I first need to apologize for missing a few months of my reminders. The last few months have been a perfect storm of trials for me and I always put a high priority on making sure I’m as prepared as possible. So, some of the peripheral items do get put on the back burner sometimes.
Last time, I discussed the distinctions between “fixtures” and “non-fixtures” in construction projects and also explained why this distinction is important to a contractor. I also discussed how to perfect a security interest in a non-fixture. In this article, I want to continue this series and discuss ways to perfect your security interests in fixtures and how these UCC filings help you gain priority over other potential claimants (such as banks or other lien holders).
To recap, a “Fixture” means goods that have become so related to a particular real property that an interest in them arises under the real property law of the state in which the real property is situated. In other words, fixtures are, generally, those products which are physically attached to the building. There are numerous examples of this on a construction project – carpet, tile, countertops, and bathtubs.
A party with a security interest in goods which are considered a fixture must perfect this interest by making a “fixture filing.” Such is accomplished by filing a financing statement in the county where a mortgage on the real property would be recorded. In addition to the usual requirements for a financing statement (as were discussed last time – UCC Filing – Part 1), a fixture filing financing statement must contain the legal description of the real property to which the fixture is attached.
Determining priority in relation to these types of filings can be extremely tricky. However, the general rule is that in a contest between a holder of a security interest in a fixture (i.e. you, for example) and a holder of an interest in the real property to which the fixture is attached (i.e. the mortgagor, for example), the first party to file a fixture filing or record its real property interest prevails (which would almost always be the mortgagor).
However, a contractor can prevail over a mortgagor or someone with a prior interest, in the following situations:
1. The security interest is perfected in any manner authorized by the code PRIOR to affixing the good to the property. In this case, that security interest will prevail over a real property interest if (1) the collateral is a readily removable office or factory machine; (2) the collateral is readily removable equipment that is not primarily used or leased for use in the operation of real property; or (3) the collateral is a readily removable replacement of a domestic appliance that is a consumer good.
2. A security interest in fixtures, whether or not perfected, has priority over the conflicting interest of an encumbrancer or owner if (1) the encumbrancer or owner has, in an authenticated record, consented to the security interest or disclaimed interest in the goods as fixtures or (2) the debtor has a right to remove the goods against the encumbrancer or owner. This is something that would have to be included within a security agreement contained within your contracts.
3. And, if you are not dealing with a construction mortgage but instead are dealing with a conventional mortgage or home equity line of credit (such as in remodel situations), a secured party who makes a fixture filing within 20 days after the fixture was attached to the property (i.e. you) will prevail over a real property interest in the same fixture that was recorded prior to affixation (i.e. the mortgagor).
In layman’s terms, what does this mean to you? Those services which are not the initial construction of a residential or commercial project have a high probability of falling within Exception 3, listed above. If you don’t fit into Exception 3, you can easily fit under Exception 2 and protect your interest in the fixtures you supply if you ensure that your contracts have a security agreement within the terms which is signed and consented to by all owners of the property. If you don’t fall within Exception 3 and do not have your contractual language in order, pursuant to Exception 2, the only thing you can do is see if the goods that you are providing to the Project are goods designated in Nos. 1-3 within Exception 1.
Generally, if you provide goods which can be considered a fixture to a construction project, the real point is that you can usually protect your interest but you have to have a plan, which is set prior to the delivery of the goods, as to how you are going to ensure that the goods you provide fall within one of these exceptions and, thus, have priority over other encumberances to the property.
While this might sound very complicated to a non-lawyer, this is a perfect example of why business owners should meet with their attorney, periodically, to discuss their business, what they are doing, what the business goals are, and how they can legally protect all of their interests. A lawyer can usually help make sure that your corporate formalities, contracts, employment policies, financial interests, etc. are all in order where they protect you. The real trick is seeking the advice before the problems arise!!!