FAQs – Architects vs unpaid fees: is a lien the answer?

In April 2023, Litigation Consulting Principal, Penelope Pengilley, published an article Architects vs unpaid fees: is a lien the answer? This article prompted some significant questions, which we have compiled and transformed into a list of frequently asked questions (FAQs).

1. First a recap: what is an architect’s lien? 

Architects have copyright in their plans and drawings and, absent a contrary agreement with the client, when they are engaged to prepare plans and drawings respecting a building on specified land, an implied licence arises enabling the client to use the plans and drawings on that land. Further once a development consent is issued that is based upon the plans and drawings, the implied licence becomes irrevocable against the architect.

 Sometimes, at that point, the architect will still be unpaid and in my April article, I argued that in that event, an architect’s lien may arise where the increase in value of the land upon the granting of the development consent based upon the architect’s plans and drawings, exceeds the value of the architect’s exertions. This lien provides equity with a means of compensating the architect for its work. This is because upon issue of a development consent, the implied licence to use the architect’s plans and drawings becomes irrevocable and therefore the architect cannot restrain use of the plans and drawings respecting the land while the landowner (or its creditors) can take the benefit of the increased value of the land (created by the architect’s exertions) upon the issue of the development consent.

The lien arises to protect the value of the architect’s exertions to be assessed in accordance with the terms of engagement or, if they do not reflect the value of the work done, on a quantum meruit basis. However generally it will not enable the architect to share in the increase in value, just to get paid for its work.

Sometimes a development consent may add little if any value to the land or the land may increase in value for other reasons and these eventualities are discussed in section IV below in the context of disclaimer.

2. Is an architect’s lien good against a liquidator or a receiver?

If the lie existed against the client company prior to liquidation, then liquidation should not affect the existence or character of the lien.

Further, as noted in my article, the lien should take priority over the interests of a secured creditor although it will stand behind the costs of realizing the asset. Therefore, it should also be recognised by a receiver (subject to the co-venturer exception, see further below).

However, as an equitable lien, if the architect does not take steps to enforce promptly, the architect risks being met by a defence of laches or delay.

Further as the lien originates from the development consent, once that lapses, the lien may lapse also; although if the development consent is revived or extended then then apart from issues of delay, the lien may continue also.

3. Is the lien good against a mortgagee?

First, as noted in Torpey Vander Have Pty Ltd v mass Constructions Pty Ltd [2002] NSWCA 263 per Young CJ in Equity esp. at [94], the terms of the  mortgage should be reviewed to see whether it enables the transfer of the implied copyright licence via mortgagee sale. If yes, then I would argue that any attendant lien would follow alongside the development consent.

That said, settlement of a mortgagee sale would be an obvious time to assert the lien and should an architect not do so, then equity may be less ready to intervene at a later stage unless the architect has good reasons for its earlier inaction.

However, if the mortgage does not extend to the transfer of the implied licence, then if the purchaser attempted to use the plans and drawings of the architect or rely upon any development consent based upon the plans and drawings, the architect should be able to restrain such use.

4. If the lien continues upon liquidation, can a liquidator disclaim the lien or the development consent underpinning the lien as onerous property under s568 of the Corporations Act?

Any liquidator seeking to disclaim onerous property of this kind should seek legal advice.

The lien arises by reason of the increase in value of the land due to the architect’s exertions but, sometimes, a development consent may add little, if any, value to the land while the lien, if it arises, is a burden. In that event, can the development consent be disclaimed thereby also disposing with the attendant lien?

The application of section 568 of the Corporations Act in this context is not straightforward and raises questions regarding the applicable ground of disclaimer under the section. Further, while a copyright licence is well recognised as a species of property, can a development consent that runs with the land be treated as a separate item of property to the land itself? In my view, given the nature of winding up and the need to deal with all aspects of the affairs of a company, the Courts will take a practical, expansive approach to this question however this will be a threshold issue. There is also a question as to whether a disclaimer of the development consent will also operate to disclaim the implied copyright licence (which becomes irrevocable on the part of the architect, but not the client, upon the issue of the development consent) or whether that should be disclaimed separately.

All that said, assuming a practical, expansive approach by the Courts, both the development consent and implied licence may fall within the ground of disclaimer set out in section 568 (1) (e). This ground concerns property where it is reasonable to expect that the costs, charges and expenses (here, the value of the architect’s exertions that would have to be paid to satisfy the lien) that would be incurred in realising the property  (development consent and/or implied license) would exceed the proceeds of realising the property (the added value of the development consent/implied copyright  licence to the sale price of the property).

Further, associated provisions provide an environment in which the lien can be asserted and then dealt with by the Court. So, s 568A requires the liquidator to give written notice to anyone who claims, or the liquidator has reason to suspect could have, an interest while s 568 B provides a time frame for any application to have the disclaimer set aside.

Further, once the development consent and/ or implied licence is disclaimed, the land should be sold expressly excluding both (and the point made in Torpey Vander Have Pty Ltd v mass Constructions Pty Ltd [2002] NSWCA 263 per Young CJ in Equity esp. at [94] about whether the mortgage enables transfer of the implied licence is apposite here).

But, what if, despite disclaimer and exclusion from transfer, the applicable development regime continues to operate as if the development consent remains on foot enabling the purchaser to take the benefit of the architect’s plans and drawings without having paid for them; that is, with the price of the land not having taken account of the existence of the development consent and the architect remaining unpaid?

First, if the implied copyright licence has been expressly excluded from the sale, the architect and possibly the liquidator/receiver may be able to restrain the purchaser from using the plans and in the case of the architect, assert the lien afresh.

Second, with the development consent and/or implied licence expressly excluded, the purchaser is not a bona fide purchaser for value without notice so can’t take the benefit of indefeasibility.

In addition, the architect could have recourse to section 568D of the CA which enables claimants to seek leave to make application to set aside disclaimers after they have taken effect. Here the architect would be seeking to set aside the disclaimer of the development consent (and/or implied licence) that underpins the lien. However, leave will be given only if the Court was satisfied that it was unreasonable in the circumstances to expect the party to have applied to set aside the disclaimer before it took effect (s 568D (2)). Therefore, if any application was made, there would have to be an examination of the architect’s conduct and reasons for inaction at the time of provision of the s 568A notice.

It is also possible that the value of the land may increase by reason of factors other than the development consent – say a zoning change – then if this can be demonstrated, disclaimer may also be an option.

Finally, it should be noted that given the manner in which the lien arises, if as a matter of fact, a particular development consent does not add value over and above the value of the architect’s exertions, then arguably the lien should not be recognised in any event. However s 568A, the notice provision, casts a wide net so the prudent course may be to serve the notice (rather than assume no lien) and then make this argument should application be made under s 568B.

The foregoing suggests that the increase in value assessment should be done at the time the lien is asserted, another reason not to delay.

5. If the architect is a participant in the development contributing ‘sweat equity’ through its exertions and the development company goes into liquidation or receivership, can the architect assert a lien respecting the value of its exertions against the land in any event?

The architect’s lien arises in circumstances where in fairness and equity, the Court takes the view that given the benefit received through the increase in value of the land resulting by the development consent, the architect should be compensated for its exertions. Therefore, looking at the question raised, there is a threshold issue as whether an architect who has agreed to take the risks and potential benefits of property development alongside other co-venturers rather than simply be paid for its exertions, should be able to recover some benefit in circumstances where the other co-venturers cannot.

That said, the most pertinent point may be that as a co-venturer, the architect is likely to be in some sort of fiduciary relationship with the other co-venturers so in the event the architect was able to assert a lien, as a fiduciary, it would hold any fruits of that lien for the benefit of all the co-venturers and their creditors in any event ( see Concrete Pty Ltd v Parramatta Design & developments Pty Ltd (2006) 231 ALR 663 per Gummow ACJ at 668 for a discussion of the significance of the architect being a fiduciary ). That is, in such a case, there may be nothing to be gained by asserting the lien, at least where the development company also holds the land, as any benefit would just have to be handed back to the development entity or its liquidator or receiver (if such an interest was caught by the security).

However, sometimes the landowning entity may be separate to the development entity of which the co-venturer architect was a part. If so, there may be benefits to the liquidation of the development entity for a lien to be asserted against the land (as in equity the lien could be regarded as an asset of the development company) although  that may not directly benefit the architect. In this manner, the liquidator would be monetizing the value of the architect’s contribution for the benefit of the creditors of the development entity.

CREDIT: I would like to thank my colleague Paul Noonan who reviewed these FAQs in draft and provided insightful comment.

KEY WORDS: liquidations; receiverships; mortgagee sales; disclaiming onerous property; architect as co-developer

NOT LEGAL ADVICE: These answers are given at a theoretical level with relevant arguments only lightly sketched out to show the likely direction of applicable principle so should not be treated as legal advice. Architects’ liens have not yet been given judicial consideration. Where the circumstances are such that that a lien may arise, legal advice should be sought.