What this is: UCC fixture filings are essential for lenders to secure their interests in goods that will be attached to real property (fixtures). When drafted and filed correctly, these filings perfect a lender’s security interest in the fixtures and establish priority among other secured creditors and subsequent buyers of the real estate.
What this means: In this article, we will explore the definition of “fixtures” under Article 9 of the Uniform Commercial Code (UCC), the significance of securing interests in fixtures, the various filing options and key considerations when filing, and finally, how priority is determined for fixture filings and best practices for maintaining them.
Understanding UCC and Fixture Filings
The UCC is a comprehensive set of laws that regulate commercial transactions in the United States. “Fixtures” is defined by UCC Section 9‐102(a)(41) as “goods that have become so related to particular real property that an interest in them arises under real property law.” It refers to items that are originally personal property but become attached to and part of real property in such a way that they are considered a permanent part of the property. The determination of whether an item is a fixture depends on factors such as the manner of attachment, the intent of the parties, the item's adaptability to the use of the property and any agreement between the parties involved.
What is an Example of a Fixture?
An example of a fixture is a commercial air conditioning unit installed on the roof of a retail building. This air conditioning unit is considered a fixture because it is permanently affixed to the real property and is used as part of the building’s HVAC system. Unlike movable personal property, fixtures are integrated into the structure and typically become part of the real estate, which is why they often require special consideration in legal and financial transactions.
The Legal Framework: UCC Article 9
UCC Article 9 governs secured transactions. It provides a framework for the creation, perfection, priority and enforcement of security interests in personal property or fixtures, thereby facilitating credit and commercial transactions.
Filing Requirements
When filing a UCC fixture filing, it is crucial to consider the following requirements to ensure the filing is effective and enforceable:
- Debtor’s legal name: Confirm that the debtor’s name is accurate and matches their “legal name” as defined under UCC Article 9.
- Secured party’s name: The name of the secured party or the name of the secured party’s representative.
- Collateral: Describe or indicate the collateral covered by the financing statement in accordance with UCC Section 9-504 and state that it covers fixtures.
- Ensure the filing indicates that it is to be filed (for record) in the real property records.
- Legal description of the real property: Include an accurate legal description of the real property to which the fixtures are related (sufficient to give constructive notice of a mortgage under the law of the state if the description were contained in a record of the mortgage of the real property).
- Record owner: If the debtor does not have an interest of record in the real property, the name of the record owner is required.
- Correct filing location: File the fixture filing in the real property records of the county where the real estate is located and, if the collateral includes both personal property and fixtures, also in the central UCC filing office where the debtor is “located” (as per UCC Article 9’s definition of debtor location).
The Process of Filing: Perfecting a UCC Security Interest in Fixtures
A secured party has 3 distinct methods for perfecting a UCC security interest in fixtures under Article 9, as follows:
1. File a UCC1 Financing Statement
The secured party can file a financing statement with the office specified by UCC Section 9‐501(a)(2), which is typically the central UCC index maintained by the secretary of state in most jurisdictions. This method is used for fixtures that are still classified as personal property (e.g., a warehouse full of air conditioning units not yet attached to any property). The financing statement must include the debtor’s “name” (as defined in UCC Section 9-503) and address, the secured party’s name and address and a description of the collateral (as per UCC Section 9-504).
2. File a UCC Fixture Filing in the County Records
A “filing on fixtures” should not be confused with a “fixture filing,” which is the second method for perfecting a UCC security interest in fixtures. According to Section 9‐102(a)(40), a “fixture filing” involves filing a financing statement for goods that are or will become fixtures, meeting the requirements of Section 9‐502(a) and (b). To create a fixture filing, the secured party uses the national UCC form along with an addendum. In addition to including the debtor’s “name” (as defined in UCC Section 9-503) and address, the secured party’s name and address and a description of the collateral (as per UCC Section 9-504) this filing must also provide a legal description of the real property to which the fixtures are related, the name of the record owner of the real property and ensure that the appropriate boxes are checked. Under Section 9‐501(a)(1), this filing should be made at the local office in the county where the real property is located.
3. Record a Mortgage That Covers the Fixtures
The third method for perfecting a UCC security interest in fixtures is by recording a mortgage that covers the fixtures. This approach is typically used when the collateral primarily involves land and buildings rather than just fixtures. If the mortgage record meets the requirements of Section 9‐502(c), it serves as an effective financing statement, similar to a fixture filing. The requirements under Section 9‐502(c) are similar to those for a fixture filing.
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Impact on Business Transactions
Why is it Important for Fixture Filings to Be Properly Drafted and Filed?
Properly drafted and filed (recorded) fixture filings are essential for secured transactions involving collateral that includes fixtures. Not only are they generally necessary in order to perfect a secured lender’s interest in fixtures used as collateral, but they also establish priority among secured parties. They can also influence the terms and amount of the loan, help resolve disputes and clarify issues in future property transactions.
Conflicting Security Interests in Fixtures
The priority of conflicting security interests in fixtures is a key issue in secured transactions, especially when multiple creditors claim the same fixtures. Priority determines which creditor has the superior right to the fixtures if a default or foreclosure occurs. According to UCC Section 9‐334, priority is generally given to the first party to file a legally sufficient fixture filing or otherwise perfect its interest, placing them ahead of subsequent creditors.
Some Exceptions
There are some exceptions to the general rule, however. In particular, under certain circumstances, purchase money security interests (PMSI) in the fixtures, and prior mortgages and construction mortgages on the real property to which the fixtures are related, can impact a secured party’s priority over fixtures. It is important to review UCC Article 9 and applicable real estate laws in the appropriate state to understand these potential exceptions to the general rule.
Best Practices When Filing a Fixture Filing
Because the line between personal property and fixtures can be blurry, following best practices when filing a fixture filing is essential to ensure that the security interest is properly perfected and legally enforceable. Consulting with legal counsel can help ensure compliance with UCC Article 9 and relevant state or local laws, avoiding errors and confirming that all requirements are met. Additional best practices include ensuring that the filing information is accurate and complete and that it is submitted in the correct jurisdiction and filing office.
Your Fixture Filing Has Been Filed Successfully... What’s Next?
Once a fixture filing has been filed successfully, it is important to monitor and maintain the filing. Best practices include filing continuations prior to fixture filing lapse dates and amending filings when information has changed.
Under Section 9‐515(a), a filed financing statement is effective for 5 years after the date of filing. The secured party may extend the effectiveness of the financing statement for additional 5‐year periods by filing a continuation statement within 6 months before the lapse date of each 5‐year period. The general 5‐year effectiveness rule does not apply to a record of mortgage. Under Section 9‐515(g), a record of mortgage filed as a financing statement filed as a fixture filing is effective until it is released, satisfied or its effectiveness otherwise terminates.
The Importance of Reviewing and Updating Fixture Filings
Regularly reviewing and updating fixture filings is essential for ensuring that a secured party's interest in fixtures remains effective and enforceable. Over time, various changes can occur that may impact the validity or priority of a fixture filing, and failing to address these changes in a timely manner can lead to significant legal and financial risks. If there are changes to the debtor's name, the collateral description or the secured party, an amendment to the fixture filing should be timely filed to keep the information current and the filing perfected.
Conclusion
By gaining a solid understanding of the rules and best practices regarding fixtures as collateral, secured lenders are better equipped to secure their interests, establish their priority, manage legal and financial risks and ensure compliance with legal requirements related to fixture filings.
To assist you with the complexities of securing an interest in fixtures, it is recommended that you look for a service company that has a deep understanding of the critical aspects of filing perfection, timeliness and maintaining your priority.
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What is a PMSI filing?
Section 9-103(b)(1) of the Uniform Commercial Code (UCC) states that “a security interest in goods is a purchase money security interest … to the extent that is the goods are purchase-money collateral with respect to that security interest.”
Simply put, a PMSI is created when a creditor loans money to a debtor to finance the purchase of certain goods. In return, the debtor grants the creditor a security interest in those goods. For more information on this topic, see our article, Unpacking PMSI: What is a Purchase Money Security Interest?
What is a UCC termination?
When a debtor has satisfied all debts owed and/or collateral has been returned to the lender, the lender typically files a UCC amendment to terminate the UCC financing statement that established the lender’s priority over the collateral. Refer to our article, UCC Termination Statements Part 1: Preparing and Filing, for more information.
What is an effective UCC search and lien portfolio management strategy for searchers?
Searchers: When your UCC search uncovers termination, examine it and the underlying financing statement carefully to determine if the termination extinguishes the rights of all secured parties of record, or only some. In some instances, further inquiry of the parties involved is necessary to determine authority of the filer and other particulars. See our article, UCC Termination Statements Part 2: Public Record and Maintaining Priority.
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.
