What are the Benefits of Liening a Project?

By Sophie Petrillo (published in the January 2008 issue of Construction Canada)

Previous “Legal Issues” columns in Construction Canada have taken close looks at the effects of lien litigation in high-profile cases. This edition brings things back to basics, providing a general survey of the liens for design professionals less familiar with Canadian construction law.

In an ideal world, every contractor, subcontractor, material supplier, engineer, architect, or other consultant on a construction project would be paid in full and on a timely basis. Unfortunately, the reality is often altogether different.

Recognizing the potential volatility and instability of the construction industry, the Ontario government enacted legislation—the Construction Lien Act—to provide those involved in construction projects with an added layer of security to reduce the risk of non-payment.

Who has lien rights?

Under the Ontario Construction Lien Act, any person who supplies services or materials to an “improvement” (i.e. a construction project) has lien rights for the cost of those services or materials. The Act applies equally to the smallest, most modest of home renovations to the most elaborate commercial project.

Although earlier versions of the Act were more restrictive, the current definition of “supply of services” is broader and, as a result, the lien remedy is available to more parties in a construction project. For example, lienable services include demolition services and the supply of rental equipment.

Services supplied by architects, engineers, and specifiers are also covered by the lien umbrella. Even where construction has not commenced on a planned improvement, any design, plan, drawing, and specification that in itself enhances the land (which includes buildings) is lienable. (A person who has lien rights is a “claimant.”)

The first hurdle—preserving the lien
Lien rights expire unless certain technical steps are taken to preserve their life. The most common step is to register a ‘claim for lien’ on title to the lands where the services or materials were supplied. If the improved land is a road, a railway right-of-way, or owned by the provincial government, then the lien is preserved in a different manner.

In these cases, instead of registering the claim for lien, a lien claimant is required to ‘deliver’ a copy of it, together with the affidavit of verification, to the owner of the property. (If the owner of the land is a municipality, the copy of the claim for lien and affidavit are to be given to the clerk of the municipality. Where the owner is the provincial Crown or a Crown agency, the copy of the claim for lien and affidavit must be given to the office prescribed in the regulations to the Act.)

The information contained in the claim is prescribed by statute and includes:

the lien claimant’s full legal name;
the name of the owner of the lands;
the person to whom the lien claimant supplied services or materials;
the nature of the services or materials that were supplied;
the amount owing to the lien claimant;
the day on which the supply of services or materials commenced; and
the day on which the services or materials were last supplied.

The lien must be preserved before it expires. Generally speaking, it runs out 45 days after the claimant last supplied services or materials. In cases where a certificate of substantial performance has been published, the lien could also expire 45 days after publication, if this date comes first.

It is imperative a claimant preserve its lien within these time limits. If these limitation periods are missed—by even a single day—the lien forever expires and cannot be revived.

The second hurdle—perfecting the lien

A lien that has been preserved will expire again unless a second step is taken. This involves commencing a lawsuit to enforce the lien. Referred to as ‘perfecting,’ this step must be taken within 45 days from the last day the lien could have been preserved. Failure to adhere to this time limit means the lien is lost forever.

The holdback

The final piece of the puzzle that completes the understanding of why a claimant would choose to exercise lien rights is the concept of ‘holdbacks.’
In a typical construction pyramid, payments flow from the owner at the top, down through the many layers of contractors, subcontractors, material suppliers, and so on. Every payer in the hierarchy must retain a holdback equal to 10 per cent of the price of the services or materials as they are supplied.

A holdback must be held until all liens that can claim against that holdback have expired, or have otherwise been dealt with. Holdbacks are ‘sacred’ in that where a trade defaults, its holdback cannot be used to complete the work until all liens that may be claimed against that holdback have expired or have otherwise been satisfied. The holdbacks are pools of money available to lien claimants, provided they do not allow their lien rights to expire.

Lien claimant’s secured position

The best way to understand the benefits of exercising lien rights is to put some of the concepts outlined above into a simple example.

Large Commercial Owner Inc. (“LCO”) hires ABC Contracting Inc. (“ABC”) to design and build a new commercial office building. ABC, as the design-builder, hires Lucky Architect Inc. ( “Lucky”) as the prime consultant. Lucky, in turn, hires all of the required engineers and any other subconsultants. Lucky renders invoices to ABC totaling $1,100,000, but is not paid a dime.

It is later discovered that, LCO has paid ABC in full except for the holdback of $1,000,000. Worse still, it is also discovered that ABC has stopped operating, emptied its bank account, vacated its rented premises, and the owner of ABC has disappeared to parts unknown. Where does this leave Lucky.?

Without the Act, Lucky’s only remedy is to sue ABC for $1,100,000. In this case, Lucky will end up with an unenforceable paper judgment.

However, if Lucky preserved and perfected its lien, it could circumvent traditional contract law and make a claim on ABC’s payer, the owner. In this example, if Lucky was the only valid lien claimant, it would receive the $1,000,000 holdback in exchange for its lien, resulting in a loss to Lucky of only $100,000 (instead of the full $1,100,000). If, in addition to the holdback, LCO also owed ABC another $100,000, then Lucky might also be entitled to receive those funds, and would be paid in full. If there were other valid lien claimants claiming against the same holdback, Lucky would share the pool with them.

Impact of liens on projects

The effect of the lien remedy is substantial as it disrupts the flow of funds on a project. When a claim for lien is registered on the improved lands, those lands cannot be sold or encumbered and no further advances are made on any construction loan. The flow of payments is halted, or reduced by the lien amount.

Recognizing the disruptive chain of events that may be set off by the registration of a lien, the Act provides a mechanism for the removal of the lien from title. The lien amount, plus 25 per cent as security for costs, is lodged with the Court and the lien is lifted from the lands. This security can take the form of a Bond, a Letter of Credit, or cash. The lien no longer attaches to the lands, but instead becomes a charge against the security posted with the Court. The land can be dealt with freely and the flow of funds is restored. At the same time, the lien claimant has alternate security for the lien amount plus costs.

Conclusion

Lien-related acts can be complex, confusing, and unforgiving. However, when properly used, they can be powerful tools designed to help those most vulnerable in a construction project. Understanding the lien remedies and taking advantage of them in appropriate circumstances can mean the difference between full or partial recovery and big losses.

Legislation similar to Ontario’s Construction Lien Act exists across the country, varying considerably by province or territory. For example, the amount of statutory holdback required to be retained varies and, in some instances, is determined by the amount of the contract. However, generally the statutory holdback is in the 10 to 20 per cent range.

The time within which lien rights must be exercised also varies from 30 days ( in Newfoundland) to 60 days ( in New Brunswick and Prince Edward Island). The most common time limit lien claimants face is 45 days. Quebec has its own civil code dealing with liens, which is radically different from the rest of Canada. Because of this wide variation, a prudent lien claimant will always consult local counsel.

Where the land is situated – rather than the location of the parties – dictates which lien legislation governs. For example, if two Ontario companies enter into a contract for the improvement of land located in Alberta, the Alberta legislation will govern the lien action.