Understanding the Landlord's Lien

In the world of commercial leases, a landlord's lien can be a critical tool that provides an additional layer of security for the landlord against tenant defaults. But what exactly does this mean for the landlord, the tenant and the tenant's lenders? Let's break it down.

What Is a Landlord's Lien?

A landlord's lien is a legal right granted to the landlord to secure payment for unpaid rent or other lease obligations. These lien rights may encompass the tenant's personal property, fixtures, equipment, accounts, licenses and more. This lien can arise in different ways – either by statute (a lien imposed automatically by state law), by contract (based on terms agreed to in the lease) or both.

Statutory Liens

In many jurisdictions, a statutory lien is automatically granted to the landlord and, unless waived, will provide the landlord a legal right to seize the tenant's property to satisfy a default. The specifics of these statutory liens vary from state to state and will usually be subject to limitations on amount, time and priority. For example, a landlord's statutory lien may take priority over other, subsequent, creditors of the tenant but limited in time or amount (such as to six months of unpaid rent). In other states, there may not be an automatic landlord lien, but a lien may arise after a landlord action for distress for rent.

Contractual Liens

A contractual landlord lien is one that arises specifically from the terms of the lease agreement. In this case, the landlord and tenant explicitly agree in writing that the landlord will have a lien on the tenant's personal property, fixtures, equipment or additional assets. A landlord may then perfect this lien by taking the required action (often filing a Uniform Commercial Code (UCC) financing statement) to ensure its order of priority and provide notice to other potential creditors.

Enforcement of a Landlord Lien

Enforcement varies from state to state and will depend on whether a landlord's lien is "perfected." Some judicial action is likely required in order to attach (and seize possession) of the tenant's property, and a tenant may have rights under the applicable law to a hearing or redemption rights by posting a bond or other security in order to regain possession or remove the attachment of the lien.

Practical Considerations for Landlords

1. Engaging with Tenants on Financing: Landlords may use their lien rights to discuss financing with tenants. For retail leasing in particular, it is important for a landlord to understand how a tenant intends to finance its buildout and operations. For example, if a tenant leases all its equipment or furniture, the landlord's lien may have little to no value. Similarly, if a tenant has secured financing from third-party lenders, those lenders may hold priority over the landlord's lien.
2. Subordination to Lender Interests: In some cases, landlords may agree to subordinate or waive their lien in favor of a tenant's lender. This agreement, typically made in writing through a landlord consent agreement, allows the lender to have priority in claiming the tenant's property. Such agreements often set the scope of the lender's rights, timelines for their actions and protections for the landlord in case the lender exercises its rights. Having clarity on these terms is a benefit to all parties involved.
3. Describing the Collateral: Especially in the context of a consent agreement between landlord and its tenant's lender, describing the scope of the lender's rights to the property in the space can be very important. The landlord will want the collateral limited to that property, which may be removable without damage to the building or premises, exclude property or improvements financed by any landlord contribution and exclude the tenant's leasehold interest.
4. Assessing the Lien's Value: Landlords should consider the overall value of the lien in relation to other lease security such as security deposits or guarantees. The lien is just one tool in a larger risk management strategy.

A landlord's lien is a valuable mechanism for securing unpaid rent or other obligations, but it is not without its complexities. Landlords need to carefully assess their rights, the enforceability of the lien and the relationship with the tenant's lenders. By understanding how the lien works and considering the full range of security options available, both landlords and tenants can avoid potential disputes and create a lease agreement that protects their respective interests.