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Unpaid vendor liens


United Kingdom

We consider below the circumstances in which a person may hold an "unpaid vendor lien" and what best practice should be going forward on transactions where such a lien may arise.

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

  1. 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 appropriate rules for these transactions.

What is the effect of a lien

An unpaid vendor's lien arises both at law and in equity as soon as a contract for sale of land is made.  It arises automatically by operation of law.  It does not depend upon the parties' subjective intentions.  It can however be waived or excluded by express agreement in the documents.

The equitable lien survives both completion and the vendor's giving up of possession to the extent that purchase money remains outstanding.

The equitable lien is in effect an equitable charge on the property.  However it does have an unusual feature in comparison to a charge or mortgage.  A charge or mortgage secures the liabilities of the debtor to the lender up to the amount of those liabilities, so if the property is sold for more than the amount of the liabilities, the lender would account for the surplus to the debtor.  If an unpaid vendor sells the property, a second time, for more than on the first sale, he has no obligation to account to the defaulting first purchaser for the excess.  In the Menelaou v Bank of Cyprus case mentioned above, the High Court determined that as the bank was not actually the unpaid vendor, but subrogated to the rights of the vendor who sold the property, it was subrogated only to the extent of the amount of funds released from the sale of the first property for the acquisition of the second property (plus interest).

The unpaid vendor's lien is a proprietary interest in the land and capable of binding successive owners of the land and persons with an interest in the land.  For example, it binds the purchaser and third party volunteers.  It would also bind subsequent purchasers unless that person is a third party purchaser for value without actual or constructive notice of the lien. 

The remedies available include the ability for the unpaid vendor to enforce its equitable charge by an application for the sale of the property.  The unpaid vendor must apply to court for the sale and it will be at the court's discretion in the circumstances of the particular facts whether to make an order for sale.  The importance of the Menelaou v Bank of Cyprus case is its identification of the approach and relevant factors and legislative regime that the court should consider before deciding whether and when a sale should be allowed.


Lenders should consider the unpaid vendor's lien whenever a transaction involves funding the acquisition of an asset – in particular property or shares – and all or part of the consideration is not fully settled on closing.

In a transaction where an unpaid vendor's lien may arise, typically the best course is to ensure that the vendor expressly either waives the lien or enters into a subordination arrangement with the lender.

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