Unpaid Vendor Liens

We consider below the circumstances in which a person may hold an "unpaid vendor lien", the effect of such a lien following the Supreme Court case of Menelaou v Bank of Cyprus UK Ltd [2016] EWHC 2656, and what best practice should be going forward on transactions where such a lien may arise.

What are they and how are they relevant in a finance transaction?

Financing transactions frequently involve providing finance, directly or indirectly, for the acquisition of an asset, for example a property or shares in a company. The vendor has a lien on the property or shares until the purchase money has been paid.

This can arise, for example, where all or part of the consideration is deferred or is left outstanding as a debt owed by the buyer to the vendor. Where the lender has taken security over the property or shares, then the vendor is in effect a competing secured creditor. In this scenario the lender will be concerned to ensure that the vendor either waives its lien or subordinates its lien to the interests of the lender, to avoid any arguments from the vendor as to priority and to prevent difficulties for the lender in enforcing its security.

An unpaid vendor's lien may also be helpful to a lender in circumstances where it has not obtained the security over the property it expected to receive. If the lender can show that its money was used to purchase the property, in whole or in part, then the lender may be subrogated to the unpaid vendor's lien; i.e. it can stand in the shoes of the vendor and have the benefit of the lien. This scenario was highlighted in a recent case which was taken all the way to the Supreme Court.

In that case, Menelaou v Bank of Cyprus, a bank had agreed to release its security over a property that was being sold on the basis that it was to be provided with security over another property that was being purchased using some of the proceeds of sale. The security over the second property was void as it involved fraud. Although the vendor from whom the second property was purchased had been paid in full, the bank was subrogated to the vendor's lien as it had enabled the moneys used to discharge the debt to the vendor to be released.

What does it apply to

An unpaid vendor's lien applies to land. It also applies to certain other items of personal property and "choses in action" such as shares. However the generally accepted view is that the concept does not apply to sales of goods as the Sales of Goods Act 1979 provides the...