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

written by: Timothy G. Moore; Karl A. Moses, Jr; Neil E. McCullagh

The landlord’s 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 goods belonging to a tenant, assignee, or sublessee, found on the leased premises or which may have been removed from the leased premises not 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 to any 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 satisfy unpaid rent. A landlord may enforce the lien by filing a distress action in court 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 the junior liens in order of their priority.

The statutes establishing the priority of the landlord’s lien relative to other liens that attach to the tenant’s property after that property is brought onto the leased premises are somewhat inconsistent. One of the applicable statutes[1] provides that the landlord’s lien has priority for up to six months of rent if the premises are used for residential purposes and up to twelve months of rent if the premises are used for farming or agriculture. That statute says nothing about a scenario in which the premises are used for commercial purposes unrelated to farming or agriculture, which suggests that in that scenario the priority of the landlord’s lien is not limited to a certain number of months of rent. However, another statute[2] provides that a creditor whose lien attaches after the property is brought onto the leased premises can remove the property from the premises by paying the landlord six months of rent if the premises “are in a city or town, or in any subdivision of suburban and other lands divided into building lots for residential purposes” and twelve months of rent if the premises are used for farming or agriculture. In other words, while the former statute suggests unlimited priority for the landlord’s lien in the context of a commercial tenant that is not engaged in farming or agriculture, the latter statute allows the lender to take its collateral in that context by paying the landlord six months of rent if, as will often be the case, the premises are “are in a city or town, or in any subdivision of suburban and other lands divided into building lots for residential purposes”.

Landlord’s 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 and is potentially left with a security interest that has substantially diminished value or possibly even no value. 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.

Timothy G. Moore is shareholder at Spotts Fain PC in the firm’s Creditors’ Rights, Bankruptcy, and Insolvency practice group.

Karl A. Moses, Jr., is an associate at Spotts Fain PC in the firm’s Creditors’ Rights, Bankruptcy, and Insolvency practice group.

Neil E. McCullagh is a partner at Spotts Fain PC in the firm’s Creditors’ Rights, Bankruptcy, and Insolvency practice group.

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.

[1] Virginia Code Section 8.01-130.6.

[2] Virginia Code Section 8.01-130.9.