By Scott Fairley
It is a fairly simple concept that the Construction Lien Act (the act) allows a contractor, subcontractor or supplier to claim a lien against an improvement to help collect an outstanding account. However, this simple concept, as it is written in the act and applied in practice, can lead to confusion.
Proposed amendments to the act have been introduced, which could lead to changes that improve and clarify the act, but could also lead to new questions once it is applied. Over the years of advising clients in relation to construction law matters, there have been common questions or misunderstandings that arise in relation to the current act. Many of these concepts will be carried forward to the amended act, based on the proposed changes.
The purpose of this article is to review some of the common points of clarification with a view to helping to better understand if, when and how, to lien.
45 Days: Am I a Contractor or a Subcontractor?
Most people are aware that a lien has to be registered within 45 days. The question is 45 days from what? The answer is: it depends. The 45-day period commences from a different event depending on where you are in the construction pyramid. The act defines a contractor as someone who has a contract directly with the owner. Therefore, under the act, architects, framers, or general contractors are considered to be contractors if they contract with the owner of the land. All others are essentially considered to be subcontractors.
The 45-day period for contractors runs from the earlier of the publication of a certificate of substantial performance, or completion or abandonment. Completion or abandonment does not necessarily mean the date of last supply. A contractor could be off site for a long period of time with the intention to return to complete contract work and for various reasons not return. Although the date of last supply would be more than 45 days since the last supply, time would not begin to run until the point of abandonment in that case.
The 45-day period for those who do not contract directly with the owner runs from the earlier of the publication of a certificate of substantial performance or the date of last supply. In most cases, this means the last date on which contract work was performed, not including rectifying your own deficiencies. This is usually proven by a time sheet, way bill or delivery slip, and can leave less room for interpretation as compared to completion or abandonment. In any event, when considering whether the 45-day period has started to run, or has lapsed, the first question will be whether you are a contractor or a subcontractor.
What is the effect of a Certificate of Substantial Performance?
As noted above, the 45-day period runs from the earlier of the publication of a certificate of substantial performance or the date of last supply/completion or abandonment. We tend to refer to the publication of a certificate as the trump card because a supply after the publication date does not extend the lien rights for materials or services provided prior to the publication date. The first thing to note is that a project is not certified to be substantially performed, it is the contract that is certified to be substantially performed. If the owner has a contract with three different parties, there are essentially three different construction pyramids and each of the three contracts would be published separately as being substantially performed. For those who are subcontractors it is important to be aware of when the contract for your construction pyramid is published.
It is surprising how many times we receive a call to register a lien and the party provides all of the facts of the supply dates and amounts owed, but isn’t aware if a certificate has been published. We then search online to find out that a certificate was published long ago and we have to advise the person that they are out of time to lien for pre-publication supply.
Whether a certificate has been published can easily be searched in the Daily Commercial News at www.dailycommercialnews.com, and is a search that should be added to the tasks of those who are tracking receivables. Keep in mind, however, that sometimes a certificate can be published but defective, and there is sometimes an argument available to avoid the clock from running. In some circumstances, although you find a certificate, it may be worth considering it further.
The holdback: ten per cent of what?
The basic statutory holdback is ten per cent because the act says that payor can make payment of 90 per cent of the price or value of materials or services without jeopardy. The proper calculation of this holdback in any given situation can be complex and is the issue that can be the most hotly contested in construction litigation, particularly in cases of a receivership or bankruptcy within the construction pyramid.
We often hear potential subcontractor lien claimants say “what’s the point of registering a lien just to get ten per cent of my contract amount?” Subcontractors can have the misunderstanding that if they have a $100,000 contract and haven’t received any payment they can only hope to see $10,000 as a result of a lien. However, the holdback is calculated on the contact between the owner and the contractor.
In the case of a $1 million contract between the owner and contractor, there is to be a basic holdback of $100,000. It the above subcontractor is the only lien claimant to share in the holdback fund, it can be entitled to the full $100,000 to cover its entire account, as opposed to only ten per cent of its own contract amount.
Of course, each situation is different and it depends on how many lien claimants share in the holdback fund, but title searches can be conducted to determine if there are other lien claims, and information can be obtained under the act, to determine what benefit a lien might provide.
The proposed amendments: What is next?
Bill 142, An Act to Amend the Construction Lien Act has been introduced in the legislature and, if passed, will introduce many changes to the act with the intent to improve on streamlining the flow of funds on construction projects. While the basic concepts under the existing act remain intact, there are many proposed changes, including a prompt payment regime, that will be added. The proposed act will include deadlines for prompt payment and notices of dispute, which should improve the flow of funds but also make it more clear which projects are problematic and may require lien rights to be exercised.
Bill 142 also includes certain improvements such as a dispute resolution process for the prompt and efficient resolution of disputes with the intention of minimizing disruption to construction schedules. In addition, Bill 142 allows for reference of hearing for liens under $25,000 to Small Claims Court, which should be more efficient and cost effective. Under the current act, a lien action can only proceed in Superior Court and cannot be heard in Small Claims Court, which is costly for liens that are $25,000 or less. If Bill 142 passes, it should create a more efficient manner of pursing smaller liens, rather than leaving a lien claimant to decide whether or not to lien or simply let the lien lapse and proceed in Small Claims Court for a contract judgment.
The proposed changes are too voluminous to review in this article, and are subject to change thought the process of being approved by the legislature. However, more information is available on the Legislative Assembly website at www.ontla.on.ca. As indicated at the outset of this article, we hope that Bill 142 clarifies and improves the current act and answers more questions than it creates.
While there are many aspects of the act that can be unclear, there are certain questions that arise on a frequent basis. This article does not deal with all of the issues that commonly arise but will hopefully provide some clarification for a few of the most common.
Prepared by Scott Fairley, partner, Dooley Lucenti LLP. For more information, contact him at firstname.lastname@example.org or at (705) 792-7963.