UCC Filing: Streamlining the Restaurant Sale

Jimmy Carey Commercial Real Estate

What is a UCC Filing?

A Uniform Commercial Code (UCC) filing is a legal form that a creditor files to give notice that it has or may have an interest in the personal property of a debtor (an entity that owes a debt to the creditor). This form is part of a national uniform law governing commercial transactions and is critical in secured transactions. The UCC filing serves as a public notice by the lender to declare its rights to potentially obtain the debtor’s collateralized assets in case of default.

For those in the restaurant and hospitality industry, where assets often serve as collateral for loans, understanding the implications of UCC filings is particularly important. Whether you’re a seasoned business owner or new to the industry, being aware of these legal considerations is crucial for a smooth business operation and a successful sale.

When a restaurant or business is up for sale, and the seller has received financial support through the Paycheck Protection Program (PPP) or an Economic Injury Disaster Loan (EIDL), UCC filings associated with these loans can have significant implications for the sale process. A UCC-1 filing acts as a public notice that a lender has a secured interest in the business’s assets. These liens must be resolved for the sale to proceed without encumbrances.

How UCC Filings Affect Business Sales When it comes to selling a business, UCC filings can introduce complexities. Here’s how:

Discovery of Existing Liens

During the sale process, a due diligence check may reveal existing UCC filings against the business’s assets. These liens can slow down or complicate the sale process, as any potential buyer would want to ensure that the assets being purchased are free of encumbrances.

Impact on Business Value

Existing liens can also impact the valuation of a business. Potential buyers may view UCC filings as a risk, potentially leading to reduced offers for the business.

Negotiation Complications: The presence of liens can complicate negotiations with potential buyers. They may request that these liens be resolved before proceeding with the sale, adding an additional step to the process.

How Attorneys Handle UCC Filings in Business SalesThe process of addressing UCC filings typically involves several steps, often handled by attorneys:

Review and Verification

Attorneys first review the UCC filings to verify their validity and understand the specifics of the liens.

Negotiations with Creditors

In some cases, attorneys may negotiate with creditors to resolve these liens. This could involve paying off the outstanding debts or negotiating a release or subordination of the lien.

Preparation of Legal Documents

Attorneys prepare the necessary legal documents to either remove the lien (upon debt clearance) or secure an agreement from the creditor to release the lien upon the sale.

Filing of Termination Statements

Once a lien is resolved, attorneys file a UCC-3 Termination Statement. This document indicates that the lien has been satisfied and the creditor no longer has a legal interest in the assets.

Continuous Communication

Attorneys keep all parties informed throughout the process, ensuring transparency and smooth progression towards the sale.

The Process to Clear UCC Filings for Closing

To clear UCC filings for a business sale, the following steps are generally taken: Conduct a UCC Search

A thorough search is conducted to identify all active UCC filings against the business.  Assess and Prioritize Liens, determine which liens need to be addressed and in what order, based on their impact on the sale.

Clear the Liens

This involves either paying off the debts or negotiating with the creditors. Payment plans may also be an option in some cases.

Obtain Release Documents

Once a lien is settled, obtaining a release document from the creditor is crucial.

File Necessary Documents, filing UCC-3 Termination Statements with the appropriate state office to officially remove the lien from public records.

Final Review

Before closing the sale, a final review ensures that all UCC filings have been appropriately cleared.

A Key to Navigating UCC Filings, Expert Legal Guidance

The role of attorneys in this process cannot be overstated. Their expertise in negotiating with creditors, preparing and filing the appropriate legal documents, and ensuring compliance with all relevant laws is indispensable. Attorneys act as navigators, steering the business through the often-complex legal landscape of UCC filings, ensuring that all obligations are met and that the business’s assets are free from encumbrances at the time of sale.

Landlords and Equipment

When a landlord provides financing for equipment or includes equipment as part of a commercial lease agreement, they may have a vested interest in ensuring that their investment is protected. One way to secure this interest is through a UCC-1 financing statement, which establishes the landlord’s legal claim to the equipment in question.  The process begins with the lease agreement. It must explicitly state that the landlord retains a security interest in the equipment. This situation typically arises when the landlord either finances the equipment for the tenant’s use or includes the equipment as part of the rental property.

To perfect this interest and alert any third parties to their claim, the landlord must file a UCC-1 financing statement with the appropriate state filing office, which is usually within the Secretary of State’s office where the property is located. The UCC-1 form requires detailed information, including the names and addresses of the debtor (the tenant) and the secured party (the landlord), as well as a comprehensive description of the equipment serving as collateral. It’s important to note that the UCC-1 form must be authorized by the debtor, affirming their consent to the secured interest.

Once filed, the UCC-1 financing statement acts as a public declaration of the landlord’s secured interest in the equipment. This filing is particularly critical in situations where the tenant may default on their lease or face bankruptcy. The filed UCC-1 gives the landlord priority over other creditors when it comes to reclaiming the equipment or recouping the value of their interest. The effectiveness of a UCC-1 filing   typically spans five years from the date of filing. To maintain their secured interest beyond this period, the landlord must file a continuation statement before the five-year term expires.

If a situation arises where the tenant defaults on the lease, the landlord, as the secured creditor, has the right to enforce their security interest. This enforcement may involve repossessing the equipment. However, the landlord must follow a specific legal process, which includes providing notice to the tenant and allowing them an opportunity to remedy the default.

Be Ready, Be Proactive, Hire a Real Estate Agent & Attorney

For business owners contemplating a sale, it is advisable to address any UCC filings well in advance. This proactive approach not only simplifies the sale process but also enhances the business’s appeal to potential buyers. It’s a demonstration of good financial stewardship and operational transparency, qualities that are highly valued in the business world.

If the seller has a PPP loan that is expected to be forgiven, the lien may still affect the sale. The forgiveness process is not immediate, and the UCC filing remains until the Small Business Administration (SBA) formally forgives the loan. Consequently, this can delay the closing as buyers typically require clear assets. In contrast, EIDLs, which are not forgivable, must be repaid in full or assumed by the buyer, with lender approval. Buyers may be reluctant to take on this debt, which can complicate and extend negotiations.

In summary, UCC filings can profoundly influence the sale of a restaurant or any type of business. Addressing these filings is essential for a smooth transition of ownership and maintaining the business’s value. While Jimmy Carey Commercial Real Estate does not provide legal advice, they offer crucial support to sellers throughout the transaction process. They assist in organizing documentation, coordinating with legal professionals, and ensuring sellers are well-prepared for sale, facilitating a streamlined restaurant sale and tackling UCC filings and efficient closing process.

For a FREE Consultation contact us at 678-406-8478 or jimmy@jimmycareycre.com