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Banks and Landlords: Competing Lien Interests

By John G. Kelly

Banks that provide financing for commercial tenants and the real estate landlords for those same tenants both want additional security in the tenant's personal property located at the premises. The interests of the landlord and the lender are in conflict. The landlord is looking to secure the tenant's rental obligations by taking a lien against the tenant's fixtures, inventory and equipment located in the space. These items may be particularly valuable in the case of certain retail, restaurant or industrial tenants. At the same time, the tenant's lender, providing tenant improvement and/or working capital financing, desires a security interest in the same property.

Depending on the state, a landlord's lien may be created under statutory lien rights, the common law or by contract under the terms of the lease. Such a lien gives the landlord the right to levy the property located at the demised premises of a defaulting tenant. The typical smaller retail or office tenant does not heavily resist its lender's request for a security interest in its personal property or resist the landlord's request for a landlord lien, but instead attempts to facilitate the competing interests of both the landlord and the lender at the time of lease negotiation. However, some national retailers with stronger credit may have the leverage to obtain a waiver or subordination of their landlords' lien rights.

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