8/24/2015 Perfection of a Security Interest in Fixtures

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Perfection of a Security Interest in Fixtures

By Paul Hodnefield, Corporation Service Company

Article 9 of the Uniform Commercial Code (“UCC”) offers lenders three different methods to perfect asecurity interest in fixtures. It is important for lenders to understand the characteristics of each,because the choice of perfection method affects both the priority and duration of the security interest.This article explains the UCC fixture perfection options and the effect each has on priority and lapsedates.

The first perfection method is the “fixture filing.” A fixture filing is a UCC financing statement filed inthe county real estate records where the related real property is located. It must satisfy the samesufficiency requirements as state-level UCC filings. In addition, the record must indicate that it is to befiled in real estate records, indicate that it covers fixtures, describe the real property to which itrelates, and, if the debtor does not have a recorded interest, identify the record owner of the property.

Once filed, a fixture filing takes priority over later recorded real estate interests in fixtures. If filed toperfect a purchase-money security interest, the fixture filing can take priority over earlier recordedinterests as well.

A fixture filing is effective for five years from the date of recording. The effectiveness can be extendedfor additional five-year periods by filing continuation statements.

When continuing a fixture filing, lenders must beware of a common trap. Some county recordingoffices confuse real estate recording rules with those applicable to UCC records. Consequently, theseoffices may claim fixture filings do not lapse and might even reject continuation statements.

Rest assured, the five-year effective period for fixture filings is uniform nationwide. The lender mustalways submit a continuation statement to continue a fixture filing. Failure to do so will cause thefixture filing to lapse, regardless of what the recording office says.

Another method for perfecting a security interest in fixtures is by filing a state-level financingstatement that includes fixtures within the collateral description. This method is really nothing morethan a normal UCC filing in the central index where the debtor is located. The financing statementmerely needs to satisfy the basic requirements for sufficiency of a financing statement.

Just like a fixture filing, the state-level UCC record is effective for five years from the date of filing.The effectiveness can be continued for additional five-year periods as necessary.

The state-level UCC record has one important limitation. The general UCC rules apply for determiningpriority in relation to competing interests filed at the state-level and certain lien claims. However, asecurity interest perfected by a state-level UCC filing is subordinate to any interest recorded in the realestate records, including fixture filings.

Finally, a security interest in fixtures may also be perfected by recording a record of mortgage. Theterm “record of mortgage” is defined to include most records that could create a real estate interest infixtures. It is first and foremost a real estate record, but can be effective for UCC purposes if it meetsthe content requirements for a fixture filing.

Unlike the five-year effectiveness given to UCC records, a record of mortgage is effective until eithersatisfied or it lapses by its own terms. It is not necessary or effective for the lender to file a UCCcontinuation statement.

The priority rules for a record of mortgage are the same as for a fixture filing. Once recorded, therecord of mortgage will take priority over later recorded real estate interests that cover fixtures.

8/24/2015 Perfection of a Security Interest in Fixtures

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A lender is not limited to just one method of perfection for fixtures. Although generally not necessary,all three methods can be used for the same transaction. A lender will commonly rely on a record ofmortgage to perfect its security interest in both the real property and fixtures. Some lenders also liketo record a fixture filing as “belt and suspenders” insurance.

A fixture filing alone is often used when the security interest covers fixtures, but not the rest of therelated real property. Lenders also use fixture filings to perfect purchase-money security interestswhen financing goods that will become fixtures on the debtor’s property.

Because of the priority limitations, lenders generally should not rely solely on a state-level UCC filingto perfect a security interest in fixtures. Most commonly, the state-level UCC filing covers “fixtures”simply as part of a blanket lien. When fixtures have significant value, the prudent lender will make afixture filing to preserve its priority with respect to real estate interests.