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Tenants’ Treasures Become Landlords’ Nightmare

Posted in Real Estate Development

With the current economy, many commercial landlords are facing not only the burden of defaulting tenants, but frequently must handle the added mess of disposing of a tenant’s personal property left behind the premises once the tenant vacates or abandons the premises.  When a tenant leaves personal property on premises after a tenancy is terminated (including vacating after a notice to quit has been delivered or an unlawful detainer action), unless the landlord has reason to believe that the personal property is “lost”, the landlord must dispose of the personal property as “abandoned property” in accordance with a rigid statutory framework in the California Civil Code; in a commercial context, sections 1993 through 1993.09 apply (the “Civil Code”).

Some of the more burdensome requirements under the Civil Code include the requirement that: (i) the landlord store the personal property in a safe place, under lock and key, (ii) the landlord must provide the tenant and any other party with a possible ownership interest in the property (such as an equipment lender) with specific written notice required under the Civil Code and (iii) if personal property remains unclaimed following proper notice, any personal property valued at more than $750 must be disposed of through a public, competitive bidding auction (personal property valued at less than $750 may be disposed of in any manner).

However, if the lease contains a “landlord lien” provision, the landlord may be able to sell the personal property without regard to the strict requirements of the Civil Code.  But, the lease must expressly grant the landlord a lien on the personal property; California law does not provide an automatic landlord lien as is the case in some other states.  A typical landlord lien provision will provide that (i) tenant grants to landlord a lien upon all of tenant’s personal property as security for tenant’s payment of rent and other amounts due under the lease, (ii) the lien is subordinate to any security interest given by tenant to any seller of tenant’s property, and (iii) upon tenant’s default, landlord may enter upon the premises and take possession of tenant’s property and may sell all of any part of tenant’s property at a public or private sale, with our without notice to the highest bidder and on behalf of the tenant.

Many items of personal property are purchased with financing from commercial lenders who will require a priority security interest in the personal property.  Because acquisition of the personal property will presumably enable a tenant to operate its business and generate funds, and thus pay rent, many landlords are willing to subordinate their landlord lien to a secured lender’s interest.  However, this article does not discuss the various issues that may arise when a lender requests a landlord subordinate their express lien rights in a lease or even waive their lien rights.  Suffice it to say, landlords should consider such requests very carefully and consult with legal counsel should questions arise.

As noted above, when the landlord has reason to believe that a piece of personal property is subject to a security interest held by a third party (including through a UCC-1 search), the landlord should give notice to the secured party pursuant to the notice requirements in the Civil Code.  Depending on the value of the personal property, many holders of security interests may abandon any interest in the personal property and free the landlord to sell or dispose of the property as they see fit.  Alternatively, if the secured party does not abandon their interest, they will be obligated to retrieve the property in the time period prescribed in the Civil Code, thus removing both the personal property from the premises and the hopefully the landlord’s headache.

Careful consideration should be given prior to disposing of tenant’s personal property, even that personal property which is subject to a landlord lien.  Express landlord liens are just one way to mitigate the damages landlords face when a tenant experiences financial trouble, including defaulting on their lease and abandoning their premises.