Use Contractual Lien Provision When Leasing to Uncertain Tenants

In recent years, filling space at shopping centers with smaller, non-traditional tenants rather than large national stores (many of which are suffering financially) has been a successful strategy for landlords. If you’re taking advantage of this rapidly growing trend, you should be aware that, while in the short term it can boost profits, it carries a substantial amount of risk in the long term. That’s because many smaller tenants often have a limited—or sometimes nonexistent—financial track record.

So how can you protect your interests against the variables associated with small or new tenants? Get your tenant to agree to give you the right to file a contractual lien against its personal property. Here’s how you can secure this right, which will allow you to go after the tenant’s personal property if it decides to shirk its lease obligations or default entirely, so you aren’t left empty-handed.

Include Key Items in Clause

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: Protect Interests by Leveraging Tenant’s Personal Property, to your lease. The clause contains the following key items:

Key item #1: 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. Be specific, by including 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 [Clause, par. a].

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 [Clause, par. b].

Key item #2: 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 [Clause, par. c]. 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.

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.

Key item #3: Contractual lien is in addition to statutory lien. Contractual liens are governed by the Uniform Commercial Code (UCC) and are 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. 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 [Clause, par. d].

Key item #4: Obtain signed UCC statements from tenant when signing lease. To make the lien in your lease enforceable in court, you need to file UCC financing statements—and both you and the tenant need to sign it. Because it’s difficult to get a tenant to sign a statement after it has signed the lease, try to obtain the tenant’s signature at the same time you get its signature on the lease [Clause, par. f].

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 another party filed a lien on the property prior to your filing. So, before you file, check to make sure that no others have filed.

Key item #5: 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 [Clause, par. g].

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, you can sign for it [Clause, par. h]. Be aware, however, that most tenants won’t agree as it creates a wide berth for owners.

Key item #6: State lien rights clearly in lease. Add language to the lease that describes, in great detail, exactly what your lien rights are. 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 Clause, par. i]. 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 [Clause, pars. j and k].

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.