Liens – Use it or lose it – Maximise your recovery prospects

There is no doubt that people across all industries have faced the struggle of recovering monies owed by clients and customers for work or services completed.

A useful tool and remedy, is the often forgotten lien. A lien can be utilised to assist with recovering debts that may be owed.

It is important to understand what they are, what type of lien you could have so that it can be enforced in an effective way. 

What is a lien?

A lien is a charge against property which allows the lien holder to retain possession of property belonging to another person, until the owner of that property repays any debt owing to the lien holder.

For example, you take your car to the mechanic for repairs. The mechanic can assert a lien over your car, and hold possession of the same, until you repay the mechanic for the services provided.

What type of lien do I have?

There are different types of liens, which give rise to different rights/obligations:

  1. Contractual liens – These are liens provided for under contracts, for example, a supplier's terms and conditions. The rights and limitations will be those stated within the contract.
  2. Statutory liens – These are liens which are specifically provided for in legislation. For example, the mechanics lien described above is general provided for under the Contract and Commercial Law Act 2017.
  3. Common law liens – These are liens which have been recognised over time by the law.  For example, a solicitor may have a common law lien over client documents and their works completed until the client has paid the fees incurred.

The distinction between these types of liens may become blurred which can create some confusion.

Contractual lien

A contractual lien is agreed to by parties in an underlying contractual document (i.e. the terms and conditions).  The important thing to note with a contractual lien is that it is a security interest under the Personal Property Securities Act 1999 ("PPSA").

Why is this important? 

Because to enforce your lien over property, you need to have registered your security interest on the Personal Property Securities Register ("PPSR") in accordance with the PPSA. This will give priority to your security interest against other interests which are either unregistered, or registered at a later date.

What if I haven't registered my security interest?

You risk losing priority to the goods. Another party (often a bank) is likely to have a general security interest against the goods that you are holding, and if you haven't registered in time on the PPSR, any rights that you have over those goods are subject to theirs!

How do I get my money back if the customer doesn't care? 

Generally, the contractual lien will only give you the right to retain possession of the goods, which may not always be helpful in a situation where the customer still refuses to pay, and the customer is indifferent to you retaining possession of the property, or, the property is of the type that may be difficult to sell.  The best thing to do is ensure the contractual lien clause in your terms and conditions is drafted so that it provides a right to sell the goods in order to recover the debt owing.

Statutory lien vs Contractual lien

A statutory lien is not a security interest, and does not need to be registered on the PPSR in order to have priority. Understanding if you may have both may assist with maximising your prospects of return, as you may have additional rights. In most cases, the applicable statute will include a power of sale in it, so a statutory lien may provide better protection.

But which one prevails? 

This appears to be a little grey.  Your rights under a wide statutory lien may be restricted by a contractual lien, so it is very important that any contractual lien is carefully and appropriately drafted.

Common law lien

Common law liens are possessory liens only. These require continuous possession of the goods, in order for enforcement of the lien to continue. Examples of common law liens include worker's liens, banker's liens and solicitor's liens.

The possibility that you have a common law lien is likely to be limited. It is best that you consider protecting yourself contractually, to avoid being in a situation of having to yield possession of goods even though you are owed funds.

What can you do?

Talk to us - Know your rights and make sure your contracts are appropriately drafted. If you believe you have contractual rights, make sure you have correctly registered the interest on the PPSR so that when it comes time to enforce, your rights have been properly perfected.

Start a conversation with:

CrispinVinnell R

Crispin Vinnell

Partner

E: crispin.vinnell@ah.co.nz

P: +64 3 364 3814

M: +64 21 352 454

Lynne Van website

Lynne Van

Special Counsel

E: lynne.van@ah.co.nz

P: +64 9 920 9261

M: +64 21 488 828

Chloe Jolliffe website

Chloe Jolliffe

Senior Associate

E: chloe.jolliffe@ah.co.nz

P: +64 3 364 3807

M: +64 27 406 1035

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