"Where things lie still." is a sentence and is correct. The subject is implied:
"Where is it? (It is) Where things lie still."
There is a difference between "lie" and "lay". "Lie" means that someone or something is situated somewhere. "Lay" means that something is begin put somewhere.
"The cat lies on the sofa." "He lay the cat on the sofa."
The difference is that "lie" doesn't take a direct object ("ON the sofa"). "Lay" does take a direct object ("the cat").
So grammatically, Eric Clapton's "Lay Down Sally" is incorrect. It should be "Lie Down Sally." Musically, however, it's incredible and should remain exactly as it is. This is why you never heard of an English teacher with a gold record.