deferred past-due amounts will be the guarantor’s responsibility if the tenant default occurs subsequently.
In drafting the guaranty, the landlord should also consider the duration of the guaranty. The term of many guarantees does not match up with the term of their corresponding leases. The ostensible rationale for a shorter guaranty term is that, similar to the “good behavior” security deposit refund, if a guarantor’s services were not needed during the first couple of years, they would likely not be needed at all. Of course, this generally has not turned out to be the case. As tenant defaults and payment delinquencies rise, guarantees are being utilized more than ever.
Because there is no downside to having the guaranty’s term match the lease term, the landlord should request that the guaranty and lease have the same terms (which should include any renewal terms). If the guarantor or the tenant rejects this request, the landlord should be prepared to offer a different guaranty term, and in any event, the landlord should have a sense of what duration it can live with going into these negotiations.
5. In-Kind Payments - Goods
If the tenant is unable to make payments to the landlord in cash, the landlord may choose to accept the tenant’s inventory or goods as an in-kind payment. However, there are a number of issues the landlord should consider before agreeing to accept and in-kind payment.
The landlord should accept a good as an in-kind payment in writing, regardless of the value of the good, or the duration of the tenant’s provision of such good. Many leases contain a provision granting the landlord the right to accept in-kind rent payments. As described in greater detail below, however, if the landlord accepts such in-kind payments, the specific terms of the acceptance should be set out in writing so as to avoid any disputes about the value of the payment in the future. The landlord may consider having an independent third-party certify to the value of the good and having such certified value added to the landlord’s written acceptance.
Before agreeing to accept a good as an in-kind payment, the landlord should ask itself whether or not it has a use for the good or whether it could somehow benefit from the good. Receiving two tons of widgets in lieu of one month’s rent does not benefit the landlord if it has no use for widgets or that many widgets.
The landlord should look at the acceptance of a good as a purchase of that good. Accordingly, as a condition to acceptance, the landlord should receive representations and warranties from the tenant as to the value and quality of the good and that such good can be conveyed by tenant free and clear of any liens, claims or other encumbrances. Ideally, landlord should obtain the independent evaluation of the value and quality of the good from a qualified third party and obtain UCC searches to ensure that no lenders or other third parties have a security interest in the good.
Before accepting an in-kind good, the landlord should determine whether it has a use for such good. If the answer is no, the landlord should determine if it knows of anyone who does have a use for such good. Assuming the landlord does know of someone who has a use for such good, the landlord must ask itself if it wants to get into the business (albeit short-term) of selling or transferring the good. If the landlord who received two tons of widgets has a neighbor who, coincidentally needs two tons of widgets, then accepting the good may prove beneficial to recover what may otherwise be a loss to the landlord. However, what if the neighbor wants the landlord to provide him with a warranty for the widgets? Does the landlord need a license to sell the widgets, even if it is a one-time event? What taxes or other fees may apply to the sale? How will landlord know at what price to sell the widgets? What if market fluctuations have caused the value of the widgets to drop below the value of one month’s rent? What if the neighbor has questions about the widgets? The landlord may want to, as a condition of acceptance, require the tenant to provide “sales support” with respect to the good. Some of the answers to the foregoing questions may cause the landlord to determine that the good or product is more trouble than it is worth.
6. In-Kind Payments - Services
As opposed to accepting a good as a payment in-kind, the landlord may find accepting services as an in-kind payment much easier and much more useful, especially if the landlord can put the services to use in connection with its own business. However, there are still a number of issues the landlord should first consider.
As with goods, the landlord should accept all in-kind service payments in writing. The value of the service should be stated clearly on the written acceptance. If the value of the service is tied to a set rate (for example, a per-person charge for a catering service), the landlord and the tenant should make sure that the rate is clearly stated in the written acceptance. Ideally, the landlord should also confirm that the value or rate assigned to the service is consistent with the value assigned or rates charged by similar service providers to ensure that the landlord is getting the market value or rate for such services. The tenant should be responsible for providing the landlord with regular invoices for services rendered, and the landlord should have the right to dispute an invoice and withhold rent offset/credit until the dispute is resolved. The landlord may also want to add a provision to the written acceptance that requires all invoice disputes to be settled by mediation or arbitration if the landlord and tenant are unable to resolve the discrepancy themselves. The landlord should also have the right to terminate the in-kind relationship if the products or services fail to meet the standards or requirements agreed to by the parties.
7. Payment Modifications
A less punitive collection technique the landlord can utilize is modification of the tenant’s lease payments. The landlord should engage in a comprehensive round of diligence before agreeing to any payment modification, so that the landlord can reasonably determine (i) whether or not the tenant will actually be able to pay rent consistently in accordance with the modified payment schedule and (ii) what effect the tenant’s modified rent payments will have on the landlord’s bottom line. Assuming that the modification serves to reduce the tenant’s lease payments, the most common techniques of payment modification are payment deferment and payment forgiveness; depending on the tenant’s financial situation, it is not uncommon to see the landlord agree to a combination of payment deferment and payment forgiveness.
With payment deferment, the landlord allows the tenant to pay a portion of lease payments at a specified point in the future. The landlord can choose to defer either past-due or future. If the landlord agrees to defer a past-due payment, it should state in writing that the deferment of the past-due payment does not serve as a waiver or a release of the landlord’s rights with respect to that past-due payment, and if the tenant subsequently defaults under the lease, the deferred amounts will revert to their initial “past-due” status, allowing landlord to immediately pursue any of its rights and remedies under the lease.
With payment forgiveness, the landlord releases the tenant from its obligation to pay all or a portion of past-due or future payments. The landlord should be aware that if a payment is forgiven, the landlord’s rights with respect to that payment are waived and released as well – if the tenant defaults at a future date, the landlord has no right to request tenant’s payment of the forgiven amount, unless such right is expressly retained in the waiver as a condition to its effectiveness.
8. Liens
Another collection technique the landlord can use is enforcing its lien rights against the tenant’s assets (personal property, equipment, inventory). The landlord can establish lien rights against the tenant’s assets by adding appropriate language to the lease. In addition, some jurisdictions give landlords statutory lien rights.
(A) Statutory Liens
Many jurisdictions give landlords a statutory lien upon their tenant’s property of for payment of rent. Because the statutory lien exists by “positive law” (meaning laws duly enacted by government), the landlord does not have to address the lien in the lease in order to exercise its lien rights at a future time. Procedurally, the landlord cannot take permanent possession of any tenant property upon which the landlord has a lien without appropriate legal process, although the type of process is not standardized. Some case law holds that the validity of the landlord’s claim of debt resulting from rent past due must be established at a hearing, with proper notice, before the lien is executed.1 However, other case law holds that the seizure of property belonging to the tenant under a statute creating the landlord’s lien for charges owed by the tenant is not a state action, but instead a private action immune from the restrictions of the 14th Amendment.2
In order to claim a statutory lien right, the landlord may need to have an established landlord-tenant relationship with the tenant, one that entitles the landlord to the payment of rent (that relationship can be established by having the landlord and the tenant enter into a written lease, sublease or assignment). A statutory lien exists from the creation of the tenancy and exists independent of the institution of any proceeding for its enforcement. Some case law holds that the landlord’s lien attaches at the later of (i) the beginning of the tenancy or (ii) when the tenant’s property is brought onto the leased premises.3 Other case law holds that the lien attaches at the beginning of the tenancy for any rents that will come due during the tenancy; however, the lien does not attach to the tenant’s property until the tenant brings that property onto the leased premises.4
The landlord must exercise its lien rights in strict compliance with the jurisdiction’s statutorily prescribed procedures, and the landlord’s statutory lien must be enforced by judicial proceedings in a lawful manner without violating the jurisdiction’s forcible entry statute. The landlord may not retain personal property that it has obtained as part of a lawful reentry as security for payment of past-due rents. If the landlord retains such property and subsequently sells that property, that landlord may be found guilty of conversion.
A statute may expressly provide that the landlord’s statutory lien terminates a specified length of time after the tenant quits the leased premises. The landlord may, expressly or impliedly, also waive its right to claim a statutory lien upon the tenant’s property.5 Note that if the landlord provides its unconditional consent for tenant to sell the property subject to the lien, that consent may constitute a waiver of that landlord’s lien on both the property and the proceeds of the property (although the tenant may promise to turn the proceeds over to that landlord in payment of the claim).
If the landlord wants to enforce a statutory lien against the tenant’s property, the landlord should first confirm the scope of property covered by the lien. The fact that the tenant possesses property on the leased premises may not constitute ownership within the meaning of the state’s statute. Additionally, property that the tenant removes during one term cannot be held for the rent of a subsequent independent term. Under some state statutes, the landlord’s lien –absent language to the contrary – will attach to the tenant’s property that is otherwise exempt from execution or forced sale. In addition, under some state statutes the landlord’s lien will extend to property of third persons located upon the leased premises.
When the tenant sells property that is subject to the landlord’s statutory lien, if the person who receives the proceeds of the property has knowledge of the lien, that person may be compelled to account for the proceeds. State statutes may expressly provide that the landlord’s lien may be enforced against the proceeds of the property. However, if the tenant’s goods are sold to a bona fide third party that has no knowledge of the lien, state statutes may hold that those goods are no longer subject to the landlord’s lien.
(B) Contractual Liens
One of the most effective ways for the landlord to place a lien upon the tenant’s assets is to stipulate in the lease that the landlord has a lien on tenant’s assets. However, if the landlord adds this type of stipulation to a lease, it must identify the property that is subject to the lien and specifically state that the lien is in place to secure the debt in question – in this case unpaid payments under the lease. However, the landlord and tenant may stipulate that the landlord will also have a lien on any personal property that tenant brings onto the leased premises subsequently.6 The landlord can waive its contractual lien either expressly (for example, via lease amendment) or by its conduct (if that conduct shows the landlord intends to abandon or relinquish the lien). However, a lien is not lost, as between landlord and tenant, by landlord consenting to the removal of the personal property from the leased premises. It is also held generally that if the landlord takes a security interest on the tenant’s personal property as additional security, that taking does not constitute a waiver of the landlord’s contractual lien.7
(C) Priority of Landlord’s Lien
In general, the landlord’s lien for payment of rent is superior to any judgment or other lien that is acquired after the tenancy is created or after the tenant bring property onto the leased premises.8 If the landlord’s lien occurs before an unrelated secured party perfects its own security interest on the property, the landlord’s lien takes priority.9 However, a chattel mortgage will take priority over the landlord’s lien, even if the chattel mortgage came into existence after the creation of the tenancy.10 Additionally, the landlord’s statutory lien priority may be determined at the time of filing11 (although, where there is no mechanism for filing the landlord’s lien, priority may depend on the time of attachment).12
The landlord’s lien for the payment of rent is superior to interests created by Article 9 of the Uniform Commercial Code.13 Most authorities have recognized the exemption of landlord’s liens from coverage by the Uniform Commercial Code,14 and some jurisdictions have adopted the exemption.15
1 See Barber v. Rader, 350 F. Supp. 183 (S.D. Fla. 1972); Dielen v. Levine, 344 F. Supp. 823 (D. Neb. 1972); Adams v. Joseph F. Sanson Inv. Co., 376 F. Supp. 61 (D. Nev. 1974), each as cited in 49 Am Jur 2d Landlord and Tenant § 797 (2010).
2 See Hitchcock v. Allison, 1977 OK 221, 572 P.2d 982 (Okla. 1977), as cited in 49 Am Jur 2d Landlord and Tenant §797 (2010).
3 See U.S. v. S.K.A. Associates, Inc., 600 F. 2d 513, 27 U.C.C. Rep. Serv. 262 (5th Cir. 1979), as cited in 49 Am Jur 2d Landlord and Tenant §799 (2010).
4 See Kuemmerle v. United New Mexico Bank at Rosewell, N.A., 113 N.M. 677, 831 P. 2d. 976, 17 U.C.C. Rep. Serv. 2d 1926 (1992), as cited in 49 Am Jur 2d Landlord and Tenant §799 (2010).
5 The landlord’s waiver of a statutory lien must be established by a preponderance of testimony that affirmatively shows the landlord’s agreement, or conduct tantamount thereto, that the tenant might deal with the property as if free of a lien. See Planters Bank & Trust Co. v. Sklar, 555 So. 2d 1024, 11 U.C.C. Rep. Serv. 2d 251 (Miss. 1990), as cited in 49 Am Jur 2d Landlord and Tenant §803 (2010).
6 Note that if there is ever a question as to what property is subject to the landlord’s contractual lien, some states’ common law holds that the terms of the lease are controlling, and that a general description of all personal property of a particular kind on the leased premises is a sufficient description. See Alabama Butane Gas Co. v. Tarrant Land Co., 244 Ala. 638, 15 So. 2d 105 (1943), as cited in 49 Am Jur 2d Landlord and Tenant § 792 (2010).
7 See Armstrong v. Thompson, 62 S.D. 567, 255 N.W. 561, 96 A.L.R. 561 (1934), as cited in 49 Am Jur 2d Landlord and Tenant § 795 (2010).
8 See Howard v. Calhoun, 155 Fla. 689, 21 So. 2d 361 (1945), as cited in 49 Am Jur 2d Landlord and Tenant § 810 (2010). 9 See Mullen v. Green Tree Financial Corporation – Mississippi, 730 So. 2d 9 (Miss. 1998), as cited in 49 Am Jur 2d Landlord and Tenant § 810 (2010). 10 See Acadiana Bank v. Foreman, 352 So. 2d 674 (La. 1977), as cited in 49 Am Jur 2d Landlord and Tenant § 810 (2010).
11 See In re Esparza, 118 Wash. 2d 251, 821 P. 2d 1216, 16 U.C.C. Rep. Serv. 2d 1217 (1992), as cited in 49 Am Jur 2d Landlord and Tenant §810 (2010).
12 See Herringer v. Mercantile Bank of Jonesboro, Arkansas, 315 Ark. 218, 866 S.W. 2d 390, 24 U.C.C. Rep. Serv. 2d 1182 (1993).
13 See U.C.C. § 9-109(d)(1) (1999 revision).
14 See In re Findley, 76 B.R. 547, 4 U.C.C. Rep. Serv. 2d 227 (Bankr. N.D. Miss. 1987), as cited in 49 Am Jur 2d Landlord and Tenant §812 (2010).
15 See Franklin Bank and Trust Co. v. Mithoefer, 563 N.E. 2d 551 (Ind. 1998); Kuemmerle v. United New Mexico Bank at Roswell, N.A., 113 N.M. 677, 831 P. 2d 976, 17 U.C.C. Rep. Serv. 2d 1296 (1992); Paris American Corp. v. McCausland, 52 Wash. App. 434, 759 P. 2d 1210, 6 U.C.C. Rep. Serv. 2d 205 (Div. 2 1988), opinion modified on denial of reconsideration, review denied 111 Wash. 2d 1034 (Sept. 6, 1988); River Valley State Bank v. Peterson, 154 Wis. 2d 442, 453 N.W. 2d 193, 11 U.C.C. Rep. Serv. 2d 731 (Ct. App. 1990), each as cited in 49 Am Jur 2d Landlord and Tenant § 812 (2010).