Once again, in another case involving ‘tiny homes’, the Court has found an equitable lien in favour of the purchasers.

In March, the first tiny homes case, Maginness & Booth v Tiny Town Projects Ltd (in liq), found that the purchasers of part-complete tiny homes, which were completed off-site, had an equitable lien (a right over a specific asset conferred by law rather than agreement) to those homes up to the value they had paid for them. As a result, the purchasers were able to receive special priority to those goods over and above secured and preferential unsecured creditors—who under the normal rules of insolvency receive priority to the distribution of assets. For more about the case, please click here.

There have been questions about whether this decision would be followed, or confined to its specific facts. The liquidators of Podular Housing Systems Limited recently sought directions from the Court for how to deal with bespoke modular homes. The Court ruled—in line with the Tiny Homes decision—that the purchasers had an equitable lien which attached to particular incomplete pods.

Background

Podular Homes developed bespoke modular buildings for residential use. These buildings would be based on Podular Homes’ standard designs which customers would pick and then specify variations and additions. Payments were staged based on project milestones, with the final milestone being the issue of a code compliance certificate by the relevant local authority.

A point of difference from Tiny Homes is that construction was to start at the company’s premises, either in Hamilton or Christchurch, and then the pod would be transferred and completed at the customer’s property (in Tiny Homes, the build was completed off-site then transferred in a complete state to the customer’s property). There were 13 pods in construction in the Hamilton facility, and a further three in the Christchurch facility.

Podular Homes was clearly insolvent. It owed creditors around NZ$5.3 million. Secured creditors were owed about NZ$1.42 million, and preferential creditors had also made claims.

Three issues arose for determination by the Court:

1. Did the company own the incomplete pods?
2. Did s 53 of the Personal Property Securities Act 1999 (‘PPSA’) apply?
3. Could the customers claim an equitable lien over the incomplete pods?

Title remained with Podular Homes

Like Tiny Homes, title had yet to pass to the purchasers under the relevant contracts. The Court found that:

• part payments did not transfer title to particular goods or materials that had been part-paid for; and
• title remained with Podular Homes even after transportation to the customer’s site—and it only transferred on the customer’s full payment.

None of the customers in question had paid for pods in full. As such, title remained with Podular Homes in all cases.

Section 53 of the PPSA did not apply

An innocent buyer can take goods free of a security interest. Like Tiny Homes, the Court found that s 53 of the PPSA did not apply because the sale of the pods remained incomplete and unperfected.

Equitable liens do attach to part-complete pods

The Court referred to the Tiny Homes decision as authority for establishing a purchaser’s equitable lien to part-constructed homes that are:

(a) readily identifiable; and

(b) easily attributed to specific contracts with individual purchasers.

The Court was not persuaded by the liquidators’ arguments that the Tiny Homes decision should not have been followed on the grounds that it is inconsistent with the statutory priority regime, elevated unsecured creditors’ interests above secured interests, and brought uncertainty to secured creditors.

The Court was particularly attracted to the argument made by Venning J in Tiny Homes that the equitable lien does not arise merely on any payment for company assets—it particularly arises where goods are readily identifiable and attributed to a customer’s contract:

The customer’s payment, in whole or part, is not of itself a sufficient basis on which to attach a lien over any of the company’s assets. Rather the lien only is to the extent of payments attributable to identified goods appropriated to the contract in question, as a charge against those particular goods. Whether it is so in any circumstance likely will be a question of fact and degree.

The Court found that with Podular Homes’ customers it was clear equitable liens applied because the pods, even if part-complete, were readily identifiable, and were attributable to specific contracts.

Wider implications are still unclear

Whilst the decision provides further comfort for purchasers of tiny homes, it is not clear to what extent it will apply beyond the context of prefabricated buildings. The Courts have generally taken a cautious approach to equitable relief, particularly where equitable remedies might cut across an established statutory priority scheme. The Court found that the equitable liens attached according to a ‘first in time’ priority rule, but left open the question of whether they need their own priority rule.

It remains to be seen if the Podular decision will be appealed. In the meantime, insolvency practitioners and secured lenders will need to continue to grapple with the practical and legal issues that arise from equitable liens.