If a customer won’t pay, can you retain their property? – Small Business UK
Many businesses face the problem of customers not paying their invoices promptly or at all. In circumstances where a business is in possession of their customer’s property, such as a garage repairing a car, then it may sometimes be possible to retain that property until payment is secured of the invoice or debt. The legal terminology for such circumstances is a known as asserting a lien.
Key takeaways
- A common law lien allows a creditor (business) to retain a specific piece of the debtor’s (customer’s) property until the debt is fully paid.
- Another example is where a business has been given goods under an obligation to deliver them, then they may be able to retain the goods to secure the costs associated with delivery.
- However, if you do not have a lien over the client’s property and you unlawfully hold the property ‘hostage’, then it is possible that you could open yourself to claims under the Torts (interference with goods) Act 1977.
- Businesses should consider including a contractual lien into their written contract with the customer and should make them aware of it.
What is a lien?
There are many different types of liens, including:
- Statutory liens (which automatically arises by operation of law);
- Common law or particular/possessory liens (which requires physical possession of property belonging to the debtor);
- Equitable liens (which does not require physical possession of the debtor’s goods);
- Contractual liens (agreed between parties as a term of the contractual relationship).
For the purposes of this article, the focus is specifically on a type of common law lien, known as particular or specific liens, which allows a creditor to retain a specific piece of the debtor’s property until the debt is fully paid.
How does it work?
If you have carried out work to property belonging to the customer, which has improved the piece of property itself (as opposed to just maintaining the property), then a specific or possessory lien may arise. This would enable the business to retain that property as security for the work undertaken.
A common example of how this may arise is when a garage carries out repairs to a vehicle, they have a particular or possessory lien over the vehicle until the customer has paid the garage for those works. This lien arises automatically over the vehicle.
A further example is where a business has been given goods under an obligation to deliver them, then they may be able to retain the goods to secure the costs associated with delivery.
Particular liens can arise involuntarily depending on the facts of the case, without the customer’s knowledge or consent. This may assist businesses who can retain goods until charges in respect of those goods have been met.
It is important to note however, that this does not give the lien holder the right to sell the asset to settle the debt. As such, the lien can only really be used as encouragement for the customer to pay your invoice. That said, it is a powerful tool to employ in circumstances where the debtor needs their property and can act as a catalyst to payment without requiring lengthy court proceedings to recover sums owed.
However, if you do not have a lien over the client’s property and you unlawfully hold the property ‘hostage’ then it is possible that you could open yourself to claims under the Torts (interference with goods) Act 1977. If found liable, you could be required to pay damages to your client as a result of any losses suffered from you unlawfully withholding their property. As a result, it is imperative that you obtain legal advice if you doubt whether your actions are legal.
Businesses should consider incorporating a contractual lien into their written contract with the customer and should take steps bring the existence of the contractual lien to the attention of the customer. This provides stronger and clearer protection than common law liens.
If you are unsure whether or not to argue a lien over property, you should seek early legal advice on your specific position. If you don’t, you might create a much larger dispute with the customer and find your business at a disadvantage financially and legally.
Case study
In a recent matter, our client had carried out work to the customer’s possession. The customer subsequently disagreed with the sums charged in the client’s invoice and refused to pay. The situation escalated prior to our involvement and the customer commenced court proceedings, claiming a multitude of losses from our client.
Ultimately, our client had physical possession of the property, and they had carried out works which had improved the property itself. As such, a particular or possessory lien had arisen, entitling our client to keep the property until the customer paid in full.
From the paying customer’s point of view, typically, the best way to approach this would have been to confirm that the invoice was not agreed but to pay under protest. The customer could then dispute the paid invoice and be able to demonstrate to the court that it had mitigated its losses.
We were able to assist the client in dealing with the customer’s exaggerated claim to avoid the matter escalating further. The customer who had not obtained legal advice unwittingly exposed themselves to the risk of extensive legal cost consequences as a result of their over-inflated claim for damages.
It is best for businesses to act quickly and take legal advice on the options available to them either to recover unpaid invoices as soon as possible and/or to navigate potential claims from customers.
Lauren Windsor is a solicitor specialising in commercial litigation at Taylor Walton Solicitors.
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