March 20, 2025
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Part II in a Series on Changes to Ontario’s Construction Act:
The Annual Release of Holdback and Annual Expiry of Lien Rights
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In our introductory article on forthcoming changes to Ontario’s Construction Act, we advised that we would be writing targeted articles and conducting seminars to drill down into the significance of the new legislation. In this article we will discuss the requirement that holdback be released annually, a change which comes with a corresponding annual expiry of lien rights. These changes will be significant in ways that many in construction may not understand or be prepared for.
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We agree that interim, or annual, release of holdback on multi-year projects is a good idea, and we applaud the decision to make it mandatory. In our view, however, there significant problems with how the new legislation is drafted. In what follows, we will summarize the changes, outline our concerns about them, and then recommend how in our view the processes might be made more efficient and predictable towards better outcomes. In this regard, we believe that the release of holdback upon the completion of phases of the work should be maintained, that the contractor (and not the owner) should drive the process through applications for holdback release (as is currently the case with substantial performance), that more efficient ways can be determined for how annual release dates are set and that dispute resolution provisions need to be introduced. We are also strongly of the view that there is no need to have lien rights expire on an annual basis.
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Before we dig into the changes, we’d like to share that our seminar series will commence Tuesday April 1, 2025, and continue weekly so long as there is an appetite for them. They will be free and conducted over Zoom from 8:30 – 9:30 am every Tuesday. Our goal will be to give focused and practical information and end each session on the hour. Our first topic (April 1, 2025, at 8:30am) will be on understanding and managing the risks associated with US tariffs on the construction industry. Thereafter, a number of seminars will be focused on the Construction Act changes. Other topics, of course, will follow. Not infrequently, industry representatives, consultants or other lawyers will join us. For a list of upcoming seminars and to register for some or all of them, please visit the Webinars page on our website, at kennaley.ca or email us at inquiries@kennaley.ca.
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The Need for Change
As outlined in our introductory article, the changes are further to recommendations made by Duncan Glaholt, a very well-known and respected construction lawyer, arbitrator and author in his Report The 2024 Independent Review: Updating the Construction Act. Mr. Glaholt described the need to address delays in holdback release on modern multi-year projects as an “urgent issue”, suggesting that “our new reality requires that we strike a new balance”. A mere portion of Mr. Glaholt’s well articulated explanations for why change is required is set out below:
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“Ontario’s current, well-intentioned holdback scheme places unnecessary stress on the entire interdependent system. People and trades least able to sustain this retainage are most vulnerable to insolvency. They are left dependent on strangers to their subcontract or purchase order. They end up waiting, and waiting, and waiting to receive money earned several months – or even several years – earlier.” [1]
We don’t quarrel with this. Subcontractors, in particular, are increasingly required to finance projects in circumstances where delays to substantial performance can put receipt of their holdback off indefinitely, often where the 10% held back reflects more than their actual profit in the job. Suppliers of services and materials should be able to get their holdback earlier on multi-year projects and the current approach, which allows phased or annual release of holdback on a voluntary basis on some contracts,[2] has not solved the problem.
How the Forthcoming Annual Release is Structured
Subject to the transition provisions set out at s.87.4 of the Act, the new s.26 of the Act provides that:
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the owner must determine the “date on which the contract was entered into” and publish a prescribed form of “Notice of Annual Release of Holdback” in one of the 3 construction newspapers authorized for Construction Act publications within 14 days of each anniversary date; [3]
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the “Notice of Annual Release of Holdback” must set out what the owner “intends” to pay by way of the annual release, as well as the “intended payment date”;
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upon the Notice being published, a 60-day lien expiry period commences. Anyone who has lien rights for pre-anniversary date supply must either preserve a lien or lose their lien rights in relation to (only) the “supply of services or materials to an improvement that are included in a notice of annual release of holdback published in accordance with section 26”;
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within 14 days of the lien expiry period, and so long as no liens have been preserved but not discharged or vacated, the owner must pay the contractor all of the “accrued” holdback, in respect of “services or materials supplied by the contractor during the year immediately preceding the anniversary”; and
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if liens remain preserved but not discharged or vacated on the 14th day, the owner must make payment “not later than 14 days after the circumstances preventing payment cease to apply”.
Below is a graphic which sets out the process.
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As above, the process is subject to the transition provisions set out at s.87.4. Effectively, where the old Construction Lien Act continues to apply, or where the prompt payment and adjudication provisions of the Act do not apply, the new annual release of holdback provisions do not apply. In addition, if the first anniversary date falls less than 12 months after the new requirements are proclaimed into force, then that date is ‘skipped’ and the next anniversary date becomes the first effective anniversary date.
ssues and Unknowns with the Process
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There are, we suggest, significant unknowns and issues surrounding the process:
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the owner must determine the “date on which the contract was entered into”. This might be unclear and subject to dispute. There is also no mechanism under the Act to allow a contractor or subcontractor to challenge the owner’s decision in that regard;[4]
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the owner must also determine what it “intends to pay” by way of annual release. The Act offers no formulae or guidance for how the calculation is to be made and no way for a contractor or subcontractor to challenge the owner’s determination in that regard [5];
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the owner must then pay all holdback which has “accrued” during the year immediately preceding the anniversary. However, “accrued” is not a defined term. It may be that “accrued” is intended to refer to amounts already retained as holdback by the Owner from the contractor’s monthly payment draws. However, this is not clear;
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it is entirely uncertain what happens if there were no pre-publication invoices or where invoicing is based on milestones. Under the proposed process, the owner will nonetheless have to determine what amount of holdback has “accrued” under the contract, with no formulae or guidance for how the determination should be made;
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an even more problematic question is: how is the contractor to determine how to distribute the holdback it receives amongst subcontractors? On sophisticated projects, progress applications are very often approved based on a schedule of values which breaks the contract price down into items of work, not subcontract prices. It appears that the contractor will have to make its own assessment of what has been paid by the owner vis-à-vis each subcontractor. This may be difficult where it is not clear how the owner determined either the amount it “intends” to pay or the amount “accrued” as holdback;
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finally, there are no set consequences for an owner who pays an unreasonably low amount. There are also no paths for a contractor or subcontractor to challenge the owner’s determinations in that regard or for a subcontractor to challenge the quantum of the distribution from a contractor or subcontractor above them in the pyramid.
From a broader perspective, we note that the onus is on the owner to drive the process for annual release of holdback. We believe this will put unnecessary stress on many owners, for example where the owner is working under a CCDC5A model and has dozens, if not hundreds, of trade contractors on the same project.
Similarly, large owners (including ministries, municipalities, transit authorities, school boards, crown agencies and developers) might have hundreds of contracts on the go at any one time. We believe that requiring owners to track the anniversary dates of hundreds of contracts, year over year, will impose administrative burdens that may be difficult to manage and result in inefficiencies and errors. These burdens are also, of course, to be imposed on top of the already onerous burdens of determining (within 7 days) whether invoices are proper and (within 14 days) whether a proper invoice ought to be paid.
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In addition, requiring the owner to first state what it “intends” to pay, and to then later actually pay the “accrued” holdback, is problematic. The owner’s actual holdback obligation under s.22 is to retain “10 per cent of the price of the services or materials as they are actually supplied under the contract”. This, of course, can be for more than what was retained from a contractor’s progress draws, for example where the contractor has not submitted progress invoices or where the contractor has not invoiced for work-in-progress, unapproved changes or the impacts of delay. [6] Also, unsophisticated owners may not have the ability or experience required to reasonably or accurately assess what should be paid.
Some Suggested Tweaks to the Process
a contractor driven process
We suggest that the process for annual release of holdback should mirror, so far as is possible, the established process for basic holdback release following substantial performance which owners and contractors are already familiar with. This only makes sense. We therefore suggest that the contractor should be the one who drives the process. The contractor, after all, wants to get paid and has the incentive to make a timely application (as it does in relation to substantial performance). In addition, if the contractor is applying for the annual release of holdback, the contractor will understand what portion of the application relates to which subcontractors, such that its distribution of holdback received will be (at least potentially) easier to manage.
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We believe the contractor’s application for the release of the holdback should set out its position on the applicable release date and the amount it believes should be released. As is the case with substantial performance, then, the parties can engage over whether or not that application is accurate and a right to dispute resolution (through the Courts or adjudication under the Act) can be provided for to address disagreement which cannot be resolved.
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maintaining the option for the release of interim holdback in phases
We believe the currently available option of releasing interim holdback upon the completion of phases or milestones in the work should be maintained. We understand that the option has been working well on CCDC5A projects. This, because everyone knows that the holdbacks will flow when a recognizable phase is concluded. Thus, if there are five phases there will be five predicable release dates (rather than potentially hundreds of releases, year after year, on hundreds of different “contract” dates). Allowing for this option also solves the problem of how the holdback is to be calculated annually on contracts where payments are tied to milestones. Any concern that the option can be abused by selecting phases that arise years apart or only towards the completion of the contract can, we suggest, be addressed in the legislation.
picking the dates for annual release
Where release of holdback is to occur on annual release dates, we believe a better system for picking those dates can, and should, be developed. First, the “date the contract was entered into” might be hard to determine and disputed. Further, requiring owners to manage potentially hundreds of release dates per year is unfair and invites both chaos and inefficiencies.
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One option would be to allow owners and contractors to pick a date for annual release. Alternatively, the Act could allow the owner to select from one of four quarterly dates to process the annual releases. We also believe that language should be drafted to ensure that owners don’t have to engage a holdback release process twice in quick succession, where the last anniversary date occurs shortly before substantial performance is going to be obtained.
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In the end, we suggest that institutional and sophisticated owners are best suited to provide feedback. They are, after all, the people who deal with these processes on a daily basis.
dispute resolution provisions
We believe that dispute resolution provisions can and should be set-up to allow owners to dispute the contents of an application for interim holdback release and to allow contractors and subcontractors to enforce the holdback distribution obligations of others.
further changes to the Act and the Regulations
We understand that Regulations are being drafted to better particularize how the changes to the Act will be implemented. In this regard, there is no question that the Regulations can be used to bring clarity to the processes and solve some of the issues surrounding the forthcoming changes. (They cannot, however, alter or over-rule the requirements of the Act, such as annual lien expiry or the obligations put owners in relation interim holdback release).
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We were surprised that stakeholders were not given an opportunity to review or comment on either Mr. Glaholt’s Report or the actual wording of the Bill 216 changes, before they were passed into law. We believe further changes to the Act or Regulations in relation to interim release of holdback should be circulated in draft form for review and comment by stakeholders.
The Annual Expiry of Liens
As above, the forthcoming changes tie the annual release of holdback to an annual expiry of lien rights. A new section 31(2) more particularly provides that all liens arising from the supply of services or materials to an improvement that are “included in a notice of annual release of holdback” will expire “on the 60th day after the date the notice is published”. This change raises a number of significant questions and concerns.
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First, it may be difficult for contractors and (especially) subcontractors to determine what is “included” in a Notice. If uncertainty exists, some may lien out of caution.
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More significantly, those with overdue accounts or unresolved claims will now have to ‘make the call’ every year on whether or not to lien. Currently, they generally only have to make that call once: before their lien rights against the basic holdback as a whole expires. In making the yearly call, those with overdue accounts and those who fear the holdback might not actually be paid, might understandably be reluctant to give up their lien security over the “accrued” holdback. Said another way, the tensions that often arise on-site when trades are asked not to lien for the benefit of the project will often occur yearly.
Mr. Glaholt suggests in his Report, however, that such tensions and disputes will be resolved through adjudication:
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“Any payment issues will have been resolved by agreement or adjudication of a “proper invoice” under the Act. The prompt payment and adjudication systems are specifically designed to resolve disputes efficiently and expeditiously before money becomes payable”.
We cannot agree, however, that subcontractors will have the time, resources or forethought to obtain (and recover on) positive results in adjudication before they must ‘make the call’ on whether or not to let their lien rights in relation to an anniversary date for holdback release. Subcontractors might decide not to adjudicate for any number of business reasons, including where the claims are for ongoing impacts which might not have crystalized. This will be particularly so in relation to delay claims. In addition, as adjudication is only an “interim” remedy for which there is no security or guarantee of payment, nothing short of actual payment will suffice before some will allow their lien rights to expire.
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We accordingly believe that having lien rights expire on an annual basis will result in increased lien activity. While the extent of the activity might be debated, it would be naïve to think there will be none. Our instincts suggest there will be more than we should be comfortable with.
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Curiously, the annual expiry of liens is not required for the annual release of holdback to work. To be clear, the voluntary process which is currently in place does not involve the expiry of liens. Rather, under the current process if the owner and contractor agree to release the holdback in phases or annually where allowed, the holdback fund is simply reduced. The fund becomes smaller with no lien rights expiring by virtue of the release itself. Those who have lien rights for pre-release supply can assess whether the reduction in the fund will justify preserving a lien before the release occurs. In many circumstances, we imagine that lien claimants would conclude that their continuing lien rights against the remaining fund will be sufficient. Regardless, under the present system they at least have the option of liening for their pre-release supply at a later date. There is, we suggest, no reason to force lien claimants to ‘make the call’ on an annual, or interim, basis.
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We fear that forcing subcontractors to ‘make the call’, annually, will result in lien claims being preserved in the middle of a projects where there are concerns about delays, disputed changes or the likelihood that funds will flow from above. It will result, we fear, in some projects suffering a run on lien claims long before a contract is substantially performed, as subcontractors move to preserve their rights, before they lose them, in uncertain circumstances. If the project is to continue, monies will need to be spent on bonding, or other types of security, to vacate the liens from title. In some circumstances contractors will be unable to resolve or vacate the entirety of a mid-project run of subcontractor liens, resulting no doubt in a combination of further delays, contractor terminations and/or contractor liens.
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We fear that mid-project lien runs will in some cases result in project failures, particularly as the process is likely to repeat itself annually. We also note that there can be a significant difference between a run of liens at the end of the job and a run of liens mid-stream: the equity in an almost completed project can be used to resolve lien and mortgagee claims, while a partially completed project will often be virtually worthless beyond the value of the land.
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We also note that the annual (or interim) expiry of lien claims will invite litigation over whether a claim for lien includes amounts which were “included” in a prior year’s Notice of Intention to Release the Holdback. Similarly, in changing the Act to provide for the annual expiry of lien rights, the overall lien expiry provisions of the Act have been completely re-written. Accordingly, decades of existing case law which has interpreted the existing provisions may have to be revisited. Some will argue that the new provisions apply differently than the old. We believe that construction litigation is already sufficiently complicated and expensive and that we should utilize established, Court considered language wherever possible.
We accordingly believe the decision to tie the annual expiry of liens to the annual release of holdback is problematic and should be reconsidered.
Summary
In summary, we believe that the mandatory interim (phased or annual) release of holdback is a good idea. We do not believe, however, that lien rights should correspondingly expire on an annual basis. Rather, we believe the Act’s lien expiry provisions should remain unaltered such that, while the holdback fund will be reduced upon its interim or annual release, persons with liens can assess the circumstances and decide whether or not to lien (knowing that their lien rights for pre-anniversary date supply will continue, albeit against a smaller fund). This is what is contemplated by the current, voluntary process.
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We also believe it should be the contractor that drives the process of interim holdback release, as they do now in relation to substantial performance, by applying for same. This, we believe, will lessen the burden on owners and be more likely to result in timely outcomes. We believe that the option of holdback release in phases should be maintained. We also believe that owners should be able to pick triggering dates for annual release that are not tied to the “contract date”, so that they will not have to potentially manage hundreds of release dates in relation to any one project or any one calendar year. We believe that dispute resolution provisions can and should be set-up to allow owners to contest the contents of an application, allow subcontractors to insist that the application process be followed and allow contractors and subcontractors to enforce the holdback distribution obligations. We finally believe that further proposed legislative or regulatory amendments should be circulated for comment before they are passed into law.
Our next article in this series will address the forthcoming change which deleted s.27.1 of the Act and the owner’s right to set-off for backcharges or deficiencies as against the holdback at the end of the lien expiry period. The change, we submit, is both significant and problematic.
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To subscribe to our blog, register for a Webinar, please visit our website at kennaley.ca. To inquire about seminars for your group or association, please contact us at inquiries@kennaley.ca.
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Rob Kennaley and Rachel Prestayko*
Kennaley Construction Law
(*with the assistance of Sam Aird, Student-at-Law)
[1] page 12 of Mr. Glaholt’s Report
[2] where the contract price is more than $10 million
[3] the owner must also “following each anniversary of the date on which the contract was entered into” give the Notice to the contractor “in accordance with subsection (3)”. Subsection (3), however, is silent on the issue.
[4] Section 39 allow requests for the date to be made of owners or contractors, however given the potential confusion, the two might provide different answers to the question.
[5] unlike what is provided for in relation to substantial performance.
[6] s.1(1) of the Act expressly provides that “price” includes “any direct costs incurred as a result of an extension of the duration of the supply of services or materials to the improvement for which the contractor or subcontractor, as the case may be, is not responsible”.
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