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CLEARING UP THE MYSTERY AROUND LANDLORD’S LIENS

By:  John B. Newman

Few concepts involving real property or secured transactions are less understood than landlord’s liens.   Landlord’s liens encompass a bundle of rights that a landlord has to recover unpaid rent from the personal property of its tenant.  In fact, most landlords have no liens until they distrain, a concept which contributes to the confusion.

Long before the New Jersey State Constitution was adopted in 1947, landlords who were not paid their rent could distrain the personal property of the tenant, typically by padlocking the premises.  The landlord would then cause the property to be sold and the proceeds to be applied to the unpaid rent.  New Jersey has an 1877 statute, still in effect, which specifically authorizes this procedure.

Except in the case of certain industrial facilities which will be discussed below, a landlord does not actually have a lien on the tenant’s property prior to distraint.  The landlord has the right to be paid up to one year’s rent from property of the tenant in the leased premises which property is taken by execution, attachment or court order.  Thus, if a judgment creditor of a tenant causes a sheriff to levy upon equipment or inventory in a leased facility, the sheriff will be obligated to pay the landlord up to one year’s rent arrearage out of the proceeds of sale.

A landlord which is not paid its rents may also act proactively to perfect its lien on the tenant’s property within its premises by distraining the property.  Prior to 1983, distraint was done the old fashioned way–by padlocking.  In 1983, the New Jersey Supreme Court held that that process was unconstitutional because the tenant did not have a right to be heard by an impartial judicial officer before being deprived of its property.  Today, a landlord may only distrain a tenant’s property within the leased premises by going to court and obtaining a temporary restraining order distraining the property.  To do so, the landlord must show the court that it has a lease, that there is a breach, i.e., unpaid rent, and that the tenant has property on the leased premises.

Significantly, because the Supreme Court specifically authorizes this procedure, trial court judges are far more likely to grant emergent relief of this kind than in other applications for restraining orders.

If the court orders the distraint, then the landlord must follow the balance of the 1877 statutory framework.  Thus, once the distraint has been effected, the tenant has ten days after receiving notice to make a motion to recover its property.  Next, on two days’ notice, the landlord may have the goods inventoried and appraised by three persons sworn by the county sheriff or local constable.  [In practice, this procedure does not occur without the landlord’s active involvement in hiring such persons.]  Finally, on five day’s public notice, the landlord can hold a public sale conducted by the sheriff.  The proceeds of sale are applied to the costs of distraint and sale, and then to the unpaid rent.

There are certain important factors to keep in mind.  First, there is no landlord’s lien with respect to premises solely used as a residence.  [A residential apartment used partially for business purposes is still a residence.]  Second, the lien does not apply to property removed by the tenant from the leased premises.  The lien only applies to property on site.  This is why you will sometimes see tenants moving in the middle of the night.  Third, the landlord can only distrain one year’s arrears of rent.  [This is among the reasons why most leases provide that all monies which a tenant owes, such as common area charges, taxes etc., are considered “additional rent.”]  Fourth, the landlord does not have a true lien until the distraint occurs.  Until that time it just has a right to obtain the lien and a right to be paid in the event some other creditor seizes the tenant’s property pursuant to a writ of execution, attachment, or court order.  [Therefore, the landlord’s right to obtain a lien is subordinate to a perfected security interest to a financing company or bank.]

There is special type of lien for certain industrial facilities under the Loft Act.  The Act applies to a “mill, factory or loft” leased to a tenant for “manufacturing or other purposes.”  Unlike the general statute on landlord’s liens, the Act creates a lien from the date the rent is unpaid, without any requirement to distrain.  This lien, however, gives priority up to only six months’ rent.  This lien can prime a secured creditor unless the secured creditor’s lien is placed on the property prior to the commencement of the lease.

As a result of the above statutory framework, most lenders providing financing to tenants require that the landlord sign a document called a “Landlord’s Waiver” before extending the financing.  This is often a negotiated document which typically provides that the landlord waives [or subordinates as to the lender] its common law and statutory lien and right to distrain; that the lender may, on notice to the landlord after default, remove its collateral from the leased premises; that the lender will pay for damage from any removal; and, often times, that the lender will pay rent and utilities during some time period while it is removing the property.  Landlord waivers benefit both sides.  From the lender’s perspective, it is obvious.  From the landlord’s perspective, the landlord is not generally making its credit decision based upon potential resort to the tenant’s personal property.  Therefore, since the tenant needs financing to operate its business, providing a waiver of lien is just part of the bargain.  Further, being assured of repair of damage from removal of equipment and any rental for the period of a lender’s use of the premises is a plus.

This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult legal counsel to determine how the law may apply to specific situations.