equitable lien

Equitable liens are a security interest which arises for sums justly due, in property not in the possession of the person. They arise by operation of law or by statute. An equitable lien grants a charge over the property and arises by virtue of the relationship between the parties.

Equitable liens create an equitable proprietary right to the property in question. The lien holder is entitled to a (court) order for sale, and may be enforced by an injunction to prevent disposal of the relevant property where the person owing the debt does not perform its obligations.

Circumstances of an Equitable Lien

Case law points to circumstances where indicate are sufficient, rather than those which are essential for an equitable lien to arise. In the case of a contract a claimant is required to show:

1. Actual indebtedness on the part of the party which is the owner of the property (the defendant), which arises from a promise of payment in relation to the property itself or an expense incurred in relation to the property;
2. The property is specifically identified and appropriated for the performance of the contract;
3. The claimant, ie the person owed the sum claimed, would be treated inequitably or unfairly if the defendant were to dispose of the property to a third party without his consent.

Contracts for Goods and Services

Equitable liens will not arise in cases where there has been a sale of goods, as the Sale of Goods Act has been said to be an exhaustive code in respect of parties’ rights for contracts involving the sale of goods. This leaves contracts for the supply for work, materials and services.

Equitable liens cannot be enforced against a bona fide purchaser for value without notice.