KPA Lawyers - July 16, 2020
In this article, we’ll be discussing a little bit about how construction liens work in Ontario. For homeowners, we’ll be exploring questions like what happens if I renovate my home but don’t provide full payment for services rendered by my contractor? For contractors, we’ll also discuss the other side of the situation and what you can do if you haven’t been paid for a renovation that you performed on someone’s home.
We’ve made this article in a way that we hope will be relatively straightforward, and easy to understand whether or not you have any experience in construction, real estate or knowledge of the law. Even if you’re a construction lawyer just getting started in your career, you’ll likely find some helpful information in this article as well.
What is a construction lien
First, let’s start off by explaining what a construction lien is. In Ontario, a construction lien is a legal claim for payment for goods or services that have been supplied to improve a property. This is sometimes called a builders’ lien or mechanics’ lien in other provinces in Canada.
The idea here is that a person who supplies services or materials to improve real estate is entitled to a lien against the premises that they worked on. The person who is owed the money in a construction lien is called the “lien claimant”.
The monetary value of the lien is an amount equal to the price of the services or materials. As long as services or materials were provided, it doesn’t really matter if the services or materials were provided directly to the owner, or to a contractor, or even to a subcontractor.
A construction lien is a pretty serious legal tool because it typically gets registered on title to real estate. It’s okay if you haven’t heard the expression “registered on title”. What that basically means is the lien will be saved in a government record where it will be publicly visible to anyone who wants information about that property. More importantly, if a particular piece of real estate is purchased or sold while a lien is registered on title, some or all of the money in the transaction will be used to pay the lien claimant, whether or not the buyer or seller wants that to happen.
Having a construction lien registered against a property can also create other disruptions in a homeowner’s life. For example, if you have a home equity line of credit, it is very common for banks to freeze your line of credit when they discover that a lien has been registered against your real estate.
Keep in mind that homeowners making payment for a home improvement is required to retain or “hold back” 10% of the amount owed until all potential liens have expired or been satisfied, discharged, or vacated by payment into court. This obligation extends to every level of the construction pyramid, or in other words, it applies to all contractors and sub-contractors involved in the project. The owner must hold back 10% of the amount owed to the contractor, who in turn must hold back 10% owed to the subcontractor(s), down to the bottom of the pyramid.
As you’ve probably noticed by this point in the article, construction law in Ontario can get fairly technical, and compared to other areas of law. In fact, we’re just getting started. There are many strict deadlines and requirements that must be followed. There are many pitfalls and common slipups that even lawyers will occasionally struggle with when it comes to construction law. Since failing to follow these very specific rules and requirements can result in serious consequences for both contractors as well as homeowners, we’re going to spend some time talking about these rules.
We’re going to mention a couple of legal terms so you can understand some of the deadlines involved. Almost all liens must first be “preserved” and then “perfected”. Let’s talk about what it means to preserve a lien.
Just because someone provided goods or services to improve a property does not mean that they are allowed to wait around forever to exercise their right make a claim for a lien. Preserving a lien is exactly what it sounds like, in the sense that it avoids the expiration of a lien claimant’s rights. If the lien claimant is registering the lien on title to a home, then the lien may be preserved by making a registration in the relevant land registry office. This is usually done online by a lawyer. If the lien claimant is not registering the lien on title, then the lien may be preserved by simply giving the homeowner a copy of the “Claim for Lien”, which is a formal legal document.
Like we mentioned, there are important deadlines involved here. A lien must be preserved within 60 days of the publication of something called a Certificate of Substantial Performance, or within 60 days of the contract is completed or abandoned, whichever is earlier.
A construction project is considered to be “substantially performed” when both the following criteria are met:
First, the home improvement is being used or ready for use;
Second, the cost to complete the project is less than:
· 3% of the first $1,000,000;
· 2% of the next $1,000,000; and
· 1% of the balance
Certifying that a project has been substantially performed can allow for the release of holdbacks even where some work remains to complete the project. The rules governing the certificate of substantial performance can be found at section 32 of Ontario’s Construction Act.
It’s important to keep in mind that a Certificate of Substantial Performance has no effect until a copy is published in a “construction trade newspaper”. A construction trade newspaper is a newspaper that meets the following four requirements:
· it is published either in paper format or in electronic format, with circulation generally throughout Ontario
· it is published at least daily on all days other than Saturdays and holidays,
· calls for tender on construction contracts are customarily published, and
· it is primarily devoted to the publication of matters of concern to the construction industry.
Alright, so whether you’re a contractor or a homeowner, you’re going to want to know if the lien was preserved correctly, so for now, let’s assume that is has been preserved properly, and move on to the next step.
Perfecting the lien
The next step is called perfecting the lien. But what does this mean?
A preserved lien will expire unless perfected before the end of the 90th day following the last day on which it could have been preserved. The clock doesn’t start from the actual date that it was preserved, but is related to the same triggering event giving rise to the preservation requirement.
For example, if the triggering event was the publication of a Certificate of Substantial Performance and a lien was preserved 10 days after publication, the lien must be perfected within 140 days of being preserved (1500 days after publication, the triggering event).
Where the lien attaches to the premises, you must also register a certificate of action on title. In other words, this means that the lien claimant must start a lawsuit against the homeowner, which is usually done through a construction lawyer. After the lawsuit has been commenced, the certificate of action can be created and registered on title. The certificate of action is a very specific legal form, and it must be issued by the court registrar. This can be a procedurally delicate process, so it’s important to use a construction lawyer who knows what they’re doing.
If the lien attaches to the land, but the owner has posted monetary security and obtained a court order removing the lien from the real estate title, then the certificate of action is no longer required.
The 90-day perfection deadline only applies to:
· Contracts or procurement processes started on or after July 1, 2018; and
· Contracts or procurement processes on or after December 6, 2018, where the premises was subject to a lease that pre-dates July 1, 2018.
Prior to the changes in the law, the deadline to perfect was 45 days from the last date that the lien could have been preserved. This deadline still applies to contracts pre-dating the updates to the law.
If you are uncertain whether the current or previous deadline applies, the best practice is to operate on the assumption that you have only 45 days to perfect the claim.
It’s important to keep in mind that a preserved lien can be perfected without the necessity of any other steps being taken by a process called “Sheltering”. This concept is a little bit more advanced, and is beyond the scope of this article. If you have questions about sheltering a lien, feel free to reach out to us for an appointment.
Now let’s move on to how a lien can be removed from the title of a piece of real estate.
Vacating and discharging liens
Removing a lien is always of particular importance to homeowners. After all, homeowners don’t want that kind of headache attaching to their real estate.
It’s important to understand that there is a difference between “vacating” a lien and “discharging” a lien.
Vacating a lien involves removing a lien from the title of a particular real estate property, usually by offering up some monetary security to the lien claimant. A lien may also be vacated where there is an error in the original registration to allow a lien claimant to register a corrected lien, provided the time for preservation has not expired.
Posting security and vacating a lien may be necessary in landlord-tenant relationships, where a sale of land is in progress or where the terms of the construction financing require that title to remain free and clear.
Vacating a lien does not end the lawsuit related to the lien. The court case continues as before, except for the following:
· One, the lien claimant doesn’t get to force the sale of the land.
· Two, the security charge is now against the money that was put up rather than the land itself.
· Three, a Certificate of Action is no longer required to perfect the lien.
Basically, it’s simply the registration from title that is being removed. The lien claim still technically exists, but the lien is considered to be a charge on the monetary security that was posted.
Acceptable forms of security are:
· Payment into court by certified cheque or bank draft.
· A deposit of an irrevocable letter of credit in the prescribed form from a recognized chartered bank.
· Posting a guarantee bond.
It’s important to keep in mind that a court order is required to vacate the lien. This means that a lawyer will bring a motion which may be brought in front of a judge without the involvement of the other party. This is called an “ex parte” motion, which simply means that the other party’s involvement is not necessary. If the monetary security posted by the homeowner is for the full value of the lien plus the lesser of $250,000 or 25% of the lien, then the court order is mandatory.
A judge, or a master, which is a type of judge, can decide to vacate a lien even if a lesser amount of money is posted, where it is reasonable to do so. However, in those cases, you cannot proceed with such a motion without at least notifying the other party about the motion. In other words, the homeowner cannot bring an “ex parte” motion if the homeowners wants to post a lesser amount of money that what is ordinarily required.
Discharging a lien
Now let’s talk about discharging a lien.
When a lien is discharged, the lien right is permanently extinguished. This means that the right ceases to exist. A lien may be discharged by one of the following two ways:
· First, it can be done voluntarily by the lien claimant who would sign something called a “Release” and registering the release on title.
· The other way is by obtaining a court order from a Judge or Master.
Mistakenly registering a release or discharge of lien where the intent is actually to vacate a lien will be fatal to the lien right. The court has no power to revive the lien or reverse such a mistake. Therefore, it’s important for lawyers to be very careful to make sure all parties understand whether a lien is being vacated or discharged.
The difference should be made clear in all;
· Discussions with clients;
· Negotiations with the opposing lawyer;
· When creating registration documents and court orders;
· When creating settlement documents, called “Minutes of Settlement”; and
· When giving instructions to any individual or support staff who creates registration documents.
Despite the distinction between vacating and discharging a lien, the electronic registration system in Ontario uses one form to achieve both. This is known as an “Application to Delete Construction Lien” and it requires you to specify whether the lien is being:
· Discharged voluntarily;
· Discharged under a court order; or
· Vacated by court order.
In the latter two situations, the court order must be attached to the application.
So now you know a little bit about the basics of how construction liens work in Ontario. It’s important to remember that this article is not intended as legal advice, and you should always speak with a qualified lawyer if you have questions about a construction or renovation related legal dispute in Ontario.