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To lien or not to lien: that
is the question
Question: Our company is a construction
equipment rental company. Some of our equipment was leased
by a contractor to use for a meat-packing plant expansion.
The expansion also includes relocating the plant’s
emergency power system. The contractor rented from us various
items such as a backhoe, emergency generators, and site
fencing. The contractor has fallen way behind in making
payments for the rented equipment. We provided the 20-day
preliminary notice as required for this project when we
first sent the equipment out. Can we record a mechanic’s
lien to protect our rights to payment?
Answer: The right to a mechanic’s
lien for persons supplying labor, services, equipment or
materials to improve property is vested in the California
Constitution. The public policy behind liens is to prevent
a property owner from being unjustly enriched by the value
added to their land if the one who supplied the labor, services,
equipment or materials for that increased value went unpaid.
But it is not always easy to figure out who, exactly, has
lien rights and your seemingly simple question, unfortunately,
cannot be answered with a “Yes” or “No.”
Per Civil Code, section 3116, you can file a mechanic’s
lien after you have “ceased furnishing labor, services,
equipment or materials” to the project. So the first
question is whether your company is still leasing its equipment
to the site.
Assuming you’ve retrieved your equipment, we have
to assume the project is ongoing, or if not, that the time
to record a lien has not expired. That is subject of another
question. Next, we have to consider each piece of equipment
you are supplying and determine whether it was “used
or consumed” in the “work of improvement.”
(Civil Code, Section 3110). Court cases analyzing this statute
have held that the word “used” means actually
and directly used to improve the property and increase its
value.
The leasing of the backhoe would most likely entitled
you to lien the property for the rental charges that have
not been paid for that piece of equipment. The backhoe was
used for earthwork that altered the property. Thus, the
backhoe was used in the work of improvement, meaning it
was used to directly improve the property. On the other
hand, site fencing is usually not an item that would entitle
a rental company to lien rights. The fence may have been
required by contract, insurance or even local ordinance,
and was actually in place during the construction work.
Without the fencing in place, the contractor probably would
not have been allowed to proceed with the construction work.
So, there is no doubt the fencing was a necessary element
in completing the work of improvement. But, the fence was
constructed solely for security and liability purposes.
It is temporary and does not, itself, directly improve and
add value to the property.
The emergency generators are
another issue all together. In some instances, a generator
may be used to supply power to a jobsite in order to power
up various tools being used to perform construction work.
Wouldn’t that be similar enough to the backhoe? Each
piece of equipment, while not permanently installed on the
land, was actually used to improve the property. If the
generator, or backhoe, was delivered to the jobsite and
left there for the duration of the leased time — but
for some reason sat idle and was never used — there
would be a strong argument the rental company does not have
lien rights in that situation, because the equipment was
never actually used to improve the property.
By your question, it would seem that the emergency generators
were rented to be on site for the purpose of supplying backup
power to the existing operations just in case the normal
utility power failed during the time the plant’s emergency
power system was being relocated. If that is the case, then
how would those generators, themselves, be adding value
to the property? In this case, aren’t they more like
the fencing? They are needed in order for the project to
go forward. But, the generators not actually and directly
used in the actual work of improvement — they are
not being used to enhance the value of the property.
As
you see, mechanic’s lien rights are not very straightforward.
The California Law Review Commission (CLRC) has been wrestling
with this issue for some time and is currently in the process
of revamping the mechanic’s lien laws in order to
provide clarity as to who is entitled to a lien. Those of
us in the construction industry are eager for any guidance
these new laws will provide.
Disclaimer: The information in this article is based upon
California law and is for general information only. Any
scenarios or hypotheticals are provided only to illustrate
laws and legal principals in general. Any information or
analysis presented here is intended solely to inform and
educate the reader on general issues. Nothing presented
or referenced to, regarding facts, documents or applicable
laws, constitutes legal advice. Before acting or relying
on any information, including any information presented
here, consult with a qualified attorney for your specific
situation.
Scholefield, holds an active PE license in Colorado,
an undergraduate engineering degree from the University
of Florida and received her JD from the University of San
Diego. Source Code: 20080208cyc
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