Equipment Rental Company May Lose Lien Rights in Pennsylvania

In the intricate world of construction and property development, the mechanic's lien serves as an essential legal tool, safeguarding the interests of those who contribute labor or materials to a project. The absence of such a tool is a loss of legal protection for contractors, subcontractors and suppliers ultimately leading to larger losses for all involved. Cleveland Brothers Equipment Company is facing that fate in a mechanic's lien case that has been appealed to the Pennsylvania Superior Court, and the issue to be decided is whether equipment rental companies will continue to have rights under the Pennsylvania Mechanic's Lien Statute.

"The Pennsylvania Supreme Court is considering washing away mechanic's lien rights for construction rental equipment for Cleveland Brothers although the lower courts already said the mechanic's lien rights are going to be intact," said Chris Ring of NACM's Secured Transaction Services (STS). "So the question is why did they get there?"

Pennsylvania courts have routinely enforced mechanic's liens rights for equipment rental companies like Cleveland Brothers Equipment Company for private construction projects, which allows them to bring claims against property owners who benefited from the equipment but haven't paid for it. The property owner may say they've paid their general contractor (GC) or the GC paid the subcontractor but one way or another that money has not made it downstream to the equipment rental company.

Cleveland Brothers Equipment Company, that rents Caterpillar equipment in Pennsylvania, West Virginia and Ohio, rented out heavy equipment to a subcontractor on a commercial construction project on an industrial park. The equipment was used extensively for almost a year for necessary excavation and grading to build the industrial park and Cleveland Brothers Equipment Company was never paid for that work.

"Recently, property owners have started to argue that there's a loophole for mechanic's lien laws saying that rental equipment companies don't have protection under that law because the equipment isn't physically incorporated into the improvement of the property, meaning that if your equipment was returned to the equipment rental company at the end of the project, they own that equipment," a legal correspondent said. "There is some precedent saying if you just have removable equipment like a refrigerator or shelving units, that can't be the basis for a mechanic's lien. But foundations or sewer lines for example, that equipment is incorporated into the property within the meaning of the statute. That's how it's been interpreted up until now and that's the basis of this appeal."

At the lower-level court case, the general contractor appealed it saying they have a contractual duty in an agreement with the owner that it will defend and indemnify the owner against these sorts of claims. Now, it's up to the Pennsylvania Supreme Court to change the way the law has been applied in Pennsylvania.

"What complicates this appeal further is that just last month, under a very different set of facts, the Pennsylvania Supreme Court ruled that an equipment rental company did not have a valid lien under the lien statute where that equipment had already been returned," the legal correspondent said. "So, for 19 months, they continued to charge rental fees after the equipment was already returned and filed a lien on those rental charges since it's not incorporated into the building that was already sitting at the property."

What Happens if Rental Equipment Companies Lose Their Rights?

Many equipment rental customers are small to medium-sized contractors and subcontractors that haven't made large enough capital investments to get the equipment needed to do these private construction projects. And equipment rental companies feel comfortable running to those customers because they know there's a specific project in the works that will create the income stream necessary to pay those rental fees.

In a worst-case scenario, rental equipment companies have that recourse against the property owner. But if the protection were taken away, the initial credit application stage would have to be much more closely scrutinized because you no longer have a right against the property owners and your full recourse is only against that customer. You would likely seek other ways to protect the construction rental equipment company, like requiring bonds or personal guarantees or other collaterals before they can let the equipment go off site.

The best practice for credit professionals is to make it a habit to send out notices of non-payment or the required notices to trap or to secure any bond or lien rights. "Even if you feel like you're not protected or your notice was not sent timely, it's wise to reach out to your attorney to have them review and go over statutes with you to see if there is a way to still protect your bond and lien rights," said Roxanne Price, CCE, CCRA, NACM board director and corporate credit manager at H&E Equipment Services (Baton Rouge, LA).

Credit professionals can find other ways to secure the debt like filing a Uniform Commercial Code lien, or UCC filing, a legal document that serves as a public notice of a secured transaction, providing information about a creditor's interest in the debtor's personal property collateral. Or they can file suit against any personal guarantees that were signed on the credit application.

"Don't assume that you've lost your lien rights because you may be able to determine that your equipment or your material is actually still on the job site," Price said. "It also allows you a few more days to get your required notices and to file the necessary liens."

-Jamilex Gotay, editorial associate