January 4, 2018

Ontario’s New Construction Act:

new lien procedures, lien limitation periods and trust obligations

On December 12, 2017, Ontario’s Construction Lien Act Amendment Act, 2017 was passed into law.  Its substantive changes will come into force on a date to be determined (or “proclaimed”) later this year.  Among other things, these will change the name of the Construction Lien Act to the Construction Act. 

In addition to the new prompt payment requirements and adjudication procedures set out in the legislation, the changes include new procedures, longer lien timeframes and enhanced trust obligations.  We will review some of the more substantial changes, below.

 

    Holdback

 

In keeping with the ‘prompt payment’ and ‘adjudication’ provisions that have been introduced into the new legislation, new provisions in relation to holdback are designed to help contractors and subcontractors be paid more efficiently. 

 

Under the current legislation, of course, the holdback cannot be released until all liens that might be preserved against the improvement have expired, been vacated from title or resolved.  Once that point is reached, however, the holdback ceases to be holdback.  Rather, it becomes monies potentially due and owing to the contractor under the contract.  Significantly, the owner can apply a set-off against those funds, for backcharges or for any other debt allegedly owing. 

 

This puts the contractor in a difficult position:  if he does not preserve a lien, he has to trust the owner to pay the holdback.  Similar dilemmas face subcontractors who have to decide to either lien for their holdback or have faith that it will be released by everyone above them in the payment chain.

The new Act addresses this problem by making the payment of the holdback mandatory once it becomes due, unless notice to the contrary is given in a prescribed (or mandatory) form and manner.  These provisions will give those awaiting their holdback the opportunity to preserve claims for lien.  Participants in the industry will have to understand, and meet, their notice obligations in this regard.  If you think you have a set-off against the holdback, you will have to give notice.  Also, those awaiting holdback must understand and look out for a notice that the holdback is not going to be released.

 

Other significant changes to the holdback provisions include the following (which will assist to get the holdback into the subtrades’ hands in a timelier fashion): 

 

< >provisions which allow the holdback, in some circumstances, to be released on an annual, or phased, basis;  andprovisions which allow the owner and contractor to carve out a portion of the work from the calculation of substantial performance, so as to allow for an early release of holdback,

 

    Lien Expiry

 

Contractors and subcontractors have long complained that 45 days is not enough time within which to preserve a claim for lien.  Many would point out that because their payment terms are 30 days and they are rarely paid on time, they have to decide whether or not to lien before they really know if they have a problem.  The notices now required in relation to holdback (see above) will help.  In addition, under the new provisions, the 45 day time frames within which a lien had to be preserved will be extended to 60 days.  In addition, while a lien claimant used to have to commence an action to enforce the lien within 45 days from the last day it could have preserved the lien, it will now have 90 days to do so.  This, hopefully, will allow for more settlements and less litigation.

 

In addition, and to ensure that the adjudication process is allowed to work, no one’s lien rights will expire while they are in the middle of an adjudication that has not been delayed or extended.  This allows anyone with a lien to assess the results of an adjudication before deciding whether or not to preserve that lien.  If it has not already expired, a lien will not expire until 45 days after the receipt of documents by the adjudicator in accordance with the adjudication proceedings.

 

Currently, the contractor’s lien expires relative to the completion or abandonment of a contract.  The new provisions add “termination” to this list.  The practical effect of the change is that if the owner terminates the contract, notice of the termination must be given and, at that point, everyone’s liens for services or materials provided under the contract (including those of subcontractors) will expire no later than 60 days following the termination (subject to the timeframe being extended by an active adjudication). 

 

    Leasehold Improvements

 

The law as it relates to liens against premises that are subject to a lease has been clarified and in some ways changed.  Landlords can still be liable as “owners” of an improvement, so long as they meet the definition of “owner” under the Act.  However, contractors who contract with the tenant (and those underneath them) will no longer have to send out a s.19 notice requesting that the landlord does meet that test.  Rather, the determination will be made automatically by virtue of a test set out in the legislation.

 

    Monetary Adjustments

 

A contract will now be deemed complete when the lesser of 1% and $5,000.00 (rather than $1,000.00) worth of work (including the rectification of deficiencies) remains to be corrected.  Substantial performance calculations will now be based on $1,000,000.00 instead of $500,000.00.  To vacate a lien from title to a premises (by paying in cash, bond or letter of credit) the quantum of the claim for lien plus 25% or $250,000.00 (instead of $50,000.00) will now have to be paid into court.  This will be significant for some. 

 

    Construction Trust Obligations

 

The Act continues to deem that monies which are intended to pay for an improvement and are received by or owed to anyone who owes those beneath them in the payment chain for their supply of services and materials to be trust funds.  It has often been debated whether or not someone who receives such trust monies should hold them in a separate account.  The new provisions allow the monies to be co-mingled in a single account, with other monies, but will not require the person receiving them (the trustee) to maintain detailed records of the monies in and out, on an improvement by improvement basis.  (These changes appear designed, in part, to give unpaid contractors and suppliers a potential claim on the trust funds in the event the trustee goes into bankruptcy protection.  Whether or not the changes will suffice for that purpose remains to be seen and will be for a Court to decide based on federal bankruptcy and insolvency legislation. 

 

    The Definition of “Repair” 

 

The Act will be changed in an effort to clarify that only “capital” repairs to the land will give rise to lien rights.  This appears directed, in part, at the argument (and recent case law) suggesting that certain maintenance activities, including “grounds keeping” should be considered lienable.  To clarify, the new definition of “capital repair” will include for “any repair intended to extend the normal economic life of the land or of any building, structure or works on the land, or to improve the value or productivity of the land, building, structure or works, but not including maintenance work performed in order to prevent the normal deterioration of the land, building, structure or works, or to maintain the land, building, structure of works in a normal, functional state”. 

 

We don’t believe that including the “productivity of the land” was necessary.  It appears that many agricultural activities will now be lienable.  It certainly remains to be asked:  what portion of a landscaper’s maintenance work could be said to improve, as opposed to maintain, the value or productivity of the land.    If, for example, I spray for weeds or to make flowers grow bigger and brighter, am I improving the land’s value or productivity?  This is to be determined.

 

    Procedures for Lien Actions

 

The procedures to be followed in a construction lien action have been largely removed from the legislation.  The extent to which we will now fall back on the usual rules of court set out in the Rules of Civil Procedure remains to be seen.  This is because much of the procedures will be addressed in regulations (if at all) that are still to come.  However, certain changes have been made in the new Act.  In this regard, and subject to what is said in the regulations, interim steps that do not result in a final decision on the merits (such as motions or discoveries) will no longer need the consent of the Court.  In addition, parties will be able to join a trust action with a lien action and will no longer need leave of the Court to bring third parties into a lien action. 

 

The requirement that a lien action be tried as summarily as possible will be maintained.  However, the above noted changes appear destined to take much of the ‘teeth’ out of the requirement.  It appears, subject to any corrections that occur by way of regulation, that many lien actions will take longer to conclude, given that interlocutory steps and the joinder of trust claims and third parties will apparently be allowed as they would in any other action.  This may be done, however, in the expectation that only matters that could not be solved by way of the timely adjudication processes will proceed by way of lien action.

 

    Addressing the Lien that Should Not Have Been Preserved

 

The court will now be able to discharge a lien on a motion if it finds the claim for lien to be frivolous, vexatious or an abuse or process.  In addition, the threshold for finding someone personally liable for improperly preserving (or giving written notice of ) a lien has been lowered.  In this regard, the concept of “gross exaggeration” of the lien giving rise to damages has been replaced.  Now, a person will be liable where he or she knows that there is no lien or that the amount of the lien has been “willfully” exaggerated.  The changes also clarify that a motion may be brought to reduce the amount of an exaggerated lien.

 

     “P3”, Municipal and “Broader Public Sector” Projects

 

The definitions and procedures have been changed to address “public, private partnerships” (or “P3”) projects, and improvements in which municipalities are potential owners.  These changes will largely be of a concern to lien lawyers, who have to ensure that liens are properly preserved.  The changes are certainly intended to, and will, clarify previous confusion in some circumstances. 

 

Of note, performance bonds and labour and material payment bonds will now be mandatory on P3, municipal and “broader public sector” improvements.  The latter includes virtually any project paid for by tax dollars, including hospitals and school boards, etc.  Of particular interest is the fact that, as drafted, the required labour and material payment bonds will have to be available to all subcontractors, and not just the first-tier subcontractors of the principal under the bond.  It is not clear how sureties will respond to, or price, this requirement.  Given that the definition of subcontractor includes anyone beneath the contractor who provides services or materials to an improvement, including trades, consultants and suppliers, the scope of risk to be undertaken by the surety will be substantial and hard to assess.  On the other hand, of course, this is good news for those further down in the construction pyramid. 

 

    The Lien for Delay

 

Over the years, lien lawyers have characterized the monetary impact of a delay on a project as being the increased cost of actually providing the services or materials in question.  This was necessary to avoid the argument that the impacts claimed were pure “damages” which had no relationship to the cost of the actual work.  The Act will now expressly give the suppliers of services or materials lien rights for “the reasonable costs of performing the contract or subcontract during the extended period of time, including costs related to the additional supply of services or materials (including equipment rentals), insurance and surety bond premiums, and costs resulting from seasonal conditions, that, but for the extension, would not have been incurred, but do not include indirect damages suffered as a result, such as loss of profit, productivity or opportunity, or any head office overhead costs.”

 

    Notices and The Daily Commercial News

 

Notices will no longer be published in the Daily Commercial News.  It is most likely that all notices will be made on-line, and that (for the most part) anyone with an interest will have to go online to see if a relevant notice has been given or published. 

 

    Summary

 

In summary, in becoming the Construction Act, the (soon to be former) Construction Lien Act just got a lot more complicated.  Care must be taken in addressing lien issues, procedures and timeframes, in meeting the new trust obligations, and in preparing for and taking advantage of the prompt payment and adjudications procedures. 

This material is for information purposes and is not intended to provide legal advice in relation to any particular fact situation.  Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.

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