Opinions on a Security Interest clause

Hello. My family owns a commercial rental property through a LLC. We leased this property to another LLC in 2010 and they were good tenants - until this year. They started falling behind in the rent obligation. My step-dad, being a overly trusting man, took them at their word that they would catch up. Well that didn't happen and they decided to close up shop on September 7 of this year owing us over $12,000.

When they closed, they left furnishings, equipment, inventory and the like. Their lease has a Security Interest and it says:

Landlord shall have, and Tenant hereby grants to Landlord, a security interest in any furnishings, equipment, fixtures, inventory, accounts receivable, equipment Leasehold interest and other personal property of any kind belonging to Tenant, or the equity of the Tenant therein, on the Leased Property. The security interest in granted for the purpose of securing the payment of rent, all other charges, assessments, penalties and damages herein covenanted to be paid by Tenants, and for the purpose of securing the performance of all obligations of Tenant hereunder. Upon Tenant's default or breach of any covenant of this Lease, Landlord shall have all the remedies available under the laws of the State of Michigan, including, without limitaition, the right to take possession of the above-mentioned property and dispose of it by sale in a commercially responsible manner, upon five (5) days' prior written notice to Tenant of such sale. Tenant hereby agrees to execute and deliver financing statements from time to time at Landlord's request for the purpose of perfecting and serving notice to third parties of the security interest herein granted.

My step-dad's lawyer is now telling us the contents of the building belong to the lessor and we have no recourse to sell this property to secure the past-due amount they owe.

I was under the impression that once two people sign a contract - or two LLC's sign a contract - it's binding. But the lawyer said something about filing the value of the contents with the county and to be honest, I didn't quite understand what he was saying and he didn't seem like he wanted to put it in laymans terms for me. Now one thing I know the Tenant's never did was deliver financing statements even when we requested them. And they were requested frequently once they started getting behind in their rent.

So do we have any options?

TIA.

Audiyoda:

they left furnishings, equipment, inventory and the like

Have you considered the possibility that they didn't/don't actually own these furnishings, equipment, etc outright?  What are the chances that the equipment and furnishings were rented/leased, just like they leased your building? 

Audiyoda:

My step-dad's lawyer is now telling us the contents of the building belong to the lessor and we have no recourse to sell this property to secure the past-due amount they owe.

Is this the LLC's attorney, step-dad's personal attorney, whatever?  Explain that person's involvement and knowledge of the LLC's business. If you don't agree with that lawyer's assessent, consult with another.

Audiyoda:

So do we have any options?

Sue the former tenants.

Makes sense IF your tenant leased his equipment from others  --you might be able to get some compensation out of the folks who seek to recover equipment--I doubt you are required to give it free storage room......but it may depend on your barter skills and how much the equipment is worth...

Yes, I have considered everything/somethings in there may not be owned by the lessor - however that wasn't really my question. But I'll ammend my question to furnishings, equipment, inventory, and any other property owned by the lessor.

The attorney is the LLC's attorney. We hire him on a as-needed basis. He's fairly knowledgeable of the LLC's buisness. And I am consulting with another, that's why I posted here first. Testing the waters to see what other attorney's may think.

Thanks.

The lease mentioning them putting up the stuff as security doesn't mean your father's LLC has a perfected security interest such that the landlord is even free to hold stuff hostage if the tenant wants to claim it didn't leave it behind but that your father/the LLC changed locks/whatever.  That's what the attorney was likely referring to.

"Tenant hereby agrees to execute and deliver financing statements from time to time at Landlord's request for the purpose of perfecting and serving notice to third parties of the security interest herein granted."

Ah, but evidently the landlord didn't pursue refusal to do so as a breach.

As already mentioned, it's not at all clear that the property in question was actually owned by the tenant (and there may not be much in the way of accounts receivable to go after even had the security interest been perfected).  If not, failing to ascertain that (and making sure tenant agreed not to put the stuff up as collateral for any loan in future) before bothering to lease the place to them was a mistake.

It's also not clear whether your father ever gave them proper default/breach notice under the lease, but I presume so.  And did your father/the LLC get a personal guaranty from individuals who were members/owners of this tenant LLC?  I hope so, if the company fell on hard times.

"My step-dad's lawyer is now telling us the contents of the building belong to the lessor and we have no recourse to sell this property to secure the past-due amount they owe."

Read this again; it's garbled.  Your father is the "lessor" in the scenario you paint, so ... please clarify.  You also do not identify who you mean by "we".

"But the lawyer said something about filing the value of the contents with the county and to be honest, I didn't quite understand what he was saying and he didn't seem like he wanted to put it in laymans terms for me."

You don't say who you are in this equation, but the lawyer's almost certainly talking about the landlord LLC not having perfected its security interest in the stated personal property/equipment/inventory.

"Now one thing I know the Tenant's never did was deliver financing statements even when we requested them."

And your father/the LLC did ... what in response?  What's the consequence in the lease provisions for refusing to do so and did the landlord declare a breach?

"So do we have any options?"

That's not a question reasonably put to strangers, I'm afraid.  Obviously, the landlord is free to sue the tenant for breach of the lease.  Twelve grand isn't a ton of money, so I wouldn't spend a ton of money on an attorney to pursue even if the lease calls for the tenant to cover attorney fees in the event of breach.

Audiyoda:

My step-dad, being a overly trusting man, took them at their word that they would catch up

Thousands of tales of woe start with "I trusted."

Life lesson from the school of hard knocks there.

Audiyoda:

My step-dad's lawyer is now telling us the contents of the building belong to the lessor

I assume you mean the people who leased the equipment to the tenant.

If so, then how does your step-dad's lawyer know that?

Audiyoda:

I was under the impression that once two people sign a contract - or two LLC's sign a contract - it's binding.

Yes, it's binding. But it's not binding on third parties who may have a superior lien on the equipment.

Audiyoda:

Now one thing I know the Tenant's never did was deliver financing statements even when we requested them. And they were requested frequently once they started getting behind in their rent.

It's possible that the financing statements (UCC-1 or equivalent) were recorded by the people that leased the equipment to the tenants. In which case your step-dad could have just as easily looked up the tenant on the county recorder website, which is possibly what the lawyer did and found out that the items were encumbered.

Audiyoda:

So do we have any options?

Sure.

Sue the former tenants.

But even a successful lawsuit doesn't mean that your step-dad will ever see any of the money.

One other thing I suggest is that your step-dad or his lawyer send written notice to the owners or lessors of the equipment that the equipment has been abandoned by the tenant and that if not picked up by a deadline date it will be considered abandoned by the owners or lessors after which time your step-dad will be free to sell the stuff. The lawyer ought to be able to draft that properly.

Sorry, updated reinterpretation of original poster's line about property belonging to "lessor".  Now if poster is saying it is known that this property itself is leased to tenant by owner vs. owned by tenant, it naturally makes sense that the attorney would say the landlord can't take that stuff because it ain't owned by the tenant.  This logic is why I presumed the language on this topic was garbled (I don't recall poster mentioning elsewhere in post that the subject personal property was itself leased).

My appologies for not being clear. The contents of the building are owned by the tenant. Whether or not the tenant has leased/rented any/all of those contents is unknown.

Tenant has been served with a notice to quit, court papers have been filed for a judgement to evict.

If the tenant has been served with notice to quit --you need to sort out  how to speed it up and make sure the valuable equipment is NOT taken out at night or whatever  --my commercial leases essentially allow me to lock up the premises if tenant defaults on rent  --this is not residential due process stuff --reread your lease and make sure you are moving as fact as you can

Audiyoda:

Whether or not the tenant has leased/rented any/all of those contents is unknown.

Then why did the lawyer say you couldn't sell them?