The Landlord's Lien: An Often Ignored Pitfall for the Secured Creditor

Introduction

The landlord lien is a statutory remedy in Virginia that is often overlooked by creditors who lend to individuals or entities who are also tenants. In this article, we discuss the salient features of the landlord's lien, why secured creditors should be aware of this particular remedy and the steps a secured creditor may take to protect its interest in property owned by the tenant. 

What is a Landlord's Lien?

A landlord's lien is an inchoate statutory lien that automatically grants a landlord a lien on any property belonging to the tenant, or the tenant's assignee, found on the leased premises or which may have been removed from the leased premises no more than thirty days prior to the landlord's exercise of the lien. A landlord's lien relates back to the commencement date of the lease and is superior toany other lien upon the tenant's property with the exception of (i) liens that attached prior to the property being brought onto the leased premises and (ii) most federal tax liens. Significantly, this may even include recorded UCC purchase-money security interests, so long as the competing liens were not in place when the property was brought to the leased premises. 

The landlord's lien can allow a landlord who is owed rent to attach or even seize the tenant's property to the extent necessary to satisfy unpaid rent for a period of six or twelve months, depending on the location and use of the property.[1] A landlord may enforce the lien by filing a distress action for rent against the tangible personal property of the delinquent tenant. Typically, upon an award of judgment to the landlord, the Sheriff will then arrange for the sale of the property. The proceeds of the sale are first applied to the landlord's lien and if a surplus exists, it is applied to junior liens in order of their priority. 

Landlord Liens and the Secured Creditor

One notable feature of a landlord's lien is that a landlord is not required to take any steps to perfect the lien as it exists solely by virtue of the existence of the lease or contract for rent. Unlike a security interest under Article 9 of the UCC, a landlord's lien is not recorded anywhere and will not be discovered via a typical UCC/tax lien search. 

For purposes of illustrating the above, suppose a creditor secures its loan to a borrower-tenant by taking a security interest in certain equipment owned by the borrower-tenant and located on the leased premises. Prior to doing so, the creditor exercises due diligence and conducts a UCC and tax lien search (both locally and in the central filing office) which confirms that the borrower-tenant owns the equipment free and clear of any other liens or encumbrances. The borrower-tenant's business fails and it defaults on its loan to creditor and its rent payments to landlord. The landlord files a distress action, is awarded judgment and sells the equipment to satisfy the unpaid rent. Despite having exercised "due diligence", the unknowing creditor is deprived of what it thought was its first priority lien interest in the collateral in an amount equal to either 6 months or 12 months of rent (depending on the location of the leased premises) and potentially left with a security interest of little or no value with which to satisfy the debt.  It also allows the landlord to control the method of sale of the collateral which may not be optimal or maximize the sale price. 

How Can Creditors Protect Themselves against Landlord's Liens?

It is very important for creditors who lend to tenants to be aware of the landlord's lien and its implications. Measures can be taken to ensure that a creditor's security interest in a tenant's tangible property is not affected by a landlord's lien. Such measures include (i) obtaining pertinent information from the borrower-tenant and/or landlord prior to the extension of credit regarding the location and liens on potential collateral; (ii) obtaining a waiver or subordination from the landlord of the landlord’s lien; and/or (iii) ensuring that the creditor’s security interest is in place before the collateral reaches the leased premises. Properly worded, a waiver will protect a creditor's security interest in the tenant's collateral and ensure that a landlord may not satisfy its claim for unpaid rent via the collateral prior to payment in full to the creditor.

[1] Virginia Code Section 55-231 provides that a landlord's lien is not to exceed six months' unpaid rent if "[t]he premises are in a city or town, or in any subdivision of suburban and other lands divided into building lots for residential purposes or of premises anywhere used for residential purposes". If the premises or lands are used for "farming or agricultural" purposes, the lien is for not more than twelve months' rent. Id. 


Spotts Fain publications are provided as an educational service and are not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel.