Liens, and how you can use them.
If you’re a business owner who is owed money by a difficult customer, then you may be able to exercise what is known as a lien over any goods owned by that customer which are in your possession until payment has been satisfied.
A lien is a security right which gives the person in possession of goods rights over those goods pending payment. Those rights can take precedence over the rights of others, including the owner, or a hire purchase company.
Common situations which can arise are, for example:
- A self-storage business is faced with a customer who, having stored a quantity of furniture at the storage depot, seeks to collect his effects without paying the storage bill. The storage company is entitled in some circumstances to refuse to permit collection of the furniture to the individual until he or she pays the outstanding charges.
- A car dealership is faced with a customer who brings her car in for repair and then refuses to pay the bill. The dealership may be entitled to refuse the return and/or take possession of the vehicle until payment has been made.
When does a lien arise?
In England and Wales, a lien may arise under different circumstances. English common law recognises a lien as a right to refuse the return of goods to the owner or another person asserting ownership or title over them until the debt owed has been satisfied. A lien can also arise where it is created by way of a specific contractual term between a business and the consumer.
What rights does the lien create?
At common law, the lien-holder has the right to detain the goods, i.e. to prevent them being delivered to the owner. Note, however, the lien-holder does not have the right to do anything else with those goods whilst they are detained, such as selling them in satisfaction of the outstanding payment.
However, the right to sell may arise if it is expressly written into the contract. In such a case, it is in any event best practice to detain the goods for a period of time to give the paying party time to pay the outstanding debt. If the customer still doesn’t pay, then you may have a right to sell the goods and realise the debt out of the sale proceeds. However, you must have a specific provision to that effect in your terms of business – and that specific term must form part of the contract with your customer - otherwise the customer may have a claim against you for damages for interference and/or conversion (effectively, a claim for compensation for the value of the goods by virtue of your “theft” of them).
When might a lien NOT exist?
A lien will not automatically exist if the goods belong to a third party who is not the paying party: to use our storage business scenario above, where goods in the storage depot have been sold or gifted by the customer to someone else. In this case, the storage business cannot refuse the return of the goods to the new owner for unpaid bills if the new owner can prove that he has acquired ownership from the original customer.
Once created, a lien may be lost by waiver if the storage company’s actions are inconsistent with the lien, such as if the storage company claims a different amount to the amount secured by the lien or another form of security is provided by the paying party in respect of the debt (e.g. where the paying party owes the storage company £5,000 and hands over the keys to his Porsche as security in order to procure the release of the items in storage).
What should you do to protect your rights to exercise a lien and sell goods for non-payment?
Rather than relying on the common law, the “best” liens (in terms of their enforceability in law), and indeed the right to ultimately sell goods or effects in your possession, are created by way of contract. Ensure that you have comprehensive, robust clauses in your terms and conditions of trade which give you the right not only to exercise the lien for non-payment, but ultimately to sell the goods in your care if payment is not made after sufficient warning. Get a solicitor to draft your terms of business for you.
You also need to ensure that the contractual lien has been incorporated as an express term in your contract with the customer. In practice, this means that you should always make sure that you have a proper paper trail to show both that you have provided each customer with a copy of your terms and conditions and that the customer has signed and dated the document containing those terms and conditions to confirm that he or she has read, understood and agrees to be bound by them.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.