When Creditors Lien on a Lease, the Traditional Lien Process Does Not Apply

When beginning the process of extending credit to a customer in construction, several caveats must be considered: Which state laws apply to the job, who are the people involved in the transactions, etc. In the process of obtaining job information and beginning to file a lien, oftentimes creditors forget a crucial element: whether the lien must be filed on a lease or a property, and whether the creditor is eligible to lien on a lease.

A leasehold interest, contrary to a standard project with just a general contractor and owner, involves creditors working with tenants who have bought materials for the property owner's establishment. These customers perform enhancements to a building they do not own, and they are either forced to upgrade the premises at the request of a landlord, or in certain cases, upgrade without the permission of the property owner. Should a creditor file a lien involving a tenant, the lien will be placed on the lease the tenant has signed rather than on the property itself.

As a creditor considers filing a lien on a lease, National Sales Representative for NACM's Secured Transaction Services Chris Ring said creditors should consider three core questions: Is the property truly a leasehold; was the landlord aware of the improvements and were the improvements commissioned; and can a creditor file a lien on a lease in the state? Since the lien will be on the lease, the project can be private or public.

"It all depends on how aggressive the liens on leasehold interest statutes are in that state. And basically, whatever a lien on a leasehold interest is, it's not a lien on the property; it's a lien on the lease," Ring said. "What it doesn't do is create security. It creates pressure on both the tenant and the landlord to get that lien released to allow those lease payments to flow smoothly. It's really a psychological advantage at that point."

As with any construction job, Ring said many of the issues around leasehold liens can be mitigated by diligently collecting information on the job. If a creditor relies on a third party to obtain job information, Ring said setting a threshold and certain expectations on this third party can alleviate any difficulties when filing. Once a creditor has determined a lien can be filed against a lease, the customer will likely feel pressured by the landlord to release the lien, meaning the likelihood of the creditor collecting increases.

While not immediately obvious on every project, a creditor may be doing business with a tenant of a property rather than the owner of the property. The most overt examples of a creditor needing to file on a lease rather than a piece of property emerge in projects such as chain stores in a mall or businesses in a strip mall.

"The big piece of the puzzle from a credit department perspective is setting a threshold on what questions to ask on certain jobs," Ring said. "Questions such as all jobs over $50,000 or $100,000—large projects where the sticking point can really hurt—and train personnel to ask the right questions. … The devil's in the details upfront. Set thresholds about when it's appropriate to force somebody's hand and ask that hard question, or whether to slow it down for a moment."

—Christie Citranglo, editorial associate

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Friday, 06 December 2019

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