Architects vs Unpaid Fees: Is a lien the answer?

Can unpaid architects recover their fees as a charge over the land and /or development consent running with the land obtained using the architect’s plans and drawings?

EXTRACT

Copyright in architects’ plans and drawings is generally subject to an implied licence to use the plans and drawings to build the designed structure on the land for which they were prepared. Once development consents or planning approvals are obtained, that licence becomes irrevocable and with the development consent, the licence travels with the land for the life of the development consent.

I argue that upon issue of the development consent, an architect’s lien over the development consent and/or the land arises to secure payment of the architect’s fees and that that lien has priority over the interests of any secured creditor.

KEY TAKE AWAYS

1. Once development consents or other planning approvals are obtained, an implied, irrevocable licence arises respecting the copyright in plans and drawings, the subject of the development consent, for the benefit of subsequent owners of the land for the period of the development consent.
2. Equitable liens are a means of adjusting mutual rights and obligations and many derive from the principle that those who get the benefit should bear the cost of recovering that benefit.
3. In my view, while architects’ fees remain unpaid, upon issue of the development consent, an architect’s lien arises over the development consent and/or the land the subject of the consent.
4. The lien protects the value of the architect’s exertions so covers fees calculated pursuant to generally accepted rates not profit share and in some cases, assessment may be by quantum meruit.
5. As an incident of the development consent, that lien runs with the land and has priority over all over secured interests save for a subsequent lien. Further as a species of salvage lien, it will not be extinguished by a bona fide purchaser for value without notice but may be extinguished by judicial sale.
6. As a salvage lien, equity expects that it will be enforced in a timely manner for example, in the case of multi unit developments, the court may expect any enforcement to occur prior to the issue of strata titles in accordance with the terms of the development consent. Accordingly, if there is any dispute about the existence of the lien, the architect should not delay bringing proceedings.
7. If not satisfied prior to sale, the lien or charge can be satisfied out of sale proceeds after the costs of sale and any other subsequent lien.

INTRODUCTION

In this article, I argue that unpaid architects can recover their fees as a charge or lien over the development consent running with the land obtained using the architect’s plans and drawings.[1]

However, depending upon the basis upon which fees have been agreed, it is possible that recovery may be limited to a quantum meruit assessment. The charge or lien I have identified protects the fruits of the architect’s exertions not any contractual entitlement to a share in the profits. Further, it will have priority over all claims against the land and/or the development save for the costs of sale and other like charges or liens.

My point assumes an arms’ length professional relationship between architect and developer. Where the architect is part of any joint venture development then different considerations apply.

CURRENT LAW

Copyright and implied licences

Architects have copyright in plans drawn by them[2] and it is settled law that clients commissioning architectural plans have an implied licence to use the plans for the purpose agreed by the parties[3]. Further where that purpose relates to building a structure on particular land and the plans were prepared on that basis, the licence includes an implied term that the owner may assign the licence to a subsequent purchaser.[4]

The Courts have also recognised that the preparation of plans and drawings as part of the application for a development consent by a local council is part of a progressive process governed by legislation. “If a development application is successful it will form the basis of more detailed plans and drawings leading to final plans and drawings in accordance with which a building, as approved, will be built”.[5]

Is the implied licence irrevocable?

That is, can the implied licence be revoked for non-payment or be determined  for fundamental breach of agreement on the basis of non-payment?

The existence of an implied term must always be considered in the context of the terms of the agreement in question as implied terms must not be inconsistent with written terms. However, where the architect/client agreement is silent about these matters, the court must consider the nature and extent of the implied licence and this is what occurred in Ng v Clyde Securities.[6]

There, Wootten J of the NSW Supreme Court said:

In my view, it is not reasonable to imply a term that the licence, once granted and acted upon, may be revoked in the event of subsequent non-payment. This is particularly so when, as here, a licence for immediate use of the copyright is granted in return for promises of payments at the dates of future events contingent on its use. The withdrawal of the licence would not merely affect the future activities of the licensee, but, by preventing the completion of a building, would render valueless what might be an enormous past investment in the building. Looking at the matter in terms of business efficacy, I find it unthinkable that the owner would agree to a licence revocable if a possibly temporary difficulty prevented him from paying his architect at the agreed time. Unless an architect expressly stipulated for such a devastating right of revocation to enforce actual payment, it is more reasonable to regard him as giving a licence in return for a debt recoverable, if unpaid, by ordinary litigious processes. He is essentially selling something, viz, his plans and a licence to build in accordance with them, in return for a promise of future payment, and the ordinary basis of a sale is that it gives the vendor  right in the event of non-payment to sue for recovery of the purchase price, not a right to deprive the purchaser of the enjoyment of the object sold, or to complain of the use by the purchaser of the article sold prior to payment for it [footnote omitted]”.[7]

This decision was applied by the High Court in Concrete Pty Ltd v Parramatta Design and Developments Pty Ltd.[8]  The Concrete case concerned an attempt by an architect (a Mr Fares of Parramatta Design and Developments Pty Ltd) to restrain use of its plans respecting the site on the basis that no implied licence existed.  Parramatta Design had been part of a joint venture to develop the land. There was no written joint venture agreement or terms of engagement with the architect.  Initially the architect drew up plans for an eight unit development and payment was made for the plans and drawings. Then it seemed that a sixteen unit development could be possible and the architect drew up further plans and drawings free of charge. In due course, a development consent was obtained. There was a falling out between the parties to the joint venture and subsequently the site was sold to Concrete Pty Ltd. A dispute then arose between the purchaser Concrete and the architect about whether Concrete could use the plans and drawings that had given rise to the development consent with Parramatta Design arguing that the absence of an agreement that it be paid a fee, precluded the existence of the implied licence. At an early stage, without admission of liability, Concrete offered Parramatta Design $33,000 plus costs (more than it had received for the eight unit plans) but Parramatta rejected that offer and counter offered in the sum of $5 million.

The leading judgment is that of Justices Kirby and Crennan. After setting out the facts and summarising the decisions of the courts below, they considered the NSW legislative scheme supporting development consents and then referred to Ryde Municipal Council v Royal Ryde Homes, where Else-Mitchell J said:

“… a consent to the development of the land under a prescribed planning scheme is not personal to the applicant but enures for the benefit of subsequent owners and occupiers, and in some respects a consent is equivalent to a document of title”.[9]

The judges then considered the context of earlier decisions regarding the existence of an implied licence and whether it was critical that the architect had been engaged on the basis of being paid a fee. They said that consideration of this question should focus on what occurred at the time the plans were prepared and not at a later time. In this regard, they concluded that the plans were contemplated to be used to develop the site through to making profits from the sale of constructed units and that these purposes “must encompass and include a sale of land with the benefit of the development consent, by the owners, after the development consent has been obtained and before completion of the development”.[10]

Further the fact that the architect did not charge a fee “suggests no more than that the architect was willing to contribute his architectural skills to the joint venture….were the position otherwise, an architect could ‘sterilize’, that is, render unproductive, the land in the hands of the owners (including any co-owners), any liquidator of the owners or any successor in title to the owners. That would be the case particularly where considerable costs might be necessary to prepare fresh plans or where, as here, legislative changes meant that a development consent for a project of a similar size would not be forthcoming” (footnote omitted).[11]

The judges then considered the position of the purchaser:

“Despite the architect’s conduct prior to the sale, the implied licence in favour of the owners of the land to use architectural plans and drawings for the purpose for which they were commissioned also gives rise to an implied licence in favour of successors in title, the purchaser, Concrete. This implied consent does not arise out of any contract between the purchaser and the architect, but is implied from the nature of the original arrangement between the owners and the architect. The owners requested and obtained the architectural plans and drawings for the purpose of obtaining a development consent which ran with the land for a period of five ears and which would permit the building of units, for sale, substantially in accordance with that development consent. An earlier sale than was originally contemplated does not extinguish that implied consent”.[12]

This implied licence becomes irrevocable once a development consent has been granted “because one of the purposes for which the plans and drawings were prepared has been achieved”.[13]

It is not necessary that the plans and drawings be delivered to the purchaser nor does a notice of dispute regarding the plans or absence of a warranty vitiate the consent. These circumstances “do not preclude its implication which flows from a consideration of all the circumstances, including the circumstance that the development consent runs with the land for five years and can be presumed to add value to the land”.[14]

Summary: implied licences

In summary then:

1. Unless inconsistent with the terms of the agreement between architect and client, an implied licence to use the architectural plans and drawings prepared by the architect respecting the land, arises by reason of the nature and purpose of the agreement between architect and client.
2. The implied licence becomes irrevocable once a development consent or equivalent planning approval is obtained and like the development consent, runs with the land for the period of the consent and enures for the benefit of successors in title.
3. The existence of the implied licence is said to be consistent with the business purpose for which the architect was engaged and given that development consents and the like run with the land for the period of their validity, were it to be otherwise, an architect could sterilize the productivity of the land and potentially render works worthless to the detriment of other stakeholders including creditors.

Equitable and salvage liens

Equitable liens have long been recognized as a means of adjusting mutual rights and obligations[15] with examples including a repairer’s lien, warehouseman’s lien and a general solicitor’s lien over the solicitor’s file.

In addition, solicitors have a particular lien over any property or judgment sum recovered on the basis that “they who get the benefit of the recovery of money should bear the expense of recovering it’.[16]

This idea is consistent with the principle set out by Dixon J in Re Universal Distributing[17] which was described by the High Court in Stewart v Atco Controls Pty Ltd (in liquidation) [2014] HCA 15 as follows:

[A] secured creditor may not have the benefit of a fund created by a liquidator’s efforts in the winding up without the liquidator’s costs and expenses, including remuneration, of creating that fund being first met. To that end, equity will create a charge over the land in priority to that of the secured creditor”.[18]

Later the High Court said;

 “[I]t might be said that a secured creditor would be acting unconscientiously in taking the benefit of the liquidator’s work without the liquidator’s expenses being met. However, such a conclusion is avoided by the application of the principle stated in Universal Distributing”.[19]

Liens recognised in Universal Distributing and Stewart’s case are a species of salvage lien. Like maritime liens, they arise automatically upon the happening of the event giving rise to the lien and continue to exist subject to any timing limitations until payment is made.

Given the manner in which maritime liens arise, they have also been described as ‘secret liens’ as they do not require registration or other notification to take effect. Therefore, they can survive a change of ownership (unless via court auction) and are not extinguished by a bona fide purchaser for value without notice.[20]

QUESTION: Could unpaid architects’ fees give rise to a charge over a development consent that runs with the land and/or the land itself?

In Ng v Clyde Securities, Wootten J described an architect’s fees as a debt recoverable “by ordinary litigious processes”.[21] However, where the rigor of the common law leads to unfairness and an affront to conscience, equity can intervene.

My argument is this:

1. It is well established that development consents and their equivalents (“development consents”) run with the land for the period of their validity.
2. Development consents materially enhance the value of the land to which they apply. That benefit will enure to the owner of the land or to its creditors in the event the land is sold subject to the development consent. That benefit is likely to be some orders of magnitude greater than the amount of the architects’ fees.
3. In this regard, the position is not analogous with the sale of some article of personal property where title passes upon delivery and the only recourse is to sue for debt. In such transactions, the purchaser acquires an asset for the value of the sale price and a commensurate liability to pay that price to the vendor. Here, through the architect’s exertions, the value of the owner’s land is enhanced many times more than the costs incurred to achieve that outcome, namely the liability to pay architect’s fees. That is, ‘the equity ledger’ is skewed in favour of the owner and its successors-in-title to the detriment of the architect.
4. Therefore, to adjust the ledger and in the interests of fairness and equity given the architect’s inability to revoke the implied licence, I argue that the architect is entitled to a charge or lien over the development consent and/or the land reflecting the value of the work done either assessed pursuant to its terms of engagement if they reflect industry rates and practice or otherwise to be assessed on a quantum meruit basis. I am not saying the architect is entitled to a percentage of the increase in value occasioned by the existence of the development consent (although in some instances that may be appropriate). Rather I am arguing that the architect should be compensated or rewarded in recognition of its role in enhancing the value of the land for the benefit of all stakeholders and enabling them to preserve and realize that benefit.
5. Returning to the purpose of equitable liens, the architect’s lien is an adjustment of rights and obligations necessitated by the architect’s inability to revoke the implied licence or withdraw its consent to exploit its copyright in circumstances where other stakeholders able to enjoy the fruits of the architect’s labours. That is, just as the irrevocability of the implied licence was premised on the idea that the architect should not be able to sterilize the productivity of the land, so too must those benefiting from the actualization and preservation of that productivity bear the cost of creating it.
6. Further where a financier or mortgagee steps in and completes a development using the architect’s plans and drawings, it steps in subject to the architect’s interest as it too, is taking the benefit of the architect’s labours to realize its security.
7. Put another way, to preserve or salvage the enhanced value of the land enabled by the plans and drawings as approved by the relevant development or planning process, a step-in financier or subsequent owner needs recourse to the plans and drawings. That is, by utilizing the plans and drawings either actively (through completing the building) or passively (by selling the project subject to the development consent), the financier, owner or subsequent owner has secured a material benefit from the architect’s labours and accordingly a salvage lien or charge arises over the development consent which runs with the land and/or the land itself, for the benefit of the architect.
8. Further, given the manner in which the lien arises – automatically upon issue of the development consent – it survives sale to a purchaser without notice of the lien so long as the purchaser had notice of and took the benefit of the development consent.
9. That is, as an incident of the development consent, the lien travels with the development consent (and therefore alongside the land) until satisfied by payment or the development consent lapses through passage of time.
10. Accordingly, if the purchaser has notice of the development consent and wishes to take advantage of it, then it should inquire whether the architect’s lien has been satisfied.
11. Further, as liens are an exception to the requirements of registration under the personal property securities regime,[22] failure to register will not doom the interest.
12. Finally, if the lien is treated as an incident of the development consent (which runs with the land), indefeasibility should not defeat the lien given that it doesn’t affect the transmission of the implied licence.
13. As a species of salvage lien, equity may expect beneficiaries of the lien to act promptly to realise their lien and as an incident of the development consent, it may be prudent to seek satisfaction while the conditions of the development consent are not yet completely satisfied to avoid issues about whether once the development consent is spent, the lien then attaches to the land with the building the subject of the plans and drawings and if so, what about indefeasibility of title. That is, if there is dispute about the existence of the lien, the architect may have to bring proceedings however as case law develops, the likelihood of this being necessary will diminish.

The existence of such a charge or lien is not inconsistent with the decision in Concrete because there the architect had contributed his labours to the joint venture as ‘sweat equity’[23] in contrast to an architect who enters into an engagement to provide plans and drawings for a fee.

Each case will turn on its facts but even where there is room to argue that plans and drawings provided as sweat equity could give rise to a charge or lien, if the architect was party to a joint venture, such a charge or lien is likely to be held by the architect as a fiduciary for the benefit of the joint venture (and/or its creditors), not just the architect.[24]

Finally, what about ‘unjust enrichment’? This principle was considered in Torpey Vander have Pty Ltd v Mass Constructions Pty Ltd.[25] The Supreme Court of New South Wales Court of Appeal concluded that the principle did not apply (with Young CJ in Eq dissenting).  Liens or charges do not appear to have been argued in the case and in my view, the approach taken by the majority reflects the difficulties of applying that doctrine to these circumstances. The idea of ‘unjust enrichment’ was developed to solve different problems than I am addressing here and, in my view, the doctrine of liens is the better approach.

PRACTICAL CONSIDERATIONS

In the normal course, architects are paid by their clients and disputes about the performance of the professional contract apart, issues of non-payment generally only arise when the client becomes financially distressed. In such circumstances, either step-in rights are exercised or the land and/or development is sold, as is.

If the land is sold subject to the development consent, then the architect’s lien can be satisfied out of the proceeds. Further consistently with Universal Distributing and Stewart’s case, the lien should have priority over any secured creditor although there may also be other liens to be satisfied first such as respecting the costs and expenses of sale; and in this regard, it is worth noting that maritime liens do not follow the usual rule of first in time with the last lien usually being satisfied first.

Further with the lien generally recognised, given its ubiquity, it will be an easy matter during the prepurchase phase for a purchaser wishing to avail itself of the development consent to satisfy themselves as to whether the lien has been discharged.

It should also be noted that if the lien attaches to the development consent, rather than the land, this will also avoid issues about whether or not the lien is a caveatable interest in terms of relevant state legislation.

If step in rights are exercised and the development completed then the potential inherent in the development consent will have been realized and of course, the structure built according to the architect’s plans and drawing will be subject to its copyright.  The question then arises as to whether the lien will simply attach to the land (via the structure affixed to the land) and if so for how long: indefinitely, only for the balance of the limitation period respecting which the architect could claim its fees or for some shorter period? And what about indefeasibility of title? In maritime law, it is expected that liens will be enforced in a timely manner so potentially the equitable doctrine of laches or delay could come into play. That is, use it promptly or lose it! Therefore, equity may look for a convenient time at which the architect could have enforced its rights.

In the case of multi-unit developments, one such point may be at the point of applying to have the strata titles issued. Requiring satisfaction then would avoid issue of whether the interest is affected by indefeasibility.

Alternatively, if subdivision does not occur, upon agreement the lien could be satisfied out of final sale proceeds or the architect could bring proceedings to assert its lien before the development consent is spent (that is, the final conditions are met).

CLOSING OBSERVATIONS

This article assumes an arms’ length arrangement between architect and developer with the architect seeking recovery of its fees or a reward for its exertions (quantum meruit). In other kinds of arrangement, the ‘equity ledger’ may not require adjustment.  However, arguably an architect’s lien will arise wherever, in all the circumstances of the case it would be unconscientious to deny the architect some recompense or reward for the fruits of its labours given the benefits that accrue to other stakeholders.

[1] Penelope Pengilley would like to acknowledge and thank Keypoint colleagues Roland Burt and Paul Noonan, and Andrew Roe of counsel, who participated in early discussions about this idea, Roland, Paul and Keypoint colleague Sangeeta Thaker for making important comments on the draft and Keypoint paralegal Jade Jowett-Crociani who assisted with research and also reviewed the draft. Any errors are considered Penelope Pengilley’s. 

[2] Section 10 Copyright Act 1968 (Cth).

[3] Beck v Montana Constructions Pty Ltd [1964-5] NSWLR 229.

[4] Ng v Clyde Securities Ltd [1976] NSWLR 443.

[5] Concrete Pty Ltd v Parramatta Design & Developments Pty Ltd (2006) 231 ALR 663, per Kirby and Crennan JJ at p 679 [62] (‘Concrete’).

[6] [1976] NSWLR 443.

[7] Ibid at p 446.

[8] Concrete, per Kirby and Crennan JJ at p 683 [75]-[76].

[9] Ibid at 681 [67].

[10] Ibid at 684 [82].

[11] Ibid at [83].

[12] Ibid at p 685 [86].

[13] Ibid at p 686 [95].

[14] Ibid at 687 [96].

[15] Stewart v Atco Controls Pty Ltd (in liquidation) (2014) 307 ALR 562, per Crennan, Kiefel, Bell, Gageler and Keane JJ at p 566 [14] citing Davies v Littlejohn (1932) 34 CLR 174 at 185.

[16] Ibid at [16] citing Guy v Churchill (1887) 35 Ch D 489 at 492.

[17] In re Universal Distributing Co Ltd (in liq) (1930) 48 CLR 171.

[18] Stewart’s case (n 15), at p 567 at [22].

[19] Ibid. at [23].

[20] Callaway, “Maritime Liens and Claims”, (1989) 6 MLAANZ Journal – Part 2 15.

[21] Ng v Clyde Securities (n 4).

[22] Section 8(1) Personal Property Securities Act 2009 (Cth).

[23] Concrete case (n 5) see discussion at pp 684-685 [84].

[24] Ibid see Hayne J at 692-693 [124].

[25] [2002] NSWCA 263, (2002) 55 IPR 542.