For many landscaping companies, buying used equipment is an excellent value. After all, commercial mowers, skid steers, and other OPE can carry large price tags, so finding a good used one can make a real difference.
But there’s an issue all buyers of used equipment should be aware of, regardless of price tag. And that’s if the used equipment you are buying has a hidden lien on it.
Imagine this scenario: You’re a landscaping company looking to buy a used skid steer. You find a company selling one and it seems perfect for your needs. The paperwork looks fine, the company selling it has owned it for more than five years, they have a loan payoff letter, etc. You buy it.
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Several months later, you are contacted by the seller’s bank. It appears the seller defaulted on a different loan they took out two years ago. But written into that different loan was a blanket lien. This means all the seller’s assets at the time were subject to this blanket lien, including the skid steer you purchased. As a result, the bank is claiming ownership.
After a little research, your lawyer confirms this – the bank does indeed own the skid steer and can repossess it from you. And even worse, if this happens, you will also lose the money you paid (unless the loan-defaulting seller makes good on it— which I wouldn’t count on.)
This isn’t meant to scare you. The previous example is quite rare. But it is entirely possible, especially when purchasing from a private seller (and not an authorized dealer/reseller.) As an equipment lender, we’ve seen this happen, so it is something that buyers should be aware of.
The “Hidden Lien” Peril
Every used equipment buyer should be aware of liens and how they can be uncovered. The most common way is to conduct a Uniform Commercial Code (UCC) search, which typically shows most liens. (Note: liens are a legal claim and filed with the state. The UCC search is meant to show what liens a debtor has filed against them.)
This UCC search can be done by one of several parties: if you are buying from an authorized reseller, they usually conduct one before they even list equipment. If you are financing, your lender may perform one. And if neither of these are true, you should insist on one from the seller, or conduct one yourself.
A UCC search can typically be conducted online with each state’s Secretary of State office, and the exact process and fees vary for each. A quick database of each state’s office can be found at the National Association of Secretaries of State located at www.nass.org/business-services/ucc-filings. You may also opt to use third party UCC search services (simply search online for them and you’ll have no shortage of options.)
Will a UCC Search guarantee a clean title? Unfortunately, no. Nothing can 100% guarantee a lien-free title on any piece of used equipment. There are a few reasons why. One is that used equipment can have long paper trails, especially if there were several owners. There are also many variables in a UCC search – the geographic locale searched, similar company names, long serial numbers hand-entered… there’s plenty of room for error.
But the biggest reason is the previously-mentioned blanket liens.
About Blanket Liens
Blanket liens are common in bank loans. When a bank loans a business money, they typically have a blanket lien written into the fine print. This means all assets of the borrowing company are under this lien, even if they are fully paid off and unrelated to the current loan.
This becomes problematic when a company looks to sell an asset – if it is under a blanket lien, officially it cannot be sold without permission. But since blanket liens are a “fine print” clause, they are often forgotten about. It’s not a stretch for a seller to honestly think there’s no lien on something they paid off years ago. (Note: If your company has a current bank loan, you probably have a blanket lien on all assets.)
Blanket liens can go back a long way too, even several owners ago for a particular piece of equipment. Since they are only enforced on a default, it’s easy to see how they can be forgotten. But they are all legal and valid. Most UCC searches will uncover blanket liens, but as stated earlier, it’s an imperfect process.
How Can Used Equipment Buyers Better Protect Themselves?
The easiest way for a buyer to better protect themselves from hidden liens is to buy from an authorized dealer / reseller. They will typically conduct a UCC search, and more importantly, most will stand behind the equipment if something does arise (but be sure to ask about this.)
If buying from a private seller, make sure a UCC search is conducted, either by the seller or you.
Another key point in buying from a private seller is to make sure all the paperwork is present. If the seller isn’t the original owner, ensure the paper trail can be traced to the original sale from the manufacturer. If this isn’t so, you have to ask yourself how much you trust the seller. Once equipment has changed hands a few times, the paper trail can get murky. Personally, I would not buy used equipment with a broken paper trail.
Honestly, an extremely high percentage of used equipment sales have no lien issues. But since the buyer is ultimately responsible, performing your due diligence can go a long way in making everything go smoothly.
Furman is the vice president of Strategy at Crest Capital, which provides small and mid-sized companies financing for new and used equipment, vehicles, and software, as well as offering equipment sellers a simple and risk-free financing program. Visit them online at www.crestcapital.com . Or see Furman’s prevoius article for Turf: “Tax Alert 2023: Bonus Depreciation ‘Write Offs’ To Decrease” at turfmagazine.com/2023-tax-alert-bonus-depreciation/.
All views expressed in this article are those of the author and do not necessarily represent the policy or position of Crest Capital and its affiliates. These views are also opinion – always speak to your accountant, tax, and or legal professional before engaging in any financial contract or tax matter.