Legal Definitions - contractual lien

A contractual lien is a legal claim on someone's property that comes into existence because two parties have specifically agreed to it in a contract. Unlike other types of liens that might be automatically created by law or common practice, a contractual lien exists solely because the parties involved willingly consented to it as part of their agreement. This agreement grants one party a security interest in the other party's property, meaning they have a legal right to claim that property if a debt or obligation outlined in the contract is not fulfilled.

Here are some examples to illustrate how contractual liens work:

• Imagine you purchase a new boat using a loan from a credit union. The loan agreement you sign will typically include a clause stating that the credit union holds a contractual lien on the boat. This means that until you fully pay off the loan, the credit union has a legal claim on the vessel. If you were to stop making payments, the credit union could repossess the boat to recover the money you owe, as explicitly agreed upon in your contract.
• A small manufacturing company needs to buy specialized new equipment to fulfill a large order. They take out a business loan from a bank, and as part of the loan agreement, they offer the new machinery as collateral. The contract specifies that the bank has a contractual lien on this equipment. This arrangement provides the bank with a security interest: if the company defaults on the loan, the bank has the right to take possession of the machinery to satisfy the outstanding debt, based entirely on the terms they both agreed to.
• Someone needs a short-term personal loan and agrees with a private lender to use a valuable collection of antique coins as security. They sign a written agreement stating that the lender will hold a contractual lien on the coin collection until the loan is repaid with interest. This means the lender has a legal claim on the coins, and if the borrower fails to repay the loan as promised, the lender can take possession of the collection to cover the debt, based entirely on the terms they both agreed to.