Businesses regularly provide products and services on a credit basis, billing customers at a later date. Most of the time, customers pay their invoices on time – however, it’s not always easy to know upfront whether a customer is solvent at the time of the transaction. When invoices do go unpaid, the time and costs spent collecting monies owed can cause significant disruption.
When a customer owes your business money, you may be able to exercise what is known as a ‘lien’ – a form of security that grants you the right to keep hold of that customer’s property until the debt owed has been paid.
What is a lien?
Liens are recognised by common law or can be created by contractual agreement. They give the right of a person or business who has delivered goods or services for an agreed price to detain the property of the customer for as long as a debt owed by the owner of the property remains unpaid.
A lien could be established by a creditor, or a legal judgement, and serves to guarantee the underlying obligation. In other words, by placing a lien against a debtor’s business or personal property, you can collect what is owed from a difficult customer.
A common situation in which a lien would be appropriate is if a car dealership was faced with a customer refusing to pay the bill for repair after bringing their car in for repair. By means of a lien, the car dealership could refuse to return the vehicle to the owner until they have paid for the repairs provided. A lien could also be written in as a contractual term between a business and the consumer.
What rights does the lien create?
At common law, the lien holder can legally detain the goods until the sum is paid. They do not, however, have the right to do anything else (i.e., sell those goods) whilst they are detained. Only if the right to sell has been explicitly agreed and written into the contract can it be exercised – and even in these cases, it’s considered best practice to allow time for the customer to pay before the property is sold to pay off the debt.
If the customer still fails to pay, and the right to sell is in your contract, you may proceed to sell the goods as a means of satisfying the outstanding payment.
How can I place a lien on a customer?
When a customer has refused to pay their bills, you can place a lien on their property by proving in court that they owe you a certain amount. With effective liens in place, your business is in a far better position from both a legal and financial standpoint, as the risks associated with your customer’s default are minimised.
Evidence of your provision of goods or services to the customer will support this – in the example of the car dealership, this could be photographs of the vehicle before and after repair as well as your pricing, terms and conditions. If you’re an accountant, your hourly billing statement would serve as evidence of the debt.
Although business liens are recognised by English common law, the most effective way to exercise a lien is by way of contract. If you’ve had trouble with non-payers in the past, adding in watertight clauses to your terms and conditions of trade will allow you to protect your cash-flow in the event that a customer fails to pay monies owed on time. Ask your lawyer to draft up the terms of business for you to ensure robust clauses have been included that give you the right to exercise liens. It may also be wise to state within your terms your right to sell the goods if your customer still hasn’t made payment following a specified amount of time or “grace period.”
Should you fail to include this in your terms and conditions and proceed to sell the goods following non-payment, you risk the customer claiming damages against you for interference and/or conversion. If you do plan to include a lien, you’ll need to ensure it has been properly incorporated as an express term in your contract and agreed upon by the customer. Should your customer challenge the lien, their signature on a document containing your terms and conditions will serve as evidence of their agreement to the lien.
For bespoke legal advice on business liens and how to use them, get in touch with our lawyers at your convenience.