CONSTRUCTION LIENS

BACKGROUND

A lien is a claim against property. A construction lien is a special kind of claim created by an Act called The Construction Lien Act. These liens are used by people who carry out construction work or supply materials or services for the construction, repair or alteration of buildings.

The rights that are acquired under The Construction Lien Act are not instead of, but in addition to, any other rights that workers and suppliers of materials and services might have for recovering their money at law. Among those who would commonly use construction liens are general contractors, trades people of all kinds, surveyors, architects, designers and material suppliers. This means that any party claiming that they have not been paid for their work in a construction project may decide not to use the construction lien system to collect their money, but still has the right to proceed to sue in Court for breach of contract.

In passing this kind of legislation, recognition is made of the fact that things happen quickly in the construction business, and that once work has been done or materials and services have been supplied to a property, it is impractical to take them back. All other provinces of Canada, and most of the United States, have similar legislation.

HOW DOES IT WORK?

As soon as someone provides work, services or materials to a construction site, the right to a lien arises. The Construction Lien Act ("the Act") provides that this lien will expire if it is not "preserved", or registered, within 45 days after the last substantial supply of services or materials. This is why many supply contracts require payment within 30 days after delivery.

Most liens are registered against the lands and premises as the 45 day period approaches, since there are costs associated with the registration of the lien. Often, the registration of the lien itself is enough to get the claim paid, unless there is a dispute about the amount of the contract. Even where the amount is in dispute, the party against whom the claim is made may pay the amount into court, plus estimated court costs, and the lien will be discharged so that the parties can battle it out later, thus clearing the title to allow the property to be sold or mortgaged.

As noted above, the 45 days start running after "substantial performance" of the work. There are detailed rules in the Act defining what substantial performance means, although this hasn't prevented innumerable arguments and complex case law on the issue.

As mentioned above, the missing of the period for registering your claim does not mean you cannot sue at all, it simply means that it may not be possible to proceed under the Act.

The basic purpose and effect of registering a lien is to give the claimant priority on title against any future mortgagee or owners of the property in question. This has the effect of preventing the owner from mortgaging or selling the property without dealing with the lien claimant, and also makes them aware that a law suit may be pending if they don't deal with the matter immediately. Often the registration of the claim itself causes payment to be made, or at least arrangements to be made for a settlement. Mortgagees will not provide construction money or financing on a property that has outstanding construction liens unless arrangements have been made for the settlement or discharge of the lien. Further, lawyers acting for purchasers will not recommend to their clients that the purchasers proceed to buy (nor will the purchasers be obligated to proceed to buy) unless liens have been dealt with in some way.

WHAT IF THE CLAIM FOR LIEN IS FILED AND PAYMENT IS STILL NOT MADE?

In the instance where the claim is filed and the lien remains unpaid, the claimant has an additional 45 days (meaning a total of 90 days after substantial completion) to register a "Certificate of Action" against the lands and premises. This means a law suit has been commenced. If this additional step is not taken, the claim will normally expire, and the party who had it registered will usually be required to have it removed from title.

Often, the expense of multiple court actions by workers on the same project can be avoided by a process called "sheltering" in which claimants proceed under the umbrella of one claimant and sometimes share the costs.

HOLDBACKS

Under the Act, anyone paying another party to work on a construction project, or to provide materials or services, must hold back 10 per cent of the amount owing until the time for filing all liens relating to the holdback has expired. For example, this means that if the general contractor is paying an electrician $15,000.00, he must hold back $1,500.00 until 45 days following the electrician's last substantial supply of services. Further, if the electrician has subcontracted part of the work out and owes another party $3,000.00, then he must hold back $300.00 until 45 days after that individual's work has been substantially completed, and so on. Normally, all funds are released once the 45 day period for all parties has passed. Obviously, the termination of the 45 day periods will be different for all the parties, since their different stages of work and supply will have taken place at different times.

Any individual who does not hold back the amount that they were supposed to, will still be liable for that amount, and possibly more, if others further down the construction chain do not pay the amounts that they were supposed to.

WHAT IF YOU ARE A HOUSE PURCHASER?

The legislation recognizes this, and protects people in most cases by saying that a "home buyer" will not be subject to these unknown lien rights. The Act defines "a home buyer" as being a party who does not pay more than 30 per cent of the purchase price prior to closing and also stipulates that for this definition to apply, closing cannot occur until an occupancy certificate is issued by the Municipality or a Certificate of Completion and Possession is issued under The Ontario New Home Warranty Plan Act. Obviously, this shows the importance of making sure your deposit is no higher than 30 per cent and that the proper documentation is provided on closing.

If you are a home buyer and a lien such as the one described above is filed, you will not be liable in spite of the fact that it has been filed within the 45 day period.

CONSTRUCTION MORTGAGES

Under The Construction Lien Act, where a mortgage for the purposes of construction is obtained, a lender will normally hold back 10 per cent of all money paid out until lien periods have expired. Cases involving these types of mortgages can become quite complex, since arguments arise as to exactly what money was advanced at what time, as compared to the various stages of construction that were reached when each advance was made. In these types of cases, construction lien lawyers will often refer to disputes over "priorities", that is, which claim or mortgage should rank in importance ahead of the others.

SPECIAL CASES

Where work is done on municipal streets, rather than a lien being registered, a notice is given by registered mail to the clerk of the particular municipality. It is not possible to claim a lien against lands in this case. There are also special regulations for the service of liens where work is done for the Province of Ontario.

A WORD ABOUT TIMING

Just about any lawyer who practices construction lien law in the Province of Ontario has had the experience of a lien claimant appearing at the doorstep on day 44 or day 45 of the eligibility period. It is a good idea if you are even considering a lien, to touch base with your lawyer well in advance and let him or her know what might be in the offing. The lawyer can then tell you what information you will need to have at your fingertips well in advance so that you will not miss out on your opportunity to register in a timely way because of insufficient information or because you have simply run out of time. The documentation for a claim is relatively straightforward, but does take some time to prepare properly and register. In any registration process there can be glitches and things that need to be changed at the last minute. It is generally a good idea to plan to register by day 40 of the eligibility period in order to allow for any last minute problems. The basic information required to file the lien is: the legal description, the amount of the entire invoice, the amount paid, the amount due, interest terms, if any, the legal owner of the lands and the person or company to whom the funds are owed.

REMOVAL OF THE LIEN

The lien can be simply removed from title by way of a form of discharge similar to a mortgage discharge and the same applies to the Certificate of Action once a law suit has been commenced. There are costs and penalties for those who file false or inappropriate liens.

The Construction Lien Act, as mentioned above, can be one of the more involved pieces of legislation in Ontario. The above is simply an outline and not intended in any way to be a comprehensive analysis of construction lien law or actions that should be taken in any particular circumstance. If you wish to discuss construction liens or your particular construction lien problem, please give us a call at the numbers provided at this site, or e-mail us at any time.