Farm Landlords Should Consider Perfecting Landlord's Lien
It’s almost March 1, which means that many farm leases around Iowa are beginning anew.[i] This key date is a good time to remind landlords of several available options to reduce the risks associated with nonpayment.
Payment Up Front
The easiest way landlords can protect themselves from nonpayment is to require full payment up front. If the tenant doesn’t pay, the landlord has time to terminate the lease and negotiate a lease with a new tenant for the same crop year. When this arrangement is not possible, however, the landlord should consider the landlord’s lien.
Iowa Code § 570.1 provides that a landlord “shall have a lien for the rent upon all crops grown upon the leased premises, and upon any other personal property of the tenant which has been used or kept thereon during the term and which is not exempt from execution.”
This means that a lien automatically attaches to the farm products grown on the property by virtue of the landlord leasing the property to a farm tenant. The landlord has a statutory lien by operation of law. This does not mean, however, that the lien is perfected. Only a perfected landlord's lien is prioritized ahead of other secured or lien creditors.
To perfect the landlord’s lien, the landlord must file a UCC-1 financing statement with the Iowa Secretary of State. Iowa Code § 570.1(2); Iowa Code §554.9310. If that perfection occurs when the tenant takes possession[ii] of the property or within 20 days after the tenant takes possession, the Code gives the landlord’s lien a special priority position ahead of previously perfected security interests and ahead of many other previously perfected statutory liens. Specifically, the Code provides that, subject to a few exceptions:
A perfected lien in the farm products has priority over a conflicting security interest or lien, including a security interest or lien that was perfected prior to the creation of the lien under this section.
In other words, if landlord files a UCC-1 within 20 days of possession, the landlord’s lien will have priority over a conflicting security interest held by a bank or an agricultural supply dealer’s lien perfected before March 1. Under the statute, only a properly perfected harvester’s lien[iii] or a perfected commodity production contract lien[iv] would have priority over a properly perfected landlord’s lien on crops.[v] But remember, this special priority is only available if the UCC-1 is filed by the time the tenant takes possession of the property or within 20 days thereafter.
Although a perfected lien does not guarantee that a landlord will recover his payment due (bankruptcy, for example, can throw a wrench into the recovery), it does provide the maximum legal protection available to a landlord. To perfect a landlord’s lien, a landlord takes the following steps:
- File a standard financing statement (UCC-1) with the Iowa Secretary of State. Instructions for filing this form online can be found on the Secretary of State’s website.
- Include a statement on the UCC-1 that the filing is "for the purpose of perfecting a landlord’s lien."
- It costs $20 to file the UCC-1 to perfect the lien.
- According to Iowa Code §570.1, this financing statement is effective "until the termination statement is filed." Because Iowa Code §554.9515 requires a continuation statement after five years for security interests, it may be best practice to file a continuation statement after five years if the landlord's lien remains in place. This may help avoid confusion or disputes.
- No signatures are required to file the landlord's lien.
A landlord’s lien continues for one year after rent is due or six months after the end of lease, whichever is first. Within 20 days after a landlord who has filed a financing statement receives a written demand from a tenant, the landlord must file a termination statement if the lien has expired or the tenant is no longer in possession of the property and the tenant has performed all obligations under the lease.
Landlords wishing to ensure the protection of the landlord’s lien should file the UCC-1 each new crop year, unless the lease is a written, multi-year lease. Even though such filing may not be required to perfect the lien for an auto-renewed lease or a new lease between the same parties, prudence likely dictates yearly filing until Iowa law on this subject becomes clearer.
Article 9 Security Interest
Although the Iowa Code gives special priority to a landlord’s lien, a landlord is not precluded from also seeking a standard consensual security interest in the crops grown on his or her rented ground. This may provide additional protection for the landlord, particularly in the event of a tenant bankruptcy or where the farm products subject to the lien end up in another jurisdiction.
It is important to note, however, that a consensual security interest in farm products is not granted the priority of a landlord’s lien. In other words, first to perfect generally wins. To acquire a consensual security interest in the farm products grown or raised on the rented ground, the landlord must have the tenant sign a security agreement, which can be part of the lease. A UCC-1 is then filed to perfect the security interest. To ensure that the security interest is effective against “buyers in the ordinary course,” a landlord acquiring a security interest must comply with the Farm Products Rule, which, in Iowa, requires direct notice to all purchasers of farm products. Without this notice, an elevator, for example, purchases the grain free and clear of the security interest. The holder of a perfected landlord’s lien is not required to comply with the requirements of the Farm Products Rule.
In addition to seeking payment up front and perfecting the landlord’s lien and the Article 9 security interest, landlords may also wish to include a few additional protective terms in their leases:
- Require that the tenant won’t sell any crops subject to a lien or security interest without the landlord’s permission
- Require the tenant to provide a list of potential buyers of the crops
- Require the tenant to include the landlord as a payee on checks if the crops are sold (Note: It is theft for a tenant, with an intent to defraud, to sell grain subject to a landlord’s lien for unpaid rent, without the written consent of the landlord.)
[i] Iowa farm leases generally begin on March 1 and terminate on March 1. Iowa Code § 562.5.
[ii] Iowa Code § 570.1(2(b) states that the lien may be perfected “when the debtor takes possession of the leased premises,” suggesting that the lien may be perfected before the debtor takes possession. However, Iowa Code § 554.9509(1)(a) states that a UCC-1 can be filed only for agricultural liens that “have become effective” unless the tenant authorizes the filing in an authenticated record. Consequently, the landlord should file the UCC-1 between March 1 and March 20
[iii] Iowa Code ch. 571.
[iv] Iowa Code ch. 579B.
[v] The statute also provides that a Mechanic’s Lien, a Customer Cattle Feedlot Lien, and a Veterinarian’s Lien have priority over the landlord’s lien; these liens would have priority over a landlord’s lien in livestock where the landlord, for example, leases a pasture.
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