By Glenn R. Reiser, Esq. February, 2005

New Jersey statutory law grants commerciallandlords limited lien rights against a tenant’sgoods and chattels located upon the demisedpremises to satisfy certain rental arrearages.Such liens do not exist at the inception of thelease agreement, but rather come into exis-tence only when the tenant defaults in itsrent obligation under the lease.

There are several scenarios where a land-lord’s statutory lien claims may conflict withthe lien claims of the tenant’s other creditors,including secured creditors, particularly in sit-uations where the tenant is insolvent.Therefore, parties negotiating commerciallease agreements, as well as vendors leasingand/or financing equipment and machinery tocommercial tenants, must be cognizant of thelandlord’s statutory lien remedies.

This article examines pertinent NewJersey laws that address landlord’s liens vis-à-vis the claims of other creditors and interestedparties of the tenant. The use of contractualprovisions to establish a landlord’s lien and anenforceable security interest is briefly dis-cussed in the context of guarding against atenant’s future bankruptcy filing.

I. LANDLORD’SLIENS IN GENERALTwo New Jersey statutes expressly give a com-mercial landlord a lien over its tenant’s goodsand chattels to the extent of unpaid rent:N.J.S.A. 2A:42-1 et seq., and N.J.S.A. 2A:44-

166. Whereas the latter statute is generallyconfined to landlord/tenant relationshipswhere the tenant uses the premises for manu-facturing purposes, the former statute general-ly applies to the standard commercial tenancy.In addition, landlord’s lien rights may arise bycontract in the lease itself.

A. N.J.S.A. 2A:42-1

A landlord’s lien arising under N.J.S.A.2A:42-1 provides the landlord with a lienagainst the tenant’s goods and chattels locatedupon the leased premises to the extent of 1year’s rental arrearages. By the statute’sexpress terms, if a tenant is in default of itsrent obligations to its landlord then any exe-cution or judgment creditor of the tenant isprohibited from removing any of the tenant’sgoods or chattels from the premises unless thecreditor pays the landlord for rental arrears

not to exceed 1- year’s rent. “The landlord’slien arising under N.J.S.A. 2A:42-1 is not alien that arises at the inception of the lease,”and indeed “is not a lien at all but rather astatutory right to preference in payment overother creditors.” Hartwell v. Hartwell Co.,Inc.,167 N.J. Super. 91, 97 (Ch. Div. 1979).

In Farmers & Merchants Nat’l Bank v.

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LANDLORD’S LIENS FOR UNPAID RENT VS. TENANT’S CREDITORS: WHO HAS PRIORITY?

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Boyman, 155 N.J. Super. 120, 124 -125 (LawDiv. 1977), the court emphasized that thestatute does not prohibit a tenant from dispos-ing of its goods and chattels, but rather pre-serves the landlord’s right to recoup a year’sworth of unpaid rent from the tenant’s goodsand chattels over the competing claims of thetenant’s execution creditors.

B. N.J.S.A. 2A:44-166

The Loft Act, N.J.S.A. 2A:44-165, et seq.,also provides for a landlord’s lien. SeeN.J.S.A. 2A:44-166. Specifically, landlord’sliens arising under the Loft Act are limited totenants operating commercial premises formanufacturing purposes. Hartwell, 167 N.J.Super. at 99, n.1. Whereas N.J.S.A. 2A:42-1provides for a landlord’s lien to the extent of1-year’s unpaid rental arrears, N.J.S.A. 2A:44-166 limits a landlord’s lien for rental arrears to6-months.

Landlords and their attorneys should bemindful of the Loft Act because a landlord’slien arising under N.J.S.A. 2A:44-166 has pri-ority over any lien or mortgage created afterthe machinery or chattels are placed in theleased premises, including priority over thelien of secured creditors whose liens were cre-ated or acquired after their machinery orchattels are placed in the premises. Hartwell,167 N.J.Super. at 99, n. 1, citing In re HollyKnitwear, Inc. 140 N.J. Super. 375, 383 (App.Div. 1976). However, the same priority ruledoes not apply to a landlord’s liens arisingunder N.J.S.A. 2A:42-1. Hartwell, 167 N.J.Super. at 99 at n. 1.

C. Contractual Landlord’s Lien

A landlord’s lien can also exist by contract.In fact, real estate leases can include expressprovisions granting the landlord a securityinterest in a tenant's personal property, evento after acquired property. Such a lease, ineffect, serves as a security agreement for thetenant's lease obligations and can be perfectedby following the rules of Article 9 of the NewJersey Uniform Commercial Code (“UCC”),including the filing of financing statements.

One requirement under the UCC is thatthe collateral must be reasonably described.A second requirement is that the lien be per-fected.Under the revised UCC, a landlordmay file an unsigned financing statement ifthe tenant authorizes the filing in the lease orhas otherwise granted its landlord a securityinterest. This allows landlords to correct priormissteps without requesting the tenant's sig-nature.

II. PRIORITY OFLANDLORD’S LIENSA. Statutory Landlord’sLiens vs. Secured Creditors

Whereas contractual landlord’s liens can beperfected under UCC Article 9, statutorylandlord's liens established pursuant to eitherN.J.S.A. 2A:42-1 or N.J.S.A. 2A:44-166 areconsidered to be outside the scope of Article9 by its express terms (Reference Rev. Article9-109(d)(1) and Former Article 9-104(b)).

A landlord’s lien established underN.J.S.A. 2A:42-1 is subordinate to a securityinterest perfected in accordance with theUniform Commercial Code. Hartwell, 167N.J. Super. at 100-101. This principle isderived from New Jersey cases decided beforeenactment of the Uniform Commercial Code(or pre-Code law). Id. (internal citationsomitted).

However, as previously mentioned, alandlord’s lien arising under the Loft Act(N.J.S.A. 2A:44-166) has priority oversecured creditors whose security interest was“created or acquired after machinery or otherchattels are placed in the premises.” Id. TheAppellate Division affirmed this principle inHolly Knitwear, 140 N.J. Super. at 387

A landlord’s lien rights under the LoftAct will inevitably impede a tenant’s abilityto obtain outside funding to run its businessand/or lease/finance expensive equipment.For this reason, it is common practice for ven-dors and equipment lessors to demand thatthe landlord execute a written agreementeither waiving or subordinating the landlord’slien claims to the lien rights of the creditorwith respect to the equipment to be placedupon or within the premises. Where a goodrelationship exists between a tenant and itslandlord, and for practical business reasons,the landlord will often execute a landlord'slien waiver thus enabling the lender or equip-ment lessor to obtain first priority lien posi-tion in the specified collateral.

B. Priority of Statutory Landlord’s Lien vs. Asset Purchasers

In Schlussel v. Emmanuel Roth Co., 270 N.J.Super. 628 (App. Div. 1994), the court heldthat a purchaser of business assets acquiredthe assets subject to the landlord’s statutorylien for unpaid rent pursuant to N.J.S.A.2A:44-165 to 2A:44-167. In Schlussel, whereit was undisputed that at the time of the assetpurchase closing the tenant owed the landlordback rent totaling $10,622.00, the court held

that as of the date the assets were transferredthe tenant’s assets were impressed with a LoftAct lien equal to the unpaid rent and the pur-chaser “took those assets subject to that lien.”270 N.J. Super. at 649 (internal citation omit-ted).

C. Priority of Statutory Landlord’s Lien in Tenant’sBankruptcy Proceedings

In the context of federal bankruptcy proceed-ings, a landlord’s statutory lien rights underNew Jersey statutory law is trumped by thetrustee’s or debtor-in-possession’s lien avoid-ance rights pursuant to 11 U.S.C. § 545(3).This Bankruptcy Code section allows thetrustee or debtor in possession to avoid astatutory lien on property of the debtor to theextent that such lien is for rent.

Bankruptcy Code Section 545(3), how-ever, does not void a trustee’s or debtor-in-possession’s obligation to pay the landlordpost-petition use and occupancy rent, whichis treated as an administrative priorityexpense under 11 U.S.C. § 503(b)(1)(A). See e.g., Zagata Fabricators v. Superior AirProd., 893 F.2d 624, 627 (3d Cir.1990); In re Cornwall Paper Mills, 169 B.R. 844, 851 (Bankr. D.N.J. 1994).

D. Priority of ContractualLandlord’s Liens in Tenant’s Bankruptcy Case

A prudent attorney representing a commerciallandlord, and anticipating the tenant’s futurebankruptcy filing, should consider including acontractual rent lien provision in the leaseagreement in favor of the landlord, since theexpress language of 11 U.S.C. § 545(3) pro-vides the trustee or debtor-in-possession withthe absolute right to avoid only statutory liensfor rent. The statute makes no reference toavoiding contractual liens for rent.

Logically, however, since a contractuallandlord’s lien is not a creature of statute andis capable of being perfected under UCCArticle 9, there is no reason why such a lienshould not survive the bankruptcy lien avoid-ance statute. Especially considering thatstate law determines lien priorities in bank-ruptcy. In fact, in Cohen v. Korol, 9 N.J.Super. 183, 187 (App. Div. 1950), whichinvolved the competing lien claims of a land-lord and an assignee for the benefit of credi-tors, the Appellate Division recognized that alandlord could exercise contractual lien rightsfor unpaid rent against the tenant’s personalproperty upon default of the tenant’s rentobligations. ■

LANDLORD’S LIENS FOR UNPAID RENT VS. TENANT’S CREDITORS: WHO HAS PRIORITY?(continued from cover)

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By Carmine LoFaro Esq. February, 2005

Expungement is defined by N.J.S.A. 2C:52-1(a) as the “extraction and isolation of allrecords on file within any court, detention orcorrectional facility, law enforcement orcriminal justice agency concerning a person'sdetection, apprehension, arrest, detention,trial or disposition of an offense within thecriminal justice system.” The expungementof records includes “complaints, warrants,arrests, commitments, processing records, fin-gerprints, photographs, index cards, “rapsheets” and judicial docket records.” N.J.S.A.2C:52-1(b). The purpose of expungement isto provide relief to the one-time offender, butdoes not allow a periodic violator of the law aregular means of expunging police and crimi-nal records. N.J.S.A. 2C:52-32. However,State v. A.N.J., 192 N.J. Super. 350 (App.Div. 1983), aff'd 98 N.J. 421 (1985), providesthat N.J.S.A. 2C:52-1 to 2C:52-32 permitsthe expungement of more than one disorderlypersons offense.

Indictable Offenses

N.J.S.A. 2C:52-2(a) covers indictable offens-es. It provides that in all cases where anindividual is convicted of a crime, and has noprior or subsequent convictions and has notbeen adjudged a disorderly or petty disorderlyperson on more than two occasions, he or shemay petition the Superior Court of the coun-ty in which the conviction was entered toexpunge his or her record after ten years passfrom the date of conviction, payment of fine,completion of probation or parole, or releasefrom incarceration, whichever is later.

Pursuant to N.J.S.A. 2C:52-2(b), recordsof conviction of the crimes of murder,manslaughter, treason, anarchy, kidnapping,rape, forcible sodomy, arson, perjury, falseswearing, robbery, embracery, or a conspiracyor attempt to commit any of the said offenses,or aiding, assisting or concealing any personaccused of the foregoing, are not subject to

expungement. Expungement shall also bedenied in the case of a conviction for the saleor distribution of a controlled dangerous sub-stance (“CDS”) or possession thereof withthe intent to sell, except when the CDS was25 grams or less of marijuana or 5 grams orless of hashish. N.J.S.A. 2C:52-2(c).

Disorderly & Petty Offenses

N.J.S.A. 2C:52-3 covers disorderly and pettydisorderly offenses. The statute provides that“[a]ny person convicted of a disorderly…orpetty disorderly persons offense [who has noprevious or subsequent conviction of a crime]or of another three disorderly…or petty disor-derly persons offenses may” petition forexpungement after five (5) years from thedate of conviction, payment of fine, comple-tion of probation or release from incarcera-tion, whichever is later. The petition is filedin the Superior Court of the county in whichthe conviction was entered. See also, Statev. A.N.J., 98 N.J. 421 (1985).

Ordinance Violations

Regarding ordinance violations, N.J.S.A.2C:52-4 provides that “a person found guiltyof violation of a municipal ordinance [whohas no prior or subsequent conviction of acrime] and who has not been adjudged a dis-orderly…or petty disorderly person on two ormore occasions, may” file a petition with theSuperior Court after two (2) years from thedate of conviction, payment of fine, comple-tion of probation or release from incarcera-tion, whichever is later.

Juvenile Delinquents

N.J.S.A. 2C:52-4.1(a) covers juveniledelinquents and provides that for the purpos-es of expungement, any act which resulted inadjudication as a delinquent shall be classi-fied as if that act was committed by an adult.Such adjudications may be expunged pur-suant to N.J.S.A. 2C:52-2, 3 or 4.

Pursuant to N.J.S.A. 2C:4.1(b), any juveniledelinquent may have his record expunged if:

1Five years has elapsed since the final dis-charge of that person from legal custody or

supervision, or five years has elapsed after theentry of any other court order not involvingcustody or supervision;

2He/she has not been convicted of a crime,or disorderly or petty disorderly offense, or

adjudged a delinquent…during the five yearsprior to the filing of a petition [for expunge-ment], and no proceeding or complaint ispending seeking such a conviction or adjudi-cation;

3He/she was never adjudged a juveniledelinquent on the basis of an act which if

committed by an adult would constitute acrime not subject to expungement;

4He/she has never had an adult convictionexpunged;

5He/she has never had adult criminalcharges dismissed following completion of

supervisory treatment program or other diver-sionary program.

N.J.S.A. 2C:52-5 provides that any personconvicted of an offense under Chapters 35 or36 of Title 2C of the New Jersey Statuteswhere the CDS was 25 grams or less of mari-juana or 5 grams or less of hashish and was 21years of age or younger at the time of theoffense may file a petition for expungement

“The purpose of expunge-ment is to provide relief tothe one-time offender, but

does not allow a periodic violator of the law a regular

means of expunging policeand criminal records.”

EXPUNGEMENT OF YOURCRIMINAL RECORD IN NEW JERSEY

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FIRM NEWSWe are pleased to announce that StacyModlin-Neglio, formerly of Mongelli &Neglio L.L.C., has joined the firm as anassociate. Ms. Neglio’s practice focuseson bankruptcy & creditors’ rights, andcommercial litigation.

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of such conviction and all records pertainingthereto after one (1) year has elapsed from thedate of the conviction, termination of parole orprobation, or discharge from custody, whicheveris later, provided that such person has not vio-lated the conditions of his probation or paroleand has no prior or subsequent violations ofChapters 35 or 36 of Title 2C, or has not hadany prior or subsequent criminal matters dis-missed because of acceptance in a supervisorytreatment program.

N.J.S.A. 2C:52-6 provides that pursuant toN.J.S.A. 2C:52-6(a), in all cases wherein a per-son was arrested for a crime, disorderly or pettydisorderly offense or violation of a municipalordinance and against whom the proceedingswere dismissed, who was acquitted or who wasdischarged without a conviction or finding ofguilt, that person may at any time after the dis-position of the proceedings, present a petitionfor expungement of such records. In such cases,there is no waiting period. Where the chargeswere dismissed following completion of a super-visory treatment program, such person shall bebarred from relief until six (6) months after the

entry of the Order of Dismissal. N.J.S.A.2C:52-6(b). Where the discharge, dismissal oracquittal resulted from a determination that theperson was insane or lacked the mental capacityto commit the crime charged, he/she is barredfrom expunging his/her records. N.J.S.A.2C:52-6(c).

Once your petition is filed, the court willenter an order setting a time not less than 35nor more than 60 days thereafter for a hearingon your expungement. N.J.S.A. 2C:52-9.Often, the court will order the expungementwithout conducting a hearing if there are noobjections from the persons or agencies notifiedand if there are no reasons as provided byN.J.S.A. 2C:52-14 for denial of relief.

Pursuant to N.J.S.A. 2C:52-15, once yourexpungement is granted by the court, all recordsspecified in the court's order shall be removedfrom the files of the persons and agencies whichhave been notified and shall be placed in thecontrol of the person designated by eachagency. This person ensures that the recordsare not released for any reason or utilized orreferred to for any purpose, the very reason why,if you are eligible, we strongly recommendexpunging your record. ■

EXPUNGEMENT OF YOURCRIMINAL RECORD IN NEW JERSEY(continued from proevious page)

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The New Jersey Law Today is published periodically byLoFaro & Reiser, L.L.P., with offices in Hackensackand Montclair New Jersey. This newsletter was creat-ed to inform clients, friends, and fellow colleagues andprofessionals of developments which impact on certainareas of New Jersey law. This newsletter is availablefree of charge to interested parties.

The articles appearing in New Jersey Law Today donot constitute legal advice of opinions. Legal adviceand opinions are provided by the Firm only uponengagement with respect to specific factual situations.

For more information about our Firm, please visit ourweb sites at www.new-jerseylawyers.com andwww.njlawconnect.com, or contact either CarmineLoFaro, Esq. at (201) 498-0400 or email at clo-faro@new-jerseylawyers.com, or Glenn R. Reiser,Esq. at (201) 498-0400 or e-mail at greiser@new-jer-seylawyers.com.

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