Leverage Tenant’s Personal Property to Protect Bottom Line

In recent years, filling space at shopping centers with smaller, non-traditional tenants rather than large national stores (many of which are suffering financially) has been a successful strategy for landlords. If you’re taking advantage of this rapidly growing trend, you should be aware that, while in the short term it can boost profits, it carries a substantial amount of risk in the long term. That’s because many smaller tenants often have a limited—or sometimes nonexistent—financial track record.

So how can you protect your interests against the variables associated with small or new tenants? Get your tenant to agree to give you the right to file a contractual lien against its personal property.

To secure your right to file a contractual lien against your tenant’s personal property, consider adding a lease clause that includes several key items, one of which is a description of the lien coverage. Make sure to get the right to place a contractual lien on all of the tenant’s property and inventory kept in the space, by being specific. You can do this by including any and all improvements, equipment, furniture, inventory, fixtures, and merchandise. Also, don’t forget to place a lien on the proceeds from the sale of any merchandise, inventory, fixtures, and equipment. Some states may have laws that allow tenants to bypass an owner’s contractual personal property lien, so make sure that the tenant waives its right to claim any exemptions to your lien.

A second way to protect yourself is to make sure that the clause prohibits property removal by the tenant. With the exception of the sale of merchandise and inventory during the “ordinary course of business,” require the tenant to get your consent before it moves any of its personal property, inventory, or merchandise from the space. For example, if the lien covers merchandise, the tenant could sell it to customers who wanted to buy it. But if the tenant was selling merchandise in an effort to liquidate the business and move, it would need your approval. But to be fair, consider granting the tenant’s request to be able to remove fixtures and equipment without your consent for the purpose of upgrading, repairing, or replacing them.

For four more key items to include in your contractual lien clause that will allow you to go after the tenant’s personal property if it decides to shirk its lease obligations or default entirely, see “Use Contractual Lien Provision When Leasing to Uncertain Tenants,” available to subscribers here.