A. Sections 2A:42-1 thru 2A:42-3 ( Chapter 42 Lien ) Landlord s lien for rent; amount; taking goods or chattels to satisfy

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1 To: New Jersey Law Revision Commission From: Staff Re: Landlord s Lien Statutes Date: June 8, 2009 Attached is a proposed Chapter entitled Landlord Remedies (other than eviction). The Chapter includes separate sections (now designated articles ) as follows: 1. Actions for Rent or Damages 2. Distraint 3. Lien or Right to Preference in Payment for Rent 4. Actions for Destruction or Material Alteration of Rental Premises [formerly known as waste ] 5. Abandoned Tenant Property These separate articles all derive from various provisions in current Title 2A that are not now compiled together but Staff believes should be together in one place. As the Commission will see upon review of the Chapter, Staff has made significant revisions to the source provisions. The purpose of this memorandum, however, is to highlight a dichotomy in current law regarding landlord s liens that was uncovered in the course of drafting. Staff needs Commission guidance regarding the direction of the revision, as will be explained below. Current Law on Landlord s Liens Two statutes now grant landlords lien rights with regard to a tenant s personal property in order to satisfy rental arrearages. Although both provide for liens that come into existence when the tenant defaults in its rent obligation under the lease -- not upon inception of the lease -- the statutes are inconsistent. A. Sections 2A:42-1 thru 2A:42-3 ( Chapter 42 Lien ) Landlord s lien for rent; amount; taking goods or chattels to satisfy The Chapter 42 Lien provides the landlord with a lien that is actually not a lien but a right of preference over other unsecured creditors with regard to the tenant s personal property located upon the rental premises, to the extent of one year s unpaid rent. By its express terms, the statute provides that a creditor of a tenant who is delinquent in rent payments, before levying or executing upon the tenant s personal property, must pay the landlord the amount of all rent due (not exceeding one year s) or the actual amount of rent due (if less than one year s) at the time the creditor removes the personal property from the rental premises. If the tenant s personal property is taken by virtue of any execution, attachment or other process and removed from the premises, the sheriff cannot sell the property until 10 days after removal. If the landlord, before the expiration of the 10-day period, claims a fixed amount of rent arrears with the sheriff, the property cannot be sold at all unless the execution creditor 1

2 first pays to the landlord the unpaid rent due. The Chapter 42 Lien makes no distinction between residential and nonresidential premises. The statute was originally introduced into New Jersey law by the Act of March 10, 1795 (appearing in Paterson Laws but not reviewed by Staff.) The underlying policy of the statute, as explained by the court in Farmers & Merchants National Bank of Bridgeton v. Boymann, 155 N.J. Super. 120 (Law Div. 1977), is to give the landlord: a specific lien on the tenant s property located on the demised premises against all executions to the extent of a year s rent. The statute, however, does not give the landlord a lien in the ordinary and proper sense. It gives him merely the right to a preference in payment, out of the tenant s goods and chattels on the demised premises, over other creditors, including those holding executions, who are not lienholders.[citations omitted.] The statute leaves the tenant at perfect liberty to dispose of his goods and chattels absolutely, yet as between the landlord and other creditors of the tenant, when such creditors come armed with any process whatsoever, the statute is the landlord s shield. It absolutely forbids the removal of the tenant s goods until the rent then due, subject to the one-year limitation, is paid. Although the landlord has no lien by which he can enforce the payment of rent, but must institute proceedings in his own behalf in order to accomplish that, the law preserves to him, as against every other process, the retention of the goods upon the premises until the rent be paid. 155 N.J. Super. at See, also, Hartwell v. Hartwell Co., Inc., 167 N.J. Super. 91, 97 (Ch. Div. 1979) (the lien arising from this statute is not a lien at all but rather a statutory right to preference in payment over other creditors. ); Franz Realty Co. v. Welsh, 86 N.J. Eq. 228, 230 (E & A 1916) (the court, considering the Landlord and Tenant Act (of 1910), stated that the right of the landlord... is in the absence of an actual distress, not a lien at all.... At most it was but a statutory right, possibly in the nature of an inchoate lien, maturing in effect into an actual lien only under certain conditions prescribed by the statute. ) The current Chapter 42 Lien does not refer to or even mention the distraint remedy. Moreover, current Chapter 42 Lien and the current distraint statute appear respectively at 2A:42-1 et seq. and 2A:33-1 et seq., while their predecessor statutes were located together in the same title and chapter 1. The court, in Farmers & Merchants Bank, N.J. Super. 120, 125, citing to 1 Section 2A:42-1 was formerly R.S. 2:58-1, and section 2A:33-6 was formerly R. S. 2: Interestingly, in 1795, An act concerning landlords and tenants passed the Legislature on March 10, 1795 (Paterson s Laws, p. 163) while legislative regulations on the subject of distress were embodied in An act concerning distresses, which passed on March 16, The court in Ryerson v. Quackenbush, 2 Dutcher 236, determined that these acts of March 10 th and March 16 th, 1795, were to be regarded as contemporaneous, and to be construed, each in relation to the provisions of the other, so that, it was said, the removal by the sheriff of a stranger s goods from the demised premises would not render the sheriff liable to the landlord, because the latter had no right to distress in such goods, and it was adjudged that a levy and sale of the tenant s goods upon the premises, without actual removal, did render the sheriff liable as for a removal, because, by terminating the tenant s title, it effectually defeated the landlord s right of distress, and thus deprived him of that priority over execution creditors which the statute was intended to give. See, Van Horn v. Goken, 41 N.J. L. 499 (1879.) 2 In Farmers & Merchants Bank, after the tenant had defaulted on a note, the bank obtained a writ of attachment against the tenant s property. On February 28, 1977, a receiver was appointed over the attached property remaining on the rental premises. The receiver sold the property in August of that year. Relying upon the Section 42 Lien, the landlord argued it was entitled to payment for all outstanding rent and other expenses before the attached goods could be removed from the premises. The bank argued that the statutory preference for unpaid rent ceases when attachment occurs and the landlord is entitled only to unpaid rent as of the date of attachment. Applying the 2

3 In re Waldstein Clothing Co., Inc., 24 F. Supp. 747 (D. N.J. 1938), explained the interplay between the lien right and the distraint remedy as follows: Prior to the issue of an execution, the landlord could distrain for all unpaid rent and collect the same. When, however, the tenant s goods were taken in execution by a creditor, the landlord s right to interfere with such execution was by the statute taken away, but, in view of such deprivation, the statute gave the landlord a lien for any sum of money due for rent. But in recognition of the execution creditor s right it limited the lien of the landlord s priority to the measure of a single year s rental. See also, Schwartz v. Maguire, 130 N.J. Eq. 152, 154 (Ct. of Chancery 1941), modified on other grounds, 131 N.J. Eq. 578 (E. & A. 1942) (where the receiver appointed for the tenant corporation sought to set aside a distraint, the court said [a] landlord s claim for unpaid rent is not a lien... but will ripen into a lien when a distraint is actually made. [citation omitted.] A landlord s lien, so perfected, has priority to the claims of general creditors provided the distraint was made prior to the receivership. ) In a dispute between a perfected security interest and a statutory landlord s lien under 2A:42-1, generally the Chapter 42 Lien is subordinate to a security interest perfected in accordance with the UCC. (The 2000 revision of the New Jersey UCC expressly excludes the landlord s statutory lien (other than an agricultural lien) from the application of the UCC and does not incorporate any provision regarding the priority of landlord s statutory liens over other liens; provisions regarding the priority of landlord s statutory liens over other liens have been included in the UCCs of only a minority of jurisdictions.) B. Sections 2A: through 2A: ( Loft Act Lien ) Right of lien for unpaid rent; priority The Loft Act Lien is a true lien that has priority and is paramount to any title, lien interest, mortgage, judgment or encumbrance created or acquired after the machinery or other chattels are placed in the rental premises. The priority extends for not more than six months (this is consistent with the distraint provisions), but the Loft Act sets forth a process for the sale of the liened property and the disposition of the sale proceeds that differs from the distraint provisions. The lien attaches without any requirement for perfection by steps taken to enforce the lien. See, In re Holly Knitwear, Inc., 140 N.J. Super.375, 382 (App. Div. 1976), The Loft Act Lien s reach is limited to machinery and other chattels in or on rental premises consisting of a mill, factory or loft or any portion thereof that is used by a tenant for manufacturing or other purposes. The term other purposes is not defined. The Loft Act was enacted in 1933, at a time when it had been the practice of some manufacturers to place mortgages on their machinery and other chattels to the great prejudice of principles earlier stated, the Farmers & Merchants Bank court held that the landlord is entitled to the full amount of rent unpaid and owing from June 1, 1977, the date the rent first was unpaid up to February 28, 1977, the date the receiver was appointed. 3

4 their landlords to whom rent was due.... The 1933 statute was substantially reenacted as part of the revision of 1937 (R.S. 2:60-230) and as part of the 1951 revision of the laws relating to the administration of civil and criminal justice. Gibraltar Factors Corporation v. Slapo, 23 N.J. 459 (1957), appeal dismissed, 355 U.S. 13 (1957). In upholding the constitutionality of the Loft Act, the Gibraltar court further explained that [w]hen the Legislature passed the 1933 enactment it evidenced its belief that there was an evil of sufficient magnitude to warrant the exercise of its police powers for the protection of landlords of manufacturing establishments against subsequently created chattel mortgages. In the absence of anything in the record to indicate the contrary we assume that its belief was well grounded in fact and that its classification was not unreasonable. 23 N.J. at 463. The effect of the Loft Act, however, is that if the tenant were to fall behind in the payment of rent, the tenant, thereafter, would not be able to give good title with regard to any personal property at the rental premises, whether sold or mortgaged. The Loft Act Lien would take priority over any other interest in the personal property so long as the rent remained unpaid. Staff s Proposal Regarding a Landlord s Statutory Lien Staff believes the Loft Act Lien, which had such a very specific purpose when enacted, has little relevance today. The statute is now rarely cited. The only recent case discussing the Loft Act Lien is Schlussel v. Emmanuel Roth Co., 270 N.J. Super.628 (App. Div ) There the court rejected the argument of the purchaser of the tenant s assets, that the landlord s sole remedy for its right to lien was sale of the tenant s property. The Schlussel court determined that the undisputed amount of unpaid rent and other charges was $10,622 at the time of transfer of the tenant s equipment to the purchaser s new location. It also determined that upon the date of the transfer of the tenant s equipment, the equipment was impressed with a lien equal to that amount and Novtex [the purchaser] took those assets subject to that lien. Interestingly, the Schlussel court also cites to both In re Holly Knitwear and Hartwell for the proposition that the Loft Act Lien is not actually a lien at all but rather a statutory right to preference in payment over other creditors. This evidences either the court s error in interpreting the statutory lien law, or more likely, its confusion between the Chapter 42 Lien and the Loft Act Lien. In the proposed revision, Staff eliminates the Loft Act Lien entirely and creates a new provision, LT:6-4.1 et seq., which is derived from the Chapter 42 Lien. The new provision, though preserving the landlord s right to preference, also clarifies two principles: first, that a landlord s lien for rent attaches upon distraint and, second, that the landlord s right to a preference in payment has the power of distraint when the landlord notifies the enforcement officer of the landlord s claim for rent arrears. The new provision applies only to nonresidential premises since the distraint process, having once applied to both residential and commercial rental premises, now only applies to commercial rental premises. 4

5 Finally, LT:6-4.4 expressly provides that it does not preclude the negotiation in the lease itself of a security interest, which, if perfected in accordance with the UCC at the time of commencement of the lease, would afford the landlord a contractual lien with priority over most other liens. The contractual lien permitted by this section serves in place of the Loft Act Lien. Staff seeks the Commission s view on whether to retain the Loft Act Lien in some form in the revised statute. The source statutes for LT:6-4.1 et seq. as well as the Loft Act Lien provisions are set out below. Source Provisions Chapter 42 Lien 2A: Landlord's lien for rent; amount; taking goods or chattels to satisfy No goods or chattels whatsoever, in or upon any real property leased for any term of life or lives, year or years, at will or otherwise, shall be liable to be taken, by virtue of any execution, attachment or other process, unless the party suing out the same shall, before the removal of such goods or chattels from the premises by virtue of such process, pay to the landlord of such premises all rent, not exceeding 1 year's rent, due for such premises at the time of the taking of such goods or chattels by virtue of such process, or which shall have accrued up to the day of the removal of the goods and chattels from the premises. If by the terms of the tenancy, the day of payment of the rent shall not have arrived, a rebate of interest shall be made on the sum not payable. If the arrears of rent shall exceed 1 year's rent, the party at whose action such process is sued out may, upon paying the landlord 1 year's rent, proceed to execute his process. The sheriff or other officer shall levy and pay to the plaintiff, as well the money so paid for rent as the money to be made by virtue of such process. 2A:42-2. Levy subject to landlord's lien; time of sale; notice If any goods or chattels, in or upon any real property as provided by section 2A:42-1 of this title, shall be taken by virtue of any execution, attachment or other process and removed from the premises, the same shall not be sold by the sheriff or other officer so taking and removing them until 10 days after such removal, and not then unless the party at whose action such goods or chattels are so taken shall, before the sale thereof, pay to the landlord of such premises, such sum as he may be entitled to receive for rent under the provisions of said section 2A:42-1, provided the landlord shall, before the expiration of the 10 days above-mentioned, give notice to the sheriff or other officer holding such process of the amount of rent in arrear, and claim the same. Such notice may be served by delivering the same to the sheriff or other officer, or by leaving a copy thereof at his usual place of abode. 5

6 Loft Act Lien 2A: Definitions As used in this article: "Rentor" includes a person, partnership and corporation who may rent a mill, factory or loft or any portion thereof, to another for manufacturing or other purposes. "Rentee" includes a person, partnership and corporation who may rent space for manufacturing or other purposes. "Owner" includes a person, partnership or corporation having or acquiring title to property herein referred to or having or acquiring a legal or equitable interest in the same. 2A: Right of lien for unpaid rent; priority A rentor shall be entitled to a lien on machinery and other chattels to the extent of the rentee's interest therein for the amount of unpaid rent, from the date the rent is unpaid. Such lien hereby created shall have priority and be paramount to any title, lien, interest, mortgage, judgment or other encumbrance created or acquired after machinery or other chattels are placed in the premises. Such priority shall extend only to the amount of unpaid rent for not more than 6 months. 2A: Sale to meet lien; notice; publication When a rentor has a lien upon the machinery or other chattels of any rentee for unpaid rent, and the amount due shall remain due and unpaid, either in whole or in part, he may expose or cause to be exposed such machinery or other chattels for sale, and sell the same free and clear of such liens and encumbrances, to which the lien of the rentor is given priority by section 2A: of this title, at public auction, upon notice of sale being published 2 times for 2 consecutive weeks, once in each week, preceding the day of sale, in a newspaper published in the county in which such machinery or other chattels are located and notice of sale being posted in 5 or more public places in such county, one of which shall be in the municipality in which such machinery or other chattels are located, within 15 days but not less than 5 days, before the sale. A copy of the notice shall be mailed to the owner, if known, at least 5 days before the day of sale, at his last known post-office address. 6

7 2A: Disposition of proceeds of sale The proceeds of the sale under section 2A: of this title shall be applied: a. To the payment of the reasonable and necessary expenses of such sale, and next b. To the payment of the unpaid rent for which the rentor has a lien, and next c. To the payment of liens or encumbrances which are subordinate to the lien of the rentor in the order of their priority. The balance if any shall be paid to the rentee, or the whole balance if any may be paid into the superior court. 7