How the NZ Tiny Homes Liquidation Has Revived the Lien

What is a lien?

A lien means to hold, tie or bind; an uncommon term derived from Latin and Old French.

What is the legal definition of a lien?

As an archaic legal term, a lien means a legal right of someone who doesn’t own personal property to hold and ultimately sell it to reduce a debt owed to the seller by the owner of that property.

How can liens be used in law?

As an example of a lien used in a legal sense, consider a shoe-repairer. They may repair, then hold and later sell shoes that aren’t paid for.

Traditionally, liens as a kind of charge over personal property have arisen from common law custom. They include innkeepers’, lawyers’, and bankers’ liens. They can also arise by statute. Examples are liens for an unpaid seller under the sale of goods legislation or for carriers under the carriers’ legislation.

There can also be equitable liens where in fairness a legal right is created.

In all these cases the liens arise by operation of law. They don’t depend on the agreement of the owner of the personal property charged. An owner can always agree that a lien is created over its property. In that case, there is a contractual lien.

How do liens mesh with the Personal Property Securities Act 1999?

Liens are essentially charges or security interests over personal property (but not mortgages over land).

The Personal Property Securities Act 1999 (PPSA) creates rules for the creation and enforcement of security interests in personal property. The PPSA excludes liens arising from the operation of law. It provides for a priority system for lien charges competing with PPSA charges.

Take the shoe-repairer example: the shoe-repairer has a lien over the shoes arising by operation of law, but the seller of the shoes may have a PPSA charge over the same shoes. Under the PPSA, the lien has priority because the shoe-repairer provided materials and services in the normal course of its business.

In one New Zealand case such a lien was given priority over a PPSA charge because materials and services provided in respect of cattle were the subject of a specific common law lien.

In another New Zealand case there was conflict between a charge over goods held in a warehouse and an alleged common law general lien. If it existed, the lien would prevail as it would be outside the PPSA. It was found that in New Zealand there was no basis for that lien arising by operation of law. There was also a contractual lien, another type of lien as noted above. However, this created a security interest. It was unenforceable if not registered under the PPSA by filing a financing statement.

The issue is important as is the distinction between personal property and real property (basically land and related interests). The PPSA applies only to personal property not land.

NZ Tiny Homes Liquidation & the High Court’s “Ground-breaking” Decision

A very recent case (March 2023) illustrates this distinction between personal property and real property.

It involved NZ Tiny Homes which produced custom-built homes assembled off site and then transported to the purchaser’s land. In it, buyers had fully or partly paid for those homes which were in a sense unique to them as they were defined in their contracts. At that stage they were personal property but not legally delivered to the purchaser and not physically delivered to the purchaser’s site.

The Court decided that as code compliance certificates had not been issued for the modules they had not been legally sold during the Tiny Home’s business. If they had been, this would have meant that the buyer took free of any PPSA charge.

However, controversially, the Court held that the buyers had an equitable lien over the houses as personal property.

As those kinds of lien are outside the PPSA, they did not need to be registered. Based on fairness, in the circumstances, the Court was prepared to create an equitable lien arising by operation of law. This approach contrasts with the warehouse case above. There the Court was very reluctant in the absence of clear evidence to find that a common law lien existed.

The next question was what kind of priority if any the equitable lien had over a competing PPSA charge.

The PPSA decides that liens arising from the supply of materials and services in respect of goods will have priority over PPSA charges. (The shoe-repairer being an example).

Here the buyers of the modular houses did not make those supplies so the PPSA priority rule did not apply, leaving the priority issue open.

Nonetheless, the Court treated the equitable lien as equivalent to the customary goods lien priority so that the equitable lien had priority over the PPSA charge.

There are challenges in applying these principles and some inconsistencies: land purchases are unique to the parties and a buyer may have an equitable interest in land it has purchased but that interest will not prevail against a mortgagee’s interest in the land, unlike the personal property scenario.

The priority problem remains for further consideration. Note, however, that a further case, Podular Homes, on similar facts to NZ Tiny Homes, has followed its reasoning and indicated that the liens attached on a first in time basis but that special rules might need to be considered.

What Does the High Court Decision on NZ Tiny Homes Mean for the Kiwi Building Industry?

The key advantage of the lien is that it is outside of the PPSA entirely. If there is a contractual lien or anything that creates a security interest that is not a lien then we have to register on the PPSR and we will be behind prior charges. In these cases the lien holder could ignore all other charges and as between lien holders the priority was determined by attachment. That is, the sequence of payments and completion of what is personal property – i.e. these houses – were not built on site as part of the land.

In summary, the ancient concept of a lien now has further modern life in an unexpected context. This is good for customers of failed modular home suppliers, but challenging for secured lenders. We wait to see whether the cases involving either NZ Tiny Homes or Podular Homes will be appealed.