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.
January 27, 2020
When is a Construction Lien Truly Lifted from Title in Ontario? Can an Owner withhold funds pending Certification by the Land Titles Registrar (which can take weeks)?
Under s. 14 of Ontario’s Construction Act a claim for lien attaches to the interest of the owner in a premises. Under s. 21 the lien attaches to the holdbacks and other amounts owed by a payer to a contractor or subcontractor in relation to an improvement. Due to these sections, a construction lien preserved against title will generally stop payments to the contractor and hold up transfers of title until the lien is either vacated or discharged. Accordingly, the pressure on counsel to quickly have a preserved lien vacated or discharged, to free up payments or allow for a closing, can be immense.
Occasionally, an owner, financier or purchaser will refuse to release funds or close a transaction even though an order or discharge has been registered on title, arguing that the registration will not be complete until it has been “certified” in accordance with the Land Titles Act. They might also refuse on the basis that the Land Titles Act gives anyone who requests a registration the right to have it withdrawn at any point prior to its certification. In our view, these refusals might (depending on the circumstances) be valid, but only where a discharge is registered and no court order has been obtained. Where an order to discharge or vacate has been obtained, however, there is no basis (under either the Construction Act or Land Titles Act) for a refusal to release funds or close a transaction due to the claim for lien.
By way of background, a preserved or perfected lien can be removed from title in any one of three ways. First, it can be forever discharged under s. 41 or 42 of the Construction Act through the registration on title “of a discharge of lien in the prescribed form” which is signed by the lien claimant. (This used to be called the “release of lien”, prior to recent changes to the Construction Act). Where a lien claim is resolved and where a court order is not otherwise required, parties might prefer this method because a court attendance will not be required and registering the discharge instrument can be completed in a matter of hours, if not minutes.
A claim for lien can also be forever discharged and/or vacated by way of court order under s. 47 of the Construction Act. Finally, the claim for lien can be vacated from title upon the payment of monies or security into court pursuant to a court order obtained under s.44 of the Construction Act. (Vacating the lien removes the lien from title. The lien is not discharged but if lifted from title and, instead, attaches to the monies or security paid into Court.)
As regards registration, the Land Titles Act must be considered. Section 78(2) of the Land Titles Act provides that a request to register an instrument (such as a discharge or order) can be withdrawn at any time before the registration is “completed”. The section further provides that the registration will not be complete until “the instrument and its entry in the proper register are certified”. The process of certification can take several weeks or more.
Where a discharge a lien is registered in the prescribed form pursuant to s. 41 or 42, an owner or purchaser might have a reasonable concern that the discharge instrument will be withdrawn or not be certified. We suggest, however, that this concern can be managed. First, as regards withdrawal, parties can ensure that the request to register is made by a lawyer who undertakes not to withdraw it. (For further comfort, owners or purchasers could insist that their own lawyer submit the discharge for registration). Second, in the case of a prescribed form the Land Titles Registrar will generally only refuse certification if the instrument contains a material error, omission or deficiency. This risk can be managed by ensuring that the form is properly and completely filled out. Even then, section 78(2) gives the person who seeks the registration time to correct the problem without impacting the date of registration. We accordingly submit that parties can (and routinely do) manage the risks of withdrawal and certification upon the registration of a discharge without requiring that payments or closings be withheld for weeks while certification is pending.
Nonetheless, if parties wish to eliminate any concerns over withdrawal and certification in relation to a discharge, they may insist that an order be taken out in that regard. This is because, as will be further discussed below, the certification of a registered instrument plays no role in whether or not, or when, a construction lien is removed from title when it is vacated or discharged pursuant to a court order.
As regards an order to vacate, s.44(1) of the Construction Act provides that the Court may make an order vacating the registration of the lien and any certificate of action. Significantly, under s.44(6), where such an order is made “the lien ceases to attach to the premises and ceases to attach to the holdbacks and other amounts subject to a charge under section 21”. (As above, these latter amounts are those owed by a payer to a contractor or subcontractor in relation to the improvement). Rather, the lien becomes instead a charge upon the cash or security paid into court and “the owner shall … be in the same position is if the lien had not been preserved”. The lien accordingly no longer attaches to the premises by operation of the order.
Similarly, where an order discharging or vacating a claim for lien is obtained under s. 47, the Construction Act does not require that the order be registered on title. Like s.44, s. 47 does not require registration as a prerequisite to the lien no longer attaching to the premises, to the holdbacks or to monies owed under a contract or subcontract.
To remove any doubt on the issue, section 49 the Construction Act expressly makes the registration of any order vacating or discharging a claim for lien optional. The section provides that any such order may be registered. Thus, while the registration of an order might be desired to give notice to the world that it has been taken out, it is not required for the order to be effective. Accordingly, the “withdrawal” or “certification” of the order’s registration will have no impact on the extent to which the lien has been removed from title by virtue of the order. Any suggestion to the contrary would be wrong in law.
In the end, the above makes sense from both a statutory and commercial perspective. The claim for lien is entirely a creature of the Construction Act and if an order made under that Act declares that the lien no longer attaches to a premises, to holdbacks or to funds owing, that should end the analysis. Any contrary analysis would unavoidably have to hold that a claim for lien registered against title shortly before the closing of an Agreement of Purchase and Sale could never be addressed in time to allow for the timely closing. This, we submit, would result in a commercial absurdity contemplated by neither the Construction Act nor the Land Titles Act.
Rob Kennaley, Kennaley Construction Law