Landlord’s Liens for Unpaid Rent vs. Tenant’s Creditors: Who has Priority?
By
LoFaro & Reiser, L.L.P.
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E-mail: greiser@new-jerseylawyers.com
Web Site: www.njlawconnect.com
There are several scenarios where
a landlord’s statutory lien claims may conflict with the lien claims of the
tenant’s other creditors, including secured creditors, particularly in
situations where the tenant is insolvent. Therefore, parties negotiating
commercial lease agreements, as well as vendors leasing and/or financing
equipment and machinery to commercial tenants, must be cognizant of the
landlord’s statutory lien remedies.
This article examines pertinent
Two
A. N.J.S.A.
2A:42-1
A landlord’s lien arising under N.J.S.A. 2A:42-1 provides the landlord
with a lien against the tenant’s goods and chattels located upon the leased
premises to the extent of 1 year’s rental arrearages. By the statute’s express terms, if a tenant
is in default of its rent obligations to its landlord then any execution or
judgment creditor of the tenant is prohibited from removing any of the tenant’s
goods or chattels from the premises unless the creditor pays the landlord for
rental arrears not to exceed 1- year’s rent.
“The landlord’s lien arising under N.J.S.A. 2A:42-1 is not a lien
that arises at the inception of the lease,” and indeed “is not a lien at all
but rather a statutory right to preference in payment over other
creditors.” Hartwell v. Hartwell Co.,
Inc.,167 N.J. Super. 91, 97 (Ch. Div. 1979).
In Farmers & Merchants Nat’l Bank v.
Boyman, 155 N.J. Super. 120, 124 -125 (Law Div. 1977), the court emphasized
that the statute does not prohibit a tenant from disposing of its goods and
chattels, but rather preserves the landlord’s right to recoup a year’s worth of
unpaid rent from the tenant’s goods and chattels over the competing claims of
the tenant’s execution creditors.
B. N.J.S.A.
2A:44-166
The Loft Act, N.J.S.A. 2A:44-165,
et seq., also provides for a landlord’s lien. See
N.J.S.A. 2A:44-166. Specifically, landlord’s liens arising under
the Loft Act are limited to tenants operating commercial premises for
manufacturing purposes. Hartwell, 167 N.J. Super. at 99, n.1. Whereas N.J.S.A. 2A:42-1 provides for
a landlord’s lien to the extent of 1-year’s unpaid rental arrears, N.J.S.A.
2A:44-166 limits a landlord’s lien for rental arrears to 6-months.
Landlords
and their attorneys should be mindful of the Loft Act because a landlord’s lien
arising under N.J.S.A. 2A:44-166 has
priority over any lien or mortgage created after the machinery or chattels are
placed in the leased premises, including priority over the lien of secured
creditors whose liens were created or acquired after their machinery or
chattels are placed in the premises. Hartwell,
167 N.J.Super. at 99, n. 1, citing In re Holly Knitwear, Inc. 140
N.J. Super. 375, 383 (App. Div. 1976).
However, the same priority rule does not apply
to a landlord’s liens arising under N.J.S.A. 2A:42-1. Hartwell, 167 N.J. Super. at 99 at n. 1.
C. Contractual Landlord’s Lien
A landlord’s lien can also exist by contract. In fact, real estate leases can include
express provisions granting the landlord a security interest in a tenant's
personal property, even to after acquired property. Such a lease, in effect, serves as a security
agreement for the tenant's lease obligations and can be perfected by following
the rules of Article 9 of the New Jersey Uniform Commercial Code (“UCC”),
including the filing of financing statements.
One requirement under
the UCC is that the collateral must be reasonably described. A second requirement is that the lien be
perfected. Under the revised UCC, a
landlord may file an unsigned financing statement if the tenant authorizes the
filing in the lease or has otherwise granted its landlord a security
interest. This allows landlords to
correct prior missteps without requesting the tenant's signature.
II. Priority
of Landlord’s Liens
A. Statutory Landlord’s Liens vs. Secured
Creditors
Whereas contractual landlord’s
liens can be perfected under UCC Article 9, statutory landlord's liens
established pursuant to either N.J.S.A. 2A:42-1 or N.J.S.A. 2A:44-166
are considered to be outside the scope of Article 9 by its express terms
(Reference Rev. Article 9-109(d)(1) and Former Article 9-104(b)).
A landlord’s lien established
under N.J.S.A. 2A:42-1 is subordinate to a security interest perfected
in accordance with the Uniform Commercial Code.
Hartwell, 167 N.J. Super. at 100-101. This principle is derived from
However, as previously mentioned, a landlord’s lien
arising under the Loft Act (N.J.S.A. 2A:44-166) has priority over secured
creditors whose security interest was “created or acquired after
machinery or other chattels are placed in the premises.”
A landlord’s lien rights under the Loft Act will
inevitably impede a tenant’s ability to obtain outside funding to run its
business and/or lease/finance expensive equipment. For this reason, it is common practice for
vendors and equipment lessors to demand that the landlord execute a written
agreement either waiving or subordinating the landlord’s lien claims to the
lien rights of the creditor with respect to the equipment to be placed upon or
within the premises. Where a good relationship exists between a tenant and its
landlord, and for practical business reasons, the landlord will often execute a
landlord's lien waiver thus enabling the lender or equipment lessor to obtain
first priority lien position in the specified collateral.
B. Priority
of Statutory Landlord’s Lien vs. Asset Purchasers
In Schlussel v. Emmanuel Roth Co.,
270 N.J. Super. 628 (App. Div. 1994), the court held that a purchaser of
business assets acquired the assets subject to the landlord’s statutory lien
for unpaid rent pursuant to N.J.S.A. 2A:44-165 to 2A:44-167. In Schlussel, where it was undisputed
that at the time of the asset purchase closing the tenant owed the landlord
back rent totaling $10,622.00, the court held that as of the date the assets
were transferred the tenant’s assets were impressed with a Loft Act lien equal
to the unpaid rent and the purchaser “took those assets subject to that
lien.” 270 N.J. Super. at 649 (internal
citation omitted).
C. Priority
of Statutory Landlord’s Lien in Tenant’s
Bankruptcy Proceedings
In the context of federal bankruptcy
proceedings, a landlord’s statutory lien rights under New Jersey statutory law are
trumped by the trustee’s or debtor-in-possession’s lien avoidance rights pursuant
to 11 U.S.C. § 545(3). This Bankruptcy Code section allows the
trustee or debtor in possession to avoid a statutory lien on property of the
debtor to the extent that such lien is for rent.
Bankruptcy
Code Section 545(3), however, does not void a trustee’s or
debtor-in-possession’s obligation to pay the landlord post-petition use and
occupancy rent, which is treated as an administrative priority expense under 11
U.S.C. § 503(b)(1)(A). See
e.g., Zagata Fabricators v.
D. Priority
of Contractual Landlord’s Liens in Tenant’s Bankruptcy Case
A prudent attorney representing a commercial
landlord, and anticipating the tenant’s future bankruptcy filing, should
consider including a contractual rent lien provision in the lease agreement in
favor of the landlord, since the express language of 11 U.S.C. § 545(3)
provides the trustee or debtor-in-possession with the absolute right to avoid only
statutory liens for rent. The statute
makes no reference to avoiding contractual liens for rent.
Logically,
however, since a contractual landlord’s lien is not a creature of statute and
is capable of being perfected under UCC Article 9, there is no reason why such
a lien should not survive the bankruptcy lien avoidance statute. Especially considering that state law
determines lien priorities in bankruptcy.
In fact, in Cohen v. Korol, 9 N.J. Super. 183, 187 (App. Div.
1950), which involved the competing lien claims of a landlord and an assignee
for the benefit of creditors, the Appellate Division recognized that a landlord
could exercise contractual lien rights for unpaid rent against the tenant’s
personal property upon default of the tenant’s rent obligations