Who is entitled to a Construction Lien?
Under section 14 of the Construction Lien Act, any person who supplies services or materials to an improvement is entitled to a lien. This basic definition is very broad and can capture within its reach many improvements involved with one property. Further, there can be many persons involved with each improvement. Each person involved in an improvement has a lien against the interest of the owner of the property for the price of the services or materials provided the moment that the work is begun or materials are supplied.
Therefore, suppliers of materials, lessors of equipment, and suppliers of services all have rights to lien. However, not all service providers qualify as potential lien claimants. For example, those providing janitorial services generally do not qualify as lien claimants.
Although services considered to be "soft" services historically did not have lien rights in Ontario, it is no longer the case. For example, architects carrying certificates of practice and their employees are now able to lien property interests.
General Liens
It may be the case that several projects are to be constructed under one contract. If this is so, a "general lien" may be used pursuant to section 20(1). The impact of this provision is powerful. It works like this: If an owner owns three lots and contracts with a general contractor in a single contract to construct on all three lots, the contractor or its subcontractors can lien the property interests of the owner in any or all three of the lots for the full amount of the claim. However, section 20(2) allows an owner to limit lien rights on a lot-by-lot basis within the contract itself.
Government Property
It is not possible to register a lien on government property (section 16(1)). Instead, if work or services are provided with respect to a government property, a Notice of Lien should be served on the government entity for which the work is responsible. Where a government property is jointly owned by another entity, however, section 16(2) allows the non-governmental entity's interest to be liened. In fact, any non-Crown interest in property can be subject to liens. However, a lien with respect to work on a public road or on premises which the Crown is the owner operates only as a charge upon the holdbacks that are required by the Act and the registration requirements are not necessary (section 16 (3)).
Leased Premises
When making improvements to properties subject to leaseholds, it is possible to lien the interest in the property of a landlord. In order for this to occur, it is necessary for the contractor to give written notice of the work to the landlord before it begins. The landlord then has 15 days after receipt of this notice to disclaim any responsibility for the renovations or construction. If not, then the interest of the landlord may be liened.
Without a lien, a contractor or subcontractor is an unsecured creditor whose rights may be subject to subordination in the event of a bankruptcy. A properly perfected lien, or a trust, which is discussed in further detail below, has the effect of rendering the claimant as a secured creditor (the creditor's interest is now vested in property itself). Otherwise, a service or material provider is limited to any remedies that are available pursuant to the contractual relationship only. Having a lien places such entities in much better positions with respect to the prospects of collecting what they are owed.
Times within which to file a Construction Lien
There are two steps necessary to secure a lien claimant's right to lien a property. Both of the steps are time sensitive and, if either of them is missed, the lien claimant is out of luck.
Firstly, a construction lien must be "preserved" within a prescribed time. Preservation occurs in regards to a lien that attached to the premises when a "claim for lien" is registered on title to the property. Where a lien does not attach to a premises, preservation occurs when the claim for lien and an affidavit of verification is given to the owner. The time in which a lien claimant has to preserve a lien must be within the earlier of:
1. 45 days after completion or abandonment (45 days after the last day on which work was performed on the site); or
2. 45 days after publication of the certificate of substantial performance.
For example, if the work is completed on January 1, but a certificate of substantial performance (also known as subtantial completion) is published on December 31, the lien must be preserved by Valentine's Day (February 14). If, however, the certificate is published on January 2, the lien must be registered by February 15.
Secondly, a lien must be "perfected". With respect to a lien attaching to premises, this occurs when a Statement of Claim is issued in the Superior Court of Justice and a Certificate of Action is registered on title to the property. For liens not attaching to premises, perfection occurs simply when a Statement of Claim is issued. A lien must be perfected within 45 days of the time for which preserving a lien expires. That is, 90 days from either the last day worked on the site or the day on which the certificate of substantial performance is published, whichever comes earlier. For example, if the certificate of substantial performance is published on January 1 (and assuming that the work has not been completed), preservation must occur by February 15. As long as preservation has been completed on or before February 15, the last day on which a lien may be perfected is April 1. This is true even if preservation occurs on February 5, for example.
The definition of "substantial performance" is as clear as mud. Pursuant to section 2(1) of the Act, substantial performance arises where the improvement, or a substantial part of an improvement is ready for use and it is possible to complete the contract at a cost of no more than 3 percent of the original contract price.
The Construction Lien Act also provides that a contract is "deemed" to be completed "when the price of completion, correction of a known defect or last supply is not more than the lesser of" 1 percent of the contract price plus $1,000.00 (section 2(3)).
The Act also provides for "sheltering". Sheltering occurs when one lien claimant with a preserved lien rides the coattails of another, which has perfected its lien. As long as the second lien claimant's lien is perfected within the time limitation of the first lien claimant's perfection of its lien, the first lien claimant is "sheltered" by the perfection of the second lien claimant's lien. However, in many cases it is not adviseable to rely on the shelter of another's lien. This is because the sheltered lien is perfected only with respect to the Defendants which are named in the sheltering lien's Statement of Claim and the sheltered lien will be limited to the relief claimed in that Statement of Claim.
Priorities
A central issue that arises where there are a number of creditors involved with a property is what priority construction lien claimants have over other claimants and other security holders such as mortgagees. The Construction Lien Act sets out many rules involved with the determination of priorities.
Section 77 provides that "liens arising from an improvement have priority over all judgments, executions, assignments, attachments, garnishments and receiving orders except thos executed or recovered upon before the time when the first lien arose in respect of the improvement". Consequently, unless any of the above occurs before work is commenced with respect to an improvement, a lien ranks in priority.
As for mortgages, the same can be said as above. Liens take priority over all mortgages, conveyances or other agreements that affect the owner's interst in the property (section 78(1)). However, this rule is significantly qualified.
For example, all non-building mortgages registered prior to the time when the first lien arises, and advancements made pursuant to them, take priority over the lien (section 78(3)). The priority is limited, however, to the lesser of the value of the premises at the time the first lien arises and the total of all amounts advanced prior to the time the first lien arises. In this respect, if an improvement increases the value of the premises, the mortgagee's interest in the property does not take priority over the value added.
Further, mortgages take priority over liens for any amounts advanced pursuant to the mortgage after the first lien arises unless a lien was preserved or perfected against the premises at the time of the advance or the person making the advance has received written notice of lien prior to the advance (section 78(4)). This makes complete sense. If a lien is preserved or perfected, a mortgagee searching title to a property will have notice of the lien. If an advance is made by a mortgagee or, for example, a bank has made an advance pursuant to another type of agreement after a lien is preserved, it is done at their own peril. What matters is that the creditor in this case has notice of the lien and should be alert to the fact that their interest is being threatened by the existence of it.
Building mortgages are a different animal. Liens take priority over mortgages that are provided specifically for the financing of an improvement. However, this priority is only to the extent of any deficiency in the holdbacks that are required to be retained by the owner (section 78(2)). This is often why banks hold back on their own behalf monies along the way. This priority over the building mortgage holds its rank regardless of when the building mortgage is registered.
Where a mortgage is registered after a first lien arises, the liens again take priority only over any holdback deficiency (section 78(5)). Further, where a mortgage is registered after a first lien arises and advances are given thereafter, the outcome is similar to that discussed above. The advances take priority unless a lien is preserved or perfected against the premises or the persom making the advance received written notice of a lien (section 78(6)).
There are also differences between classes of lien claimants. Section 79 provides that all subcontractors that provide services or materials to one payor belong to the same class. For example, two subcontractors hired by the general contractor are classed together because of their relationship to the general contractor. The trades hired by these subcontractors also form classes pursuant to the relationship to the payor.
Individuals belonging to each class have no priority over one another. In the construction lien context, all members of one class rank equally with respect to each other. In this respect, any amounts available to satisfy liens vis-a-vis a particular class are divided rateably according to the respective rights of each claimant. With respect to other classes, the lien of every member of a class has priority over the lien of the payor of that class. For example, the two subcontractors' liens take priority over the general contractor's lien (section 80).
It is important to note that workers also have liens that take priority. Workers have a lien to the extent of forty regular-time working days' wages that takes priority over any other person having a lien belonging to the same class.
General liens do not necessarily rank over other liens having to do with the same property. You will recall that general liens can lien all of the properties involved under one contract. If, however, a lien claimant is only providing work with respect to one of the properties, but is receiving payment from the same entity as the general lien claimant, they are a member of the same class with respect to that property and the general lien ranks equally with the other only in respect of the balance owing to that particular property. The amount in balance of the general lien ranks next in priority above all other liens on that property (section 82).
Additionally, other considerations with respect to priorities exist that are beyond the scope of this paper. For example, and perhaps not surprisingly, claims by the federal tax authorities enjoy a "super-priority". Other government-levied services and taxes such as municipal taxes and amounts owed under the Workplace Safety and Insurance Act will outrank construction liens in certain situations. In the event of bankruptcy, a lien claimant is a secured creditor if a lien arises before the date of a receiving order or an assignment in bankruptcy.
Arbitration v. Litigation
Many construction contracts include clauses that mandate the arbitration of certain issues, including construction liens, as an alternative to the costly mainstream litigation process. Courts have now begun to recognize that parties to contracts to to great lengths to negotiate rights and remedies within the contractual document itself and are now willing to enforce the parties' agreement to arbitrate issues.
Arbitration clauses can be drafted to suit the needs of the parties and, consequently, parties can take greater control over the outcome of disputes in the event that they arise. In this sense, parties can choose a mechanism through which to select arbitrators or an arbitration panel that is acceptable to both parties. However, parties are not unconstrained in what the contract can provide for.
With specific reference to the Construction Lien Act, sections 4 and 5 operate to incorporate the provisions of the Act into every contract and render void any agreement purporting to exclude the provisions of the Act. The Construction Lien Act provides for a procedure to be involved in a dispute arising from a contract. However, it has been held by the courts, and specifically in Automatic Systems Inc. v. Bracknell Corp., (1994) 18 O.R. (3d) 257 (C.A.) that arbitrations are not precluded in the construction lien context. Arbitrations in this context must be governed by the rules and rights granted by the Act, however, following sections 4 and 5 therein.
In the event of a dispute, a court or arbitrator may be called upon to determine the intention of the parties at the time of making the contract. Often they are faced with contract documents which contain provisions that are clearly in conflict with one another. To avoid this, it is adviseable to clearly lay out the parties' intentions regarding dealing with disputed in detail. Clear arbitration provisions with short time lines are a good way to obtain speedy resolutions of any disputes involved with construction agreements, including construction lien issues.
Arbitration may actually have the effect of lengthening the process involved with construction liens. Pursuant to the Arbitration Act, 1991, S.O. 1991 c. 17, as amended, when a party that has agreed to an arbitration agreement and commences a court action in the Superior Court or otherwise with respect to an issue falling within the ambit of the arbitration agreement, a court may be forced to stay the proceedings pending completion of the arbitration. In this sense, if an arbitration is unsuccessful, it may actually have the effect of causing unnecessary costs and further delay.
In every case, it will depend on the circumstances and the relationship between the parties as to the appropriate route to take when a construction lien issue needs to be resolved. In our experience, level heads and reasonable outlooks often lead to the resolution of the matter before litigation or arbitration is necessary.
Finally, it is noteworthy that the common law with respect to arbitration applies to the construction lien context. This means that if an owner files a Statement of Defence in a construction lien matter, the owner has waived its right to arbitration under the agreement. If an owner wants to preserve its right to have the issue arbitrated, the proper way to go about it is to bring a motion before the court to stay the proceedings until the arbitration is completed.
Procedures to remove construction liens
The Construction Lien Act also provides for the removal of liens. Firstly, where a lien attached to a premises, the lien is discharged upon the registration of a release on title to the property. Unless the lien claimant is a corporation, an affidavit of execution is required to support the release. If the lien does not attach to a premises, the lien is discharged by giving a release to the owner (section 41).
General liens can be discharged only against one property that is liened. For example, if four projects are governed by the same contract and a general is preserved or perfected, a release can be registered on title to only one of the properties. In doing so, the lien against the other three properties remains intact.
Secondly, section 44(1) of the Construction Lien Act provides a mechanism whereby a lien can be removed when the full amount of the lien claim is paid into court plus 25 percent of costs up to a maximum of $50,000.00. However, under section 44(2), it is possible to ask the court by way of a motion to vacate a lien when a "reasonable amount" is paid into court. Where this occurs, the lien acts as a charge against the monies that are paid into court. In this sense, the lien claimant remains secured.
The security that is paid into court can take the form of a letter of credit or a bond as well as cash.
Thirdly, the court has a general power to discharge a lien in the appropriate circumstances. In order for this to occur, a motion must be brought before the court.
Trust provisions
The trust provisions in the Construction Lien Act are separate and apart from the concept of a lien. A lien creates a type of interest in the owner's property. However, the trust provisions deem any monies being passed down from owner to contractor, to subcontractor, etc., are to be held "in trust" for the entity below on the chain. Each time money is received by (and in the case of contractors and subcontractors, owed to) an entity, it is held in trust by that entity for its subcontractors. The money held in trust is known as a "trust fund".
A trust claim is in addition to a lien claim. In this sense, a contractor or subcontractor may have both lien rights and trust rights. However, the claimant will not be able to recoup more than what it is justly owed. A person involved in an improvement may also seek recourse throught the trust provisions of the Act if their lien rights have expired.
Firstly, an "owner's trust" arises when amounts are received by an owner that are to be used for the financing of an improvement. These amounts constitute a trust fund for the benefit of the contractor. The owner becomes a trustee and is prohibited from using any of the trust fund amounts for its own benefit until all amounts owed to the contractor in relation to the improvement are paid (section 7). Additionally, if an owner sells the property, a vendor's trust arises pursuant to section 9. As a result, the amounts received from the sale, after deducting expenses and mortgage obligations, constitute a trust fund of which the contractor is a beneficiary.
Secondly, contractors and subcontractors are also trustees and hold amounts owing to them whether or not due and payable, or received by them in a trust fund for the benefit of subcontractors or others (such as workers) who have supplied services or materials and who are owed amounts by the trustees. As trustees, these contractors and subcontractors are prohibited in the same manner from using any of the trust monies for any use inconsistent with the trust until those owed money by them are paid in full (section 8).
Pursuant to section 12 of the Act, despite their obligation not to use trust monies for any other pupose, trustees can set off against debts owed to them by subcontractors. The Act permits the retention of amounts equal to what trustees are owed by beneficiaries regardless if the debts, claims or damages are related to the improvement in question. However, it must be known that this section does not expressly permit the use of the funds so retained. On this reasoning, a trustee is obliged to keep the retained set-off amount. The recent case law in this area seems to confirm this.
Trustees are liable at law for breach of trust. This means that if any of the monies that are within the trust funds are used inappropriately, even to pay the trustee's overhead, the beneficiaries have a claim against the trustee for the amount owing. However, and most importantly, it is not just the trustee that may be liable. The Act provides that directors and officers of corporations or any other person, including employees having effective control of a corporation or its activities (what comes to mind in this instance is a foreperson) who "assents to, or acquiesces in, conduct that he or she knows or reasonably ought to know amounts to breach of trust by the corporation is liable for the breach of trust" (section 13(1)). Consequently, beneficiaries can look beyond trustees in certain circumstances for the compensation that they are entitled to.
If a breach of trust has occurred and trust monies have been appropriated for other uses, beneficiaries can "trace" into assets acquired by the use of trust funds. For example, if an owner uses monies out of a trust fund to purchase a new Mercedes, the beneficiarly can actually obtain the Mercedes if the monies used to pay for it can be traced to those that originally comprised the trust fund. Trustees have the obligation to account to the beneficiaries and the court all of the transactions that the trust funds are subject to. This includes receipt and disbursement.
The trust provisions of the Construction Lien Act are only applicable where there is a direct contractual relationship. An owner is not a trustee of a subcontractor. An owner will only be required to hold monies in trust and act as a trustee for its general contractor. Essentially, for a trust to arise under the Act, there must be a direct contractual relationship between a trustee and a beneficiary.
Just as with lien claimants, trust claimants are secured creditors, in a sense. Further trust claims need not be preserved or perfected in the same manner or time frame that lien claims must. Trust claims arise from the statute itself as funding becomes available for the construction project.
In the event of bankruptcy, monies held in trust do not form the assets of the bankrupt.
Please note that this paper is intended only to serve as a general highlight of the areas covered. There is much more involved in protecting rights and fulfilling obligations under the Construction Lien Act and a lawyer should be consulted in every case.
Charles Criminisi
Real Estate
