What is a lien?

A lien is the right of a person or business to hold or retain possession of an item as security for performance of an obligation owed by another, such as the payment of monies owed.

Liens only apply to physically transferable items of personal property and effectively act as an informal or unregistered form of security for payment.

Liens only arise if the item was given to the lien holder with the express or implied authority of the owner (such as the owner or driver of a vehicle) and generally won’t arise over stolen property.

A lien does not arise simply by simply performing work.  There must be a basis for a lien to arise such as a contractual right, a piece of legislation or operation of the law.

There are 4 types of liens, each of which we discuss briefly below:

  1. statutory;
  2. contractual;
  3. common law (or possessory); and
  4. equitable.

In all but the latter of the categories, maintaining actual possession of the property in question is crucial as the rights afforded to the lien holder are only applicable while the lien holder is in possession of such property.

Statutory liens

Statutory liens arise through the operation of specific pieces of legislation such as those in Part 5 of the Sale of Goods Act 1923 (NSW), the Storer’s Liens Act 1935 (NSW) etc.

The relevant Acts describe the terms of the liens created by those statutes.

Contractual liens

If the terms of agreement, terms and conditions of trade or similar document that governs the rights and obligations of the parties to a contract provide for a lien, then such a lien is a ‘contractual lien’.

The operation of the lien is the same however – there must be money or some obligation owed and an item of the other party held pending payment or performance of that obligation.

Common law liens

At common law, liens can either be ‘particular’ or ‘general’ (also known as ‘specific’) and arise by implication of law.

A ‘specific lien’ secures obligations that are incurred in respect of the particular goods that are held.  A common example of a specific lien is the ‘mechanic’s lien’ – the right to hold your car until you have paid for the work performed or a repairer’s lien for payment in respect of improvement work done on a chattel.

A ‘general lien’ however is more favourable, although far less common and more difficult to establish. A general lien allows a person to retain possession of any goods held (but not sell or otherwise deal with that property) until all sums payable by the owner of the goods are satisfied, not just the amount payable in respect of work performed on the specific goods held hostage.

General liens must be established by strict proof of custom or usage such as a ‘solicitors’ lien’ or an ‘accountant’s lien’ which allows a solicitor or accountant to assert a lien over and thus retain a client’s documents (or the fruits of a court action) until payment of all debts owed by the client. It is effectively an implied term of the relevant contract.

Equitable liens

Equitable liens are created on a case by case basis by the law of equity as determined by the Courts. Judges may declare such liens so as to uphold or preserve fairness or justice to a situation having regard to the parties’ dealings and conduct.

An example is where a party spends money improving the item for another where there was either express or implied agreement that the performing party should have an interest in the enhanced property. The party who performed the work and is owed the debt may then acquire an equitable interest in the property proportionate to the value of the enhancement.

Unlike the other types of liens, ‘equitable liens’ do not require actual possession of the article in question. Such liens can be voided by the express or implied agreement of the parties.

Consideration often needs to be given to the value of the lien compared to the substantial time and monetary cost of seeking judicial intervention.

How does a lien end?

Any right to assert a lien (other than an equitable lien) expires upon performance of the outstanding obligation (such as payment) or upon release if the item over which the lien is maintained as without possession, there is no lien.

How does the PPSA affect a lien?

Statutory liens and common law liens can be exempted from the operation of the Personal Properties Securities Act 2009 (Cth) (PPSA).

In some circumstanced, the party asserting the lien can have priority over any security interests registered on the Personal Property Securities Register (PPSR) held by other creditors of owner of the item if:

  • the materials/services were provided in the ordinary course of business by the person asserting the lien;
  • no other Act prevents the lien from having priority; and
  • the holder of the lien did not have knowledge of any security agreement under the PPSR relating to those goods (that prohibited the creation of the lien).

Security interests registered on the PPSR under the PPSA will usually defeat any contractual lien.

FURTHER INFORMATION

For more information, please contact McKillop Legal on (02) 9521 2455 or email help@mckilloplegal.com.au to discuss your needs.

This information is general only and is not a substitute for proper legal advice.

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