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Tenant Default: Are You Preserving Your Remedies?

My mother always said, “You can’t get blood from a turnip.”  Being a fairly argumentative child (sorry Mom), I proceeded to suggest useful products that could be derived from a turnip and sold/traded for the money I was seeking.  Commercial landlords are often faced with the same dilemma.  Rent tends to be a high priority obligation to a tenant because it is difficult to run your business after you have been evicted from your store front.  If the evicted business is the primary source of income for the tenant, and its owner(s), then any guaranty of payment obtained from the owner(s) is also of questionable value.  So what products can we derive from that turnip?

Statutory Lien.  Chapter 54 of the Texas Property Code provides a commercial landlord with a preferential lien on the tenant’s property that is located on the premises.  However, the statutory landlord’s lien will not apply to rent that is more than six months overdue unless the landlord files a lien affidavit.  Additionally, the preferential status of a landlord’s lien has an expiration date.  Specifically, the preferential status of the lien is reset on the anniversary date of the lease.  Therefore, a statutory landlord lien that is senior to a security agreement in the first year of a lease may not be senior if the tenant defaults during the second year of the lease or if delinquent rent remains outstanding for too long.

Contractual lien.  Many leases include a contractual lien in addition to the statutory landlord’s lien in order to compensate for the unusual mechanics involved in the statutory lien.  A contractual lien provides the landlord with a security interest in the property located on the premises in the same way that a lender might have a security interest on a tenant’s inventory or office furniture.  Unlike the statutory landlord’s lien, a contractual lien does not have any preferential status but is also no limited to the prior six months of unpaid rent.  Instead, a contractual lien follows the same rules of priority as a lender’s security agreement.  Therefore, like a lender, a landlord seeking to preserve the value created by a contractual lien must file the document necessary to perfect its lien (e.g. a financing statement) and keep those filings current in order to preserve its lien seniority in the event of a later default.

In short, a lien (whether statutory or contractual) is a tool that a landlord can use to preserve value when a tenant defaults.  However, liens are only valuable if they are properly established and maintained, and are utilized in a timely fashion.  Your attorney can assist you in determining any applicable deadlines or steps that you should take to secure and preserve your liens on property located in your commercial space.

Royce Lanning

Phone: 281-367-1222

Fax: 281-210-1361

[email protected]

 

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