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If you have ever owned any large assets, real estate or others, you are most likely familiar with the concept of a lien, but you might not realize that liens can impact your ability to negotiate for a commercial property you want and need to start or grow your business. This guide offers in-depth information about liens including different types of liens, the ways in which a particular type might affect you, and what to do if you have a lien against your business or your landlord, or potential landlord, has a lien against the property space you wish to lease.
When an individual or a business borrows money from a lender, they must provide security interest for their loan in most cases.
A lien is the notice, or instrument, attached to assets used a collateral for any debt owed. The lender holds the lien on the property until the debt is paid in full.
In the event that the borrower defaults on the loan, the lien allows the lender to sell the underlying property to recoup the money they borrowed. If you aren't familiar with the language of liens, one of the easiest examples to understand the process is financing the purchase of a new car.
If you go to your local car dealership, find the car you want to purchase, get approved for financing, sign the paperwork, and drive off of the lot, the financing company will place a lien on your vehicle.
Once you've made all the monthly payments to which you agreed, the financing company will remove the lien and you will own your vehicle "free and clear."
When you borrow money for your business, you might not think about the repercussions of liens.
Similarly, if you are leasing office, retail or industrial space from a property owner who doesn't follow good business practices or gets in a disputes with other business owners, your business can be affected by a lien. When you put the time and effort in to understand how liens can affect your business, you can save time, money, and frustration.
Multiple types of liens can impact your business in a negative way; however, the way in which you might be impacted depends on whether the lien was placed on your business or on the property which you have leased, or you want to lease. Here are the types of liens you might have to deal with as a business owner who leases space from another entity and steps you can take to deal with each type of lien.
Each state has laws which allow contractors, subcontractors, and suppliers to file liens against property owners who don't pay for completed work or delivered products. This provides security for those who undertake this type of work.
Here is an example to illustrate how a mechanic's lien works and how you might be impacted:
The Jane Smith Contracting Services example refers to a mechanic's lien which occurred for nonpayment.
There can be some shady property owners and property mangers, but the vast majority of the time a mechanic's is not a result of simple nonpayment; it often stems from some sort of dispute.
Here are some examples of situations which might lead to a dispute over work and payment:
If your landlord or potential landlord has tax debt, the federal, state, and local government taxing authorities can place a property tax lien on the property, his or her vehicles, and his or her accounts receivables. Like a mechanic's lien, the government taxing entity must send a demand for payment and a Notice of Intent to inform the property owner that they will file a tax lien if payment doesn't occur with in a certain time period.
Once the property owner pays their back taxes, the lien will be removed; however, the government can foreclose on properties for nonpayment of taxes.
When you lease business space, you might assume that you don't have to worry about any type of lien.
Tax liens are pretty straightforward.
The government cannot place a lien on the real estate which you lease to run your business, but they can put a lien on you accounts receivable, your office equipment and other large assets, and your company vehicle(s), if you don't pay your taxes.
When it comes to mechanic's liens, things aren't as clear, and it varies by state.
Contractors want protection when doing work or providing services for tenants who need improvements on their business. If the property owner contracted the work, he or she faces a lien for unpaid work. The landlord is responsible for ensuring a general contractor, subcontractor, or supplier gets paid for the goods and services they provide.
On the other hand, if you contracted the tenant improvements, the contractor can legally place a mechanic's lien against your interest in the property. In these situations, the law argues you acted on behalf of the property owner, or as the agent of the property owner.
The contractor will likely try to place a lien against your interest and the property owner.
If you find yourself in this situation, you need to read your lease carefully. If it states you are responsible for improvements, you will need to pay for them to avoid a mechanic's lien.
If, however, your landlord is responsible for improvements, the contractor cannot place a lien on your business interests for unpaid work. It's in your best interest to consult with a real estate attorney who can protect your rights.
You can avoid a lien by getting your landlord's explicit, written permission for any improvements. When a contractor or lender refuses to remove a lien against you, it can prevent you from securing funds for your business or leasing other business space in the future. Yet, you should also remember, a mechanic's lien against your business assets is only as valuable as your assets.
All lenders must file a UCC-1 financing statement when they have a lien on the property of a debtor.
This makes it easy to search for liens against any business. Prior to leasing business or office space, you want to ensure your future landlord has no liens. In the event that a lien exists, and the creditor attempts to foreclose you will be forced to vacate if you don't want to pay your landlord's debt. In some cases, the property might be put up and sold off at an auction.
The Secretary of State where your business is located gives business owners the opportunity to perform a lien search and look for any UCC-1 forms which have been files against a business. In some cases, you might have to pay a small fee, or you can choose to use a professional lien search performed by a title company, law firm, or credit bureau.
The following states offer free lien searches through their websites: Alaska, Arizona, Colorado, Florida, Iowa, Kentucky, Massachusetts, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, and Rhode Island.
Finding a lien on a property you are interested in leasing isn't always a deal breaker.
You might find the debt has been satisfied, and the records have not been updated. If you really like the space, you should have a discussion with the property owner to find out the circumstances of the lien.
If it has been paid, he or she can contact the lender and ask for the lien to be removed. In some cases, an existing lien might be an opportunity for negotiation. For example, you can offer to pay the property owner's debt in exchange for a significantly lower monthly base rent.