TINY HOMES AND THE POWER OF THE EQUITABLE LIEN IN INSOLVENCY

Posted by Jesvin Boparoy on May 16 2023 in News

Tiny homes are becoming more and more popular in New Zealand. But without standard contracts, each provider has their own bespoke documentation, resulting in complications and inconsistencies, particularly in cases where the tiny homes provider goes into liquidation.

Because there is no standardisation of tiny homes provider sale contracts, many prospective buyers are asked to pay the deposit upfront, as well as the purchase price via payment instalments to fund the developers. With incomplete homes and partial payments made towards their construction, prospective buyers of tiny homes are left significantly unprotected. In the insolvency context, these partially completed tiny homes can be sold by the liquidators to pay off other secured creditors, leaving prospective buyers without a home and no way to recover what they paid. 

Section 53 of the Personal Properties Securities Act (PPSA) protects “buyers” who have paid for goods in full and are free of any security interest. However, this section does not apply to protect buyers who have “partially paid” for the goods, as they are not yet considered the legal owners.

In a ground-breaking decision, Justice Venning in Maginness & Booth v Tiny Town Projects Ltd (in Liq) [2023] NZHC 494, held that both fully paid buyers and partly paid buyers of tiny homes will hold an equitable lien over their partially completed tiny homes, to the extent of the money paid by them. Further, this equitable lien takes priority over other security interests (including registered ones) in the insolvency context. While the Court found that these prospective buyers were not the legal owners of the goods yet (even though some of the Tiny Homes were 95% completed), equity would treat them as having the beneficial ownership of those goods ahead of the interest of any secured creditor.

The Court emphasised the need to develop the law in equity to recognise equitable liens in the insolvency context. Particularly where the goods were readily identifiable and could not be sold to anybody else other than the identified purchasers. In particular, Justice Venning noted that:

[110] In the present case, an important feature is that the partly constructed tiny homes are readily identifiable as having been applied to the separate contracts with the individual purchasers they relate to. While they remain the property of the company, in the normal course of its business and absent default by the purchasers, the company could not, in any sensible commercial sense, have sold the tiny homes to anyone other than the identified purchasers. The individual purchasers, both fully paid and partly paid, have paid moneys towards the purchase of those specific and identifiable (but not yet completed) tiny homes. There exists readily identifiable subject matter to which the liens can attach. In those circumstances I consider equity’s response should be to support an equitable lien over the partly completed homes in favour of the purchasers to the extent of the value of the purchase moneys paid by the individual purchasers.

This decision is a positive step towards expanding the law of equity where there is a gap in the legislation, to help buyers who have partially paid for goods but cannot yet be considered legal owners.  The decision welcomes a development that seeks to solve an unfair situation for those buyers.  It will have serious implications for secured creditors who hope to be paid in priority, especially after registering their security interest on the PPSR. Insolvency Practitioners will also now need to give careful consideration to whether or not an equitable lien arises for partly paid goods when making an assessment of whose security should trump.  This, no doubt, will create some complexity and uncertainty in the industry. Insolvency practitioners would need to seek Court direction or take legal advice on what situations the equitable lien may apply to (on a case-by-case basis). Guidance may be needed for insolvency practitioners so that they can work their way through these assessments, especially where they are limited funds. 

If you need legal assistance or have any questions about how this case might affect you, please contact:

Jesvin Boparoy | Senior Associate | Jesvin.Boparoy@shieffangland.co.nz

Kalev Crossland | Partner | Kalev.Crossland@shieffangland.co.nz