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Liens: What they mean

01 August 2012

One of the most common problems faced by a funder after enforcing an asset finance agreement is the assertion that the asset is subject to a lien and will not be released until outstanding charges have been paid. 

A lien is the right of one person to retain the property of another until its claim for payment has been satisfied.

Liens can be legal, equitable, contractual or judicial. Legal liens can be sub-divided into statutory and common law liens. Liens can be general or particular and either possessory or non-possessory. In asset finance transactions we are usually dealing with either a:-

(i) Possessory lien; and/or a
(ii) Contractual lien.

Possessory Lien

This is a common law lien. If a person has in his lawful and continuous possession an asset on which he has worked, enhancing the asset’s value, that person will have a lien over the asset to the extent they remain unpaid for their labour. There are a number of essential elements for such a lien to exist:-

(a) There must be physical possession of the asset by the lien holder, which possession has been lawfully acquired. Someone facing a claim of lien should ask for a copy of the agreement under the terms of which the asset came into the lienholder’s possession.

(b) Possession must be continuous. If a repairer lets an asset out of its possession to continue operations, the repairer could not then re-assert the lien should the asset come back into its possession.

(c) The labour bestowed on the asset must improve it in some way. Merely maintaining or storing the asset is not enough. Copies of all outstanding invoices will show what work has been done;

(d) The labour must be authorised by the lessee. Written evidence of authorisation should be sought.

A possessory lien is a particular lien relating to the specific asset (or parts) in question. There is no general lien for repairs at common law. Thus, the asset cannot be retained for all debts due to the repairer, but only for the cost of unpaid repairs to the specific asset in question. The lien will give a repairer a right to retain the asset until payment, but not to sell it.

While in possession of the asset the lienholder will owe a duty of care to the lessor, including a duty to exercise reasonable care in the safekeeping and management of the asset. However, while an asset is subject to a possessory lien the lienholder usually cannot claim storage charges or expenses incurred in keeping it (although in limited circumstances the costs of any essential upkeep for which the lienholder may be responsible may be recoverable).

Contractual Lien

Regardless of whether a possessory lien exists at common law, parties may create a lien by contractual agreement (such as frequently occurs in respect of aircraft repairs). To establish a lien by contract, the contract must be certain. A contractual lien can be more extensive than a possessory lien. For example, it could arise where an asset is maintained rather than improved, or provide for the sale of the asset in the event of non-payment or for the lien to continue in the absence of possession. The nature and extent of this lien will be governed by the terms of the contract. However, it is likely that the English courts will strictly construe the terms of a contractual lien where there are competing interests. Further, in leasing or hire purchase transactions, the lessor, as a third party, would not usually be bound by a lien created by a contract between its lessee and a third party. However, where funding is by way of chattel mortgage, because the borrower retains ownership of the asset, the funder would ordinarily be bound.

In the case of possessory or (primarily in the case of chattel mortgages)contractual liens even though the asset finance transaction may prohibit the customer from creating a lien, a lien can still arise in practice and take precedence over the funder’s interest in the asset. Similarly, even though the finance agreement may impose an obligation on the customer to discharge any lien, this will not assist the funder where the customer is impecunious.