Question: I’m having trouble getting a customer to pay me on a large rental, and I want to consider filing a mechanic’s lien, but I’m not sure where to start. I’m wondering what the process is, whether it’s going to be helpful, and whether it’s even legal.
James Waite’s Answer:
Mechanics’ liens can be immensely valuable collection tools for rental operators, but each state has adopted specific rules regarding how, when and where they can be used. This article focuses primarily on mechanics’ liens filed on real property by rental operators who: (a) have rented equipment that has been used to alter or improve such real property (whether or not owned by their direct customers); (b) have not been paid as provided under their rental contract(s); and (c) feel the need to assert additional leverage in order to secure payment.
- What Is a Mechanic’s Lien?:
A mechanic’s lien is a legal claim (sometimes referred to as a “security interest” or an “encumbrance”) on privately held (i.e., non-governmental) real or personal property (“real property” being land, buildings and other improvements to real estate; “personal property” being effectively everything else, including vehicles, machinery, tools and personal effects).
Mechanics’ liens on “real property” are typically filed in the public real property records of the county in which the property is located, and they serve as “clouds” on the title to such real property until foreclosed or released. The existence of a mechanic’s lien can make it difficult or impossible for the owner(s) of the real property to sell it or use it as collateral for a loan. Thus, a mechanic’s lien can create enormous collection leverage for the rental operator who filed it. But be careful! Laws tend to be strict, and improper filings can result in waived claims and/or litigation against the rental operator.
Note: Mechanics’ liens generally cannot be filed against government-owned property, remedies for non-payment of amounts due under construction and related contracts being most commonly available under the payment bonds required under the Federal “Miller” Act and various State “Little Miller” Acts. This makes it important for rental operators to find out early in the rental process whether their equipment will be used on a public or private project.
- Who Can File a Mechanic’s Lien?:
It varies by state, but virtually all of them now permit “suppliers of labor, materials and/or services” in connection with the alteration or improvement of real estate to file a mechanic’s lien (yielding a question in some states, such as Arkansas, Delaware, Florida, Hawaii, Illinois, New Hampshire, North Dakota, South Dakota, Tennessee, Vermont, West Virginia, Wisconsin and Wyoming regarding whether “rented equipment” should be included in the definition of “materials” and/or “services”).
Helpfully, an increasing number of states now specifically permit the filing of mechanics’ liens for the “reasonable rental value of rented equipment” (or language to that effect), including Connecticut, Kentucky, Massachusetts and Nebraska (though a question remains in these states as to whether an “equipment lessor” or a “supplier to a supplier” would be directly entitled to file a mechanic’s lien).
Other states, including Georgia, Idaho, Iowa, Louisiana, Maine, Mississippi, Missouri, Montana (somewhat vaguely), Nevada (for rentals of more than $500), New Jersey, North Carolina, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Texas, Utah, Virginia and Washington, specifically extend their statutory protections, and rights to file mechanics’ liens, to suppliers of rented or leased equipment (subject to certain statutory requirements, limitations and deadlines. Importantly, many states’ statutes restrict lien rights on residential property more rigidly than they do on commercial property, making it important for rental operators to learn (among other things) what type of project their equipment is being used for.
- Where Must It Be Filed?:
Generally, a mechanic’s lien claim must be filed in the appropriate public records office of the state and county in which the real property is located (again, usually subject to strict timing and notice requirements).
- When Must It be Filed?:
State statutes vary with respect to the time within which a mechanic’s lien must be filed, but virtually all have limits (usually between two and six months after either provision of the equipment or completion of the project). These limits are strictly enforced in most states, making it imperative for rental operators to move quickly if a lien filing becomes necessary (particularly with respect to residential construction projects; see Note at the end of Paragraph 1 above).
- How Can it be Helpful?:
Mechanics’ liens can be immensely helpful to rental operators in at least two ways: (i) Mechanic’s lien statutes typically entitle the lienholder to foreclose on and sell the subject property (or have a court do so), and apply the proceeds to payment of the lien claim; and (ii) because they serve as “clouds” on title, they tend to motivate real estate owners to: (a) pay the rental operator directly (remembering that the existence of a lien can make it impossible for the real estate owner to sell or obtain a loan on the liened real property); and/or (b) threaten to sue recalcitrant contractors, thereby motivating them to pay off the lienholder(s) (often before they pay others, such as those parties who failed to timely and properly file liens).
- Where Do I Start?:
It is critical to obtain the necessary information for filing a lien before the rental commences. After the fact (usually, when the customer hasn’t paid for 30 to 60 days), it may be impossible to: (a) locate the customer (or for that matter, your equipment); or (b) get the customer to provide the information you need to file a lien (by then, the customer generally knows what’s coming, lacks the funds necessary to pay all of its subcontractors and suppliers, and wants to avoid angry calls from real estate owner-customers, not to mention lawsuits, meaning he will avoid your calls and likely refuse to provide the necessary information).
On the bright side, since the financial crisis of 2009-2012, contractors and real property owners have largely come to understand the need for preparation on the part of rental operators (making it easier to ask what were, at one time, uncomfortable questions regarding projects, project owners, general contractors, etc.). Unfortunately, however, most rental operators still don’t have an established process for obtaining the information necessary to file a lien, should doing so become necessary. Moreover, training employees to ask the right questions and obtain that information as part of the rental process can be difficult. Consequently, I recommend you start by creating a list of the information you will need to file a mechanic’s lien, and then create a form your employees can easily fill out (or require your customers to complete), at least with respect to large and/or long-term rentals.
A Short To-Do List for Rental Operators
Following is a brief list of things you can do to protect yourself and make it easier to file a mechanic’s lien, should you find it necessary:
- Identify and create a written/typed list of the information you will need in order to file a mechanic’s lien (or make a claim on a Miller Act or Little Miller Act bond) in your state;
- Create a “fill-in-the-blank” form that can be completed on each large and/or long-term rental (I qualify this requirement with “large and/or long-term” because many rental operators will find it burdensome and unnecessary in connection with short-term and/or small equipment rentals);
- Familiarize your employees with the value of, and need for, obtaining mechanic’s lien information on every rental over a given dollar amount;
- Review the information with your employees, and when a lien filing becomes necessary, inform them of its progress as well as the results (this tends to enhance understanding of the value of obtaining the information in the first place, making it more likely that sales- and counter-people will collect it);
- Vigorously pursue your lien rights (remembering that strict notice and time limits may apply); and
- Review and update your rental contract. For example, including a provision in your rental contract granting you, the rental operator, an express lien right may prove particularly valuable in those states that have not yet clarified whether rental operators are entitled to liens. This is far easier, and certainly less expensive, than hiring an attorney or collection agency to pursue recalcitrant customers, who will almost certainly be less willing to pay you if they know you haven’t filed, or don’t have the information necessary to file, a valid mechanic’s lien.
Mechanics’ liens and threats to file them, once thought of mostly as largely the province of contractors, have gone mainstream, and as a result, have become valuable collection tools for rental operators. Start with obtaining the information required to file a lien when the rental commences (if you wait until payment is overdue, obtaining that information may be impossible), and vigorously pursue your rights when payments become delinquent, remembering that, in most cases, your lien rights will be entirely surrendered if you delay providing notices and/or completing the necessary filings beyond the statutory deadline(s). This is, of course, yet another example of how a little preparation can yield enormous benefits for those who know and understand the rules. Feel free to contact us if we can help.
About the Author:
James R. Waite, Esq. is a business lawyer with over 20 years in the equipment rental industry. He authored the American Rental Association’s book on rental contracts, and represents equipment lessors throughout North America on a wide range of issues, including corporate law, employment issues, negotiating and drafting rental contracts, purchase options and other rental-related agreements (including Tier 4 addenda), as well as buying, selling and financing rental companies and their equipment. He is a veteran of the United States Air Force, has a BBA in Finance from the University of Texas at San Antonio, a Juris Doctor from St. Mary’s University, and an MBA from the Kellogg School of Management at Northwestern University in Evanston, IL. He can be reached at (866) 582-2586, or via email at email@example.com.