Those involved in the construction industry are continually faced with financial risks not encountered in other commercial contexts. These financial risks stem from the fact that most construction work is carried out by different construction trades people who have no privity of contract with the owner of the project and who work without any form of security.
As a result of these risks, contractors and suppliers of work, services and supplies to real property in Ontario have been granted special protections by the Construction Lien Act (the “CLA”). The CLA sets out the rules as to who has a lien (security against the property) and the process by which lien claimants can enforce their different rights.
Section 14(1) of the CLA provides that, “a person who supplies services or materials to an improvement for an owner, contractor or subcontractor, has a lien upon the interest of the owner in the premises improved for the price of those services or materials.” The lien creates an interest in the land in favour of those who supply materials or services, thereby creating security. This operates to prevent the owner from receiving improved land without making payment for the improvement. This is especially important to subcontractors who have no direct contract with the owner (and, therefore, no right to bring an action for payment under a contract).
The Holdback Requirements
In most cases, the flow of funds under a construction project contemplates payments being made as the work progresses from the owner down to the contractors, subcontractors, and those claiming under them. It is often referred to as the “construction pyramid.”
Part IV of the CLA provides that each payer on a contract or subcontract is required to retain a holdback of 10 per cent of the price of the services or materials as they are actually supplied under the contract or subcontract until all liens that may be claimed against the holdback have expired or have otherwise been satisfied or discharged. The term “payer” is defined in section 1(1) of the CLA as meaning “the owner, contractor, or subcontractor who is liable to pay for the materials or services supplied to an improvement under a contract or subcontract.” The purpose of this holdback is to create a fund to which lien claimants may look if they are unable to recover from the person with whom they have a direct contract.
In addition to the basic holdback, there is a separate holdback for finishing work completed after the date of substantial performance of the contract.
Provided that the owner retains the proper holdback over the course of the construction and otherwise complies with its statutory obligations, the owner’s exposure to a subcontractor or supplier lien claimant, with whom the owner has no direct contract, will be limited to the amount of the holdback.
Time Limits for Enforcing a Claim for Lien
Once it is established that one has a claim for lien, it is important to maintain those lien rights and enforce them. If certain steps or dates are missed, it could be costly to the lien claimant who is trying to enforce its lien rights. The CLA sets forth specific time limits for a claim for lien, first, to be preserved by registration against the title to the property, and second, to be perfected by the commencement of a court action.
The lien must be preserved by the claimant’s registration of a claim for lien within 45 days after the earliest of publication of a certificate of substantial performance of the contract or the date the contract is completed or abandoned in the case of a contractor, or the last supply or certification of completion in the case of a subcontractor.
The next step that has to be taken to maintain and enforce the lien right is to commence an action to enforce the lien before the end of the 45-day period next following the last day on which the lien could have been registered. Therefore, the action must be commenced within ninety days of the last supply of services or materials. If this step is not taken within that period, the lien will expire, and the lien right will be lost.
There are also circumstances by which a preserved lien of a lien claimant may be perfected by “sheltering” under the perfected lien of another lien claimant in respect of the same improvement. However, to ensure one has adequate pleadings to proceed with the action, it is recommended that each lien claimant commences its own action rather than rely on the “sheltering” provision.
It is also important to note that a claim for lien will become void and unenforceable in the event the action commenced to perfect the claim for lien is not set down for trial within a period of two years from the date of commencement of the action.
Vacating the Lien
If a construction dispute arises and a lien is registered against owner’s property, often there will be a quick resolution to this dispute, especially if the owner wishes to deal sell or mortgage his property.
An owner with a lien on his property will have to remove it from the title before any prospective purchaser closes a transaction. To clear title, the owner has a few options available. Security can be posted into court for the full amount of the claim plus 25 per cent for costs to vacate the lien from the title, or the owner can negotiate with the lien claimant for the payment of an amount sufficient enough to settle the lien in exchange for a discharge.
While a discharge of the lien is ideal, if the lien is vacated, it will no longer attach to the land, and any prospective purchaser can be satisfied that the property is not encumbered.
There is very little other legislation in Ontario that provides parties entering into agreements with the type of protection offered by the CLA. Construction trades are often working without any other form of security or contract with the property owner. Not only does the CLA provide a method for assuring that there will be a source of funds available for those with a valid claim for lien, but the CLA can also be credited with facilitating the expeditious and inexpensive resolution of construction disputes.