What’s the Difference between Consensual and Statutory Liens?
In commercial credit, creditors have an opportunity to secure accounts receivable by establishing their right to certain collateral. Then, in the event the debtor fails to pay, the creditor can leverage the collateral for payment. Depending on the goods or services provided, the collateral may be personal property or real property, and both could be secured by a lien. There are two types of liens creditors may use: consensual or statutory. The primary difference between consensual and statutory liens is that one requires consent and the other arises automatically from law or statute.
UCC Filings Are Consensual Liens
A properly perfected UCC filing benefits creditors that provide equipment, inventory, and consigned goods. To perfect the security interest the debtor must execute a Security Agreement. This Security Agreement grants the creditor a security interest in the goods/services, as noted in the collateral description within the agreement, in the event the debtor defaults or files for bankruptcy protection.
The key for consent lies within the text of the Security Agreement. The Security Agreement should include a granting clause, whereby the debtor grants the creditor a security interest in the debtor’s collateral. In other words, when your customer signs a Security Agreement, they are saying it is OK for you to proceed with filing a UCC (lien) to secure your rights to the described collateral. Your customer is providing you with consent.
Please note, if your Security Agreement does not include a granting clause, it isn’t a Security Agreement. Having your customer sign an agreement that is missing a granting clause means your customer isn’t providing consent for you to file the UCC on the collateral.
The granting clause does not need to be fancy or embellished with extraneous words or phrases. An example of a granting clause is: “In consideration for the extension of credit, Debtor hereby grants a security interest in and assigns to the Secured Party the Collateral described in paragraph II below to secure payment and performance of all debts, liabilities and obligations of Debtor of any kind whenever and however incurred to Secured Party.”
Mechanic’s Liens Are Statutory Liens
If a creditor is furnishing materials or services to the improvement of real property, the creditor may be entitled to a mechanic’s lien. The mechanic’s lien process does not require the debtor’s approval or consent, because it is a matter of law or statute. Each state’s statute may vary, but they generally permit the filing of a mechanic’s lien on the real property in the event the creditor isn’t paid. Hence, statutory lien.
Although it does not require your customer’s permission, there may be prerequisites to filing a mechanic’s lien. The most common prerequisite? Timely serving a preliminary notice upon parties within the ladder of supply. In fact, 33 states have a statutory preliminary notice that should be served prior to filing a mechanic’s lien on a private project.
It’s also imperative you carefully monitor the statutory deadlines. Statute will dictate when the notice and/or mechanic’s lien must be filed and failing to comply with statute could invalidate your lien. You certainly wouldn’t want to jeopardize your payment security.
Different, But Equally Beneficial
There are strict rules when filing a UCC or mechanic’s lien, as they are different types of processes with their own idiosyncrasies. But both processes can assist creditors with securing payment or recovery – in some cases, creditors can take advantage of UCCs and mechanic’s liens at the same time for the same debtor. Bonus? NCS specializes in both & is ready to assist you!