The Ins And Outs Of Contractor’s Liens

The Ins And Outs Of Contractors Liens

A “lien” is a form of security. It’s the strongest form of security recognised in South African Law. Let us delve into an explanation of the application of Contractor’s Liens.

Briefly defined, a lien is the right to retain physical control of another’s property (movable or immovable) as a means of securing payment of a claim relating to the expenditure of money or something of monetary value by the possessor of that property, until the claim has been satisfied.[1] However, in order for a lien to be effective, possession is a requirement.

What does this mean? For example, a mortgage bond is secured over immovable property but is registered at the Deed’s Office. It does not require possession to be effective. A pledge will suffice on the conclusion of a contract and does not require possession (the difference is that a pledge requires delivery if it becomes operative). However, the moment the property under which a lien is being exercised leaves the possession of the one so exercising the lien, the lien is lost.

A basic example of a lien is where one takes their motor vehicle into a panel-beater for repairs to be undertaken. After completion of the repairs, an invoice is released to the customer from the workshop with terms and conditions for payment. If payment is not on terms, which is the norm for the industry, payment is due upon presentation of the invoice. The panel-beater is allowed to hold onto the motor vehicle until payment is released. Put differently, the panel-beater has a right to retain the object of its performance to secure compensation for its performance.

A Contractor’s Lien (also called a construction or mechanic’s lien) is a claim made by contractors or subcontractors who have performed work on a property, and have not yet been paid. A supplier of materials delivered to the job may also have a claim of this nature. Such liens are governed by Common Law and no specific statute exists to govern its operation. However, Common Law has recognised two origins of Contractors’ Liens: “enrichment liens” and “debtor-creditor” liens.[2]

A Contractor Lien in the form of an enrichment lien may exist where the contractor’s expenditure preserved the property or enhanced its market value. In this instance, it can be said that the contractor has, to the extent of the building owner’s enrichment, an enrichment lien valid against all comers, including the employer.[3] This is a complex lien and considers Enrichment Laws in the context of the specific complaint.

A Contractor Lien in the form of a debtor-creditor lien exists where work has been performed on property and compensation is due and owing for that work. However, the lien is only operative if payment is already due. In the modern-day context, the practicality of such liens has evolved into somewhat of a complex situation as by happenstance it involves three parties: the contractors and/or subcontractors, the employer, and the financer. In recent times, finance agreements have seen demands for Contractors’ Liens to be waived so as to ensure that there are no delays on completion of the project and thus repayment of the loan.[4] These waivers tend to include the following characteristics:

1      Finance is conditional upon a written waiver of lien being received from all parties concerned, including any subcontractors, before any money is advanced under the loan;

2      The waiver is recorded as being made in favour of the financing institution, and not in favour of the employer per se; and

3      The waiver is considered to be unconditional.

If a contractor has a lien over any property, and has not waived their rights as mentioned above, it is important for the contractor to understand that it is not in itself a cause of action to litigate. Payment in terms of the agreement is still the cause of action and any pursuant litigation will follow for specific performance, and for the enforcement of your lien. The valid lien serves as a defence for having not relinquished possession of the property in favour of the employer, should the employer then demand return of the property and issue legal process for the same.

If you require further understanding as to whether or not your particular situation falls under any of the abovementioned categories; or if you wish to understand the nature of lien waivers; please consult with us for a case-specific analysis – we’ll be happy to help you.

 

Aleisha Oliver

 

Practising Attorney



[ ] Brooklyn House Furnishers (Pty) nbsp;Ltd v Knoetze & Sons 1 70 3 All SA 332 (A) at page 270E.

[ ] Goudini Chrome (Pty) nbsp;Ltd v MCC Contracts (PtyLtd 1993 1 SA 77 (A) at page 85

[ ] McCarthy Retail Ltd v Shortdistance Carriers CC 2001 3 All SA 236 (A); nbsp;2001 3 SA 482 (SCA) 492 at page 498

[ ] See Standard Bank of SA v D Florentino Construction CC & Others 2008 (5) SA 534 (C)