How do I perfect a security interest in fixtures under the UCC?

Secured lenders sometimes don’t know how to perfect their filings in fixtures: the method you choose decides both the priority you take and when the filing ends. Do it wrong and you might end up subordinate to claims from real estate recordholders, or your filing may expire when you think it should still be good.

Here’s what we’ll cover: the three ways to perfect, how priority works, how to figure out the lapse dates, and finally how to perfect when the debtor is a transmitting utility.

Perfect Fixtures

What is a fixture? You could memorize the definition in Article 9 (Section 9-102(a)(41)), if you want to, but I won’t. A fixture is a personal property thing that is so affixed to a particular building or land so that real property law creates an interest in the goods themselves. In other words, fixtures are partly personal property and partly real property.

When we perfect fixtures, since fixtures are half personal property, half real property, the perfection process is also a hybrid. And that means you can use a form of financing statement, that we call the UCC financing statement, or a recorded mortgage to perfect fixtures. The location, where you file the statement, can be in the central indexing system, the land records, or both.

Article 9 gives us three options. The first is to file the financing statement, the UCC financing statement, in the filing office specified by Section 9-501(a)(2) of the UCC, generally the secretary of state’s central index, or the state UCC index. This way of filing we call “a filing on fixtures.”

Second, a fixture filing in Article 9 is not the same as a filing on fixtures. Just because it’s also called a filing doesn’t make it the same as the first method to perfect fixtures. In 9-102(a)(40), a fixture filing is defined as a financing statement on fixtures (present or future) that complies with 9-502(a) and (b).

What else do you have to do when you file to perfect fixtures? 9-502(a) tells us the minimum we have to include for every financing statement; 9-502(b) adds the four real-estate items that make sure the statement can be indexed in the land office: collateral type (that the collateral is a fixture), the real-estate records where it can be found, the land description, and the record owner, if the debtor has no recorded interest. This looks like a boilerplate list, but it isn’t.

Where are you going to file this fixture filing? The default, given us in 9-501(a)(1), is the place where a mortgage on that land would be filed. But the lone exception is if you’re in Louisiana, where the rule is to use the regular UCC index (the 9-502(a) and (b) requirements still apply).

Here’s the last way to perfect: record a mortgage that covers the fixtures. This is the usual choice if the collateral is mostly land and buildings and not just fixtures. If the mortgage meets 9-502(c), it acts as a fixture filing. The requirements are similar to those for a fixture filing.

Priority

The method of perfection has an effect on who’s claim comes first. Section 9-334 governs that fight.

Filing a financing statement on fixtures in the central index only isn’t the way to have any confidence. Because under section 9-334(c), a filing on fixtures in the central index only generally loses to the real estate owners and encumbrancers on the land (other than the debtor). Almost any interest recorded on the land beats it. The only thing it wins over is other filings in the central index. The best way to describe its priority is to say it’s bad.

So it’s almost always true that to beat the claims of land owners and encumbrancers, you need to file a true fixture filing on the collateral, not a filing on fixtures. (A true fixture filing, of course, is by definition filed in the land records.) Barring exceptions, it beats any filing on fixtures.

A fixture filing made before an inconsistent real estate interest is recorded prevails over the real estate interest. 9-334 generally gives priority from earliest to latest recorded.

But there’s an exception, 9-334(d). That exception lets a purchase-money security interest in the fixtures win out over the earlier-recorded landowners and encumbrancers of the land only if all of three things happen:

• First, that the debtor has a recorded interest in the land or has possession.
• Second, the interest is purchase-money.
• Third, that it was perfected by fixture filing, either before the goods become fixtures or within 20 days thereafter.

Recorded mortgages that encumber fixtures are governed by the same fixture-filing priority rules (with whatever variations), generally speaking, since under 9-502(c), it has the same effect as a fixture filing.

Lapse Dates

This is supposed to be the easy part. Does the record lapse at all? It depends what kind of record it is.

The financing statement is good for five years from the filing. 9-515(a). And a continuation statement, filed in the last 6 months before the lapse, is good for another 5 years and so on. If it is filed too late, it won’t be effective, and that perfection that you thought was good for another 5 years lapses on you.

But maybe you’re looking at a state that has one of the narrow exceptions to lapse: transmitting utility debtors, manufactured-home deals, public-finance deals. Otherwise, five years and that’s all.

If you’ve got a recorded mortgage covering fixtures, there’s no five-year lapse. At all. Instead, under 9-515(g), the record stays effective as long as the mortgage itself stays on the books, which is until the mortgage is released or satisfied or otherwise ends. You don’t have to file a continuation for a recorded mortgage.

It’s common for people to think that a fixture filing in the land records never lapses. That’s wrong. The financing statement lapses under 9-515(a), in five years, whether it’s in the central index or the land records. OK, so what do you do? You put the five-year lapse date on the fixture filing in the land office, too, and you continue it on time too. It’s no better than the regular financing statement. The location doesn’t buy you any more time. At all.

The other mistake is to believe that a recorded mortgage needs a continuation statement. It does not. A financing statement and a recorded mortgage are not the same. The mortgage can act like a statement but it’s not one. And the rules for the mortgage are not the same as the rules for the statement.

The land recording office may know a few tricks about their own land records, but what they don’t know about Article 9 is a lot. The folks in the land records office are used to the basic facts of their line of work: most of what they record doesn’t lapse. It stays good until satisfied. So their staff can be confused about the UCC lapse dates. Don’t rely on their answer.

One last thing: transmitting utility debtors. They are not like other debtors. For them, both the place to file and the length of filing are different.

By default, a filing on a transmitting utility debtor is to be made in the central office that 9-501(b) designates. That’s usually, as it says, the central office of the state where the debtor is located, which is generally the central UCC office. And that filing is, says 9-501(b), also a fixture filing. Neither the text nor the comment says otherwise. So it’s easy to go with just a state-office filing.

But for fixtures, since fixtures are partly goods, partly real estate, the law of the state where the fixtures are located controls perfection by fixture filing, under 9-301(3)(A). File in the state where the fixtures are located, and in its central office for 9-501(b) filings. If you’re perfecting in fixtures, and the fixtures are located in another state, a filing in the state where the debtor is located won’t protect you.

Note that a financing statement describing the debtor as a transmitting utility doesn’t lapse, just like a mortgage. 9-515(f). It’s good until you decide to terminate it and so file. Until then, keep it on the index.

So pick your method knowing what it does to priority and duration: the usual way to get first priority on fixtures is with a fixture filing or a mortgage in the land records.

Make sure your tickler or tracking system matches these rules and you’ll almost never forget to continue on time.

To manage the risk on collateral, you have to do two things with fixture interests: Know the local rules in the county where the collateral is, because local detail is hard; and know the priority rules. (Whichever of the three ways you perfect on fixtures, you’ll have to get the details of the state rules right.)

Whatever you do to keep compliant, ensure you stay compliant. It’s the first and best defense against ever losing perfection or priority. The more proactive your approach, the less disputes you will have. Real-time visibility of your entire portfolio can help your team.