Introduction
Preserving a Claim for lien
Perfecting the Claim for Lien
The Construction Lien Action
The Construction Lien Trial

Introduction

The world of construction liens is a particular branch of civil litigation. While the procedure tends to follow that of regular civil litigation, there are special rules which govern the construction lien procedure. Those rules are a unique mixture of the provisions of the Construction Lien Act, the Rules of Civil Procedure, and how the local Superior Court of Justice in each county prefers to process construction lien actions.

During the course of a construction project, a balance is usually sought between the funds available to pay for the construction and the actual value of the property as the construction proceeds. The issue often is reduced to one of timing. A contractor extends credit to the owner, and provides work and materials to the construction project, thereby increasing the value of the land. With this increase in value, the owner can obtain the additional financing required to pay the contractor for the work already performed.

From the contractor’s perspective, they would like to be paid at very short intervals, thereby minimizing the amount of credit extended. From the owner’s perspective, they do not want to pre-pay for the work which is hopefully to be done at a later time.

In scenarios where the owner does not make timely payment, persons who supplied work or material to the construction project have a right to register a construction lien against the land. To the extent that their work or material served to increase the value of the land, they can then look to the land as a form of security for some, or all, of the amount owing to them. One qualification is that the amount must be properly owing to them.

In scenarios where a sub-contractor has supplied work or material to a contractor and has not been paid, then that sub-contractor has a right to register a construction lien against the owner’s interest in the land. This does not mean that the owner is automatically liable for the full amount owing to the sub-contractor. After all, the sub-contractor extended credit to the contractor, not to the owner. However, the owner does have certain obligations to protect the sub-contractors. Those obligations are to be found in the holdback provisions of the Construction Lien Act where certain funds must be retained and not paid to the contractor for a period of time. The basic holdback is 10% of the value of the work performed. However, if the sub-contractor gives proper notice to the owner, then the holdback would be increased by the amount actually owing from the owner to the contractor. What a difference it makes to deliver proper notice before an owner pays the contractor, as opposed to the day after payment.

The holdback scheme is often referred to as a pyramid, with the owner at the top, then, on the level below, all of the contractors who made an agreement with the owner. The next level is all of the sub-contractors who made an agreement directly with each contractor. The levels may continue.

At times, it is important to remember how the persons above any particular supplier or sub-contractor may be liable. While the Construction Lien Act does create responsibilities which flow from those above, to those below, the Act also gives them protection and limits their liabilities, provided they have followed the requirements of the Construction Lien Act. For example, where an owner complies with all of the holdback obligations, then the owner should never have to pay out more than that agreed upon with the contractors. However, where the owner pays out the holdback funds prematurely, then the owner might have to pay those same funds to a sub-contractor or sub-trade.

One interesting scenario is where someone supplies work or materials to several individual properties within a new sub-division or housing project. For example, $500.00 worth of materials was delivered to each of eight new houses within the same project. In this scenario, the supplier may be permitted to register one general construction lien for $4,000.00 against all 8 houses. However, if the orders were placed with a trade or supplier on a one by one basis, then the trade or supplier would be obliged to treat the orders as eight individual agreements, with individual time limits and construction lien rights.

Another problem area is when trades are asked to supply work to a tenant at a commercial property. First, the trade may not know that the person requesting the work is only a tenant. Second, even if they know, certain steps are mandatory if the trade is to retain the right to lien the interest of the owner of the lands. Without these proper steps being taken, there may not be any right to lien the land and seek recovery from the owner. Indeed, the trade could be left chasing the tenant who may have absolutely no ability to pay for the work. To rub salt into the wound, the trade might be obliged to sit back while the landlord/owner receives the benefit of all of the work performed.

One area of concern is the construction of new homes. New home purchasers are afforded a unique level of protection. In some scenarios, the construction lien will be lost if the sale of a new home is completed to a purchaser. This may happen even if you are well within the 45 day period to effect registration of your lien. Your time to preserve would be the earlier of the normal 45 day period and the date the sale of the new home is completed. There are certain exceptions to this rule, but, as with all other exceptions, do not expect or rely upon them without a clear and careful discussion with your lawyer.

The goal in any construction lien action is to collect the amount owing. The ultimate remedy in any construction lien action is to sell the interest of the owner in the land if the amount which is found to be owing by the owner is not paid. The steps below outline the general procedure when work or materials are supplied to privately owned land. Some steps differ where the work or materials are supplied to land owned by the government and certain institutions. Though a trade might have a construction lien for work supplied to a public roadway, the trade would never be able to sell the roadway as a remedy to collect on the construction lien.

Preserving a Claim for lien

As a rule, there is a 45 day time frame within which it is required that you register a Claim for Lien to protect your receivable. A review of the agreement between you and the person with whom you contracted to supply the work or materials, and some information as the construction project, will assist in determining when that 45 day period starts to run. When you contact us, we will advise you of what information is required to complete this process.

For most material suppliers and trades, the time period will start from their last day of supply or the last day when work was performed. Please note that the last day of supply or work means the last day of supply or of work which adds to the value of the construction project. It does not mean a day when you returned to make a minor adjustment, clean up the property, or check on some warranty issue. It would be wrong to believe that the supply of a small piece of material can suddenly extend the time period relating to the supply of the main contract. Remember that many persons involved in the construction project have an interest in knowing when the lien period should expire.

In some instances, your time period may run from when the overall construction project is certified to be substantially complete. The Construction Lien Act defines the phrase ‘substantially complete’, though it is not always simple to conclude the exact day when this took place. For smaller jobs, there is usually not an independent person retained to monitor the progress and certify when the project is substantially complete. However, for larger jobs, and almost all commercial construction projects, there is such a person. The certification will be published in the appropriate construction trade newspaper.

As a result, you might have started your work towards the end of the project, and part way through find that the project has been certified as substantially complete. Your lien period for the work up to the date of certification will expire 45 days after the certificate is properly published. Fortunately, there is also a finishing holdback for the work after substantial completion. However, that is not something one would want to rely upon.

Perhaps the first step in preserving the Claim for Lien is identifying the legal description of the property and then conducting the appropriate title search. While this is usually not difficult for land in the City, it can be challenging for rural areas. Do yourself a favour by not waiting until the afternoon of day 45 to provide a vague address of a hard to locate property. Advising that the building materials were delivered to a specific location, and identifying that location, is much different than advising that they were delivered near a poorly described location. The better the information provided, the less time devoted to searching for the legal description and preserving your Claim for Lien.

Often construction projects do not have room to store all of the materials being delivered. As a result, project managers might instruct a supplier to deliver the materials near, but not onto, the actual construction project. In that case, you have the right to lien the construction project lands, not the lands where the materials were temporarily stored. This means we have to identify the actual lands where the construction project is located.

A word of caution. There is no such thing as an extension beyond the 45 days. For now, we will leave aside the issue of what happens when the last day is a weekend or holiday. Make sure that you afford ample time to locate the property, complete the title search, and prepare the documentation which has to be registered.

Often a trade or supplier extends credit for a period of time and does not feel the need to prepare for the registration process. Then the person who is to pay that trade or supplier asks for an extension. A decision might be made to sit back and wait another week or two. All too often, those extra days or weeks push the time period past the 45 days. Sometimes, one has to think of the lien as an insurance policy: make the arrangements and, if need be, register the Claim for Lien in order to protect the account receivable.

Once the Claim for Lien is registered on title, you have completed the first step: the preservation of the construction lien. Immediately after the Claim for Lien is registered, we deliver, on your behalf, and in the required manner, the appropriate notices as required by the Construction Lien Act.

Perfecting a Claim for Lien

After the Claim for Lien has been preserved, the next step under the Construction Lien Act is the perfection of the Construction lien.

Timing: the preserved Claim for Lien must be perfected within 45 days from the last day that the Claim for Lien could have been preserved.

Perfection requires several steps. First, with the information provided by you, we will prepare a Statement of Claim which outlines the basis upon which you are claiming the debt from certain persons. Typically, those persons would be the person to whom you supplied the work or material, and everyone above that person, right to the owner. As the ultimate remedy is the sale of the land, you might also make certain claims against persons who hold mortgages on the land.

The Statement of Claim must be issued in the office of the local Registrar for the Superior Court of Justice for the area in which the land is situate.

When the Statement of Claim is issued, we ask the Court to issue a document entitled Certificate of Action. The Certificate of Action states that an action has been commenced in respect of the Claim for Lien and describes the land against which the Claim for Lien was registered. That Certificate of Action is then registered on title to the land to evidence that you have taken the next step, namely, the issuance of the Statement of Claim. Once the Certificate of Action has been registered against the land, you will have perfected the construction lien.

A word of caution, just as set out above, there is no extension for this 45 day period. There are several steps required to perfect the construction lien. Starting those steps on the last day may mean you do not complete them in time.

There are certain scenarios where it may not be mandatory that you issue a Statement of Claim, or issue and register a Certificate of Action. It may be that another construction lien claimant on the same project, and in the same group as you, has issued a Statement of Claim and registered a Certificate of Action. In that case, your preserved construction lien may be sheltered under that other action. Sheltering is a great thing, if you are absolutely certain that you are and will be sheltered. Always presume that perfecting your own construction lien is required unless absolutely clear to the contrary.

Another aspect to consider is that construction lien actions are a type of class action. If you and another person both supplied to the same contractor, then you are both looking to the same holdback from the owner, and the same ultimate remedy of selling the land. Because you are not to have a particular advantage or priority over that other supplier, the Court will most likely require that you and the other supplier have your trials heard at the same time.

The Construction Lien Action

Once the action is commenced, the Statement of Claim is served upon the Defendants, who then have a short time to deliver their Defence.

If the lands are in Toronto, then it is common that a Judge will refer the action to a Master who has expertise in managing and conducting construction lien trials. If the lands are outside of Toronto, then the action will remain before a Judge. Regardless of where the lands are situate, a Judge can refer the lien action to a private individual who can adjudicate the action. Depending on the issues involved, and the complexity of the case, it may be a great deal of benefit to retain a private individual. One drawback is that the costs of this private individual must be borne by the parties in some agreed upon manner.

Next, we would consider asking the Court for permission to conduct certain procedures which would be common in a regular civil action. Often, these include the exchange of documents belonging to each party, and an opportunity to examine the other parties as to their position. The goals are to gather the information required to support your case, learn about the case of the opposing side, and try to narrow the issues between the parties. Another goal is to not spend hours conducting needless or expensive steps. Throughout, a cost benefit analysis is always undertaken with the goal of maximizing your net recovery.

One very useful document which is exchanged is referred to as the Scott Schedule. It is especially useful where there are numerous extra charges from one party and numerous back charges and allegations of deficiencies from another party. With respect to the price of the work or material, the Scott Schedule will list, in table form, the basic contract price, each extra charge and each back charge, the position taken by each party, and also reference any documents or particular evidence that any party wants to rely upon to support their respective position. As well, if any persons are alleging that the work or material was defective, the Scott Schedule will list the deficiencies, the position of the parties as to the deficiencies, the amounts sought in respect of those deficiencies, and reference the evidence to support the deficiencies. Soon after the trial commences, the Scott Schedule is filed with the Court. As the trial proceeds, the Judge or Master will use the Scott Schedule to assist and record his/her decision on each item listed therein.

Along the way, we would conduct a settlement conference. In reality, good counsel should always be exploring settlement possibilities. The settlement conference is usually informal and gives the parties an opportunity to resolve, or at least reduce, the outstanding issues. Once completed, the action is then ready for a pre-trial conference.

The pre-trial conference is held before a Court Officer. Outside of Toronto, it will typically be held before a Judge. In Toronto, it will typically be held before a Master, and usually the same Master who hears the actual trial. Again, there is an effort to resolve or reduce the outstanding issues. As well, there will be discussion and resolution on the expected length of the trial, the date of the trial, and any particular procedures or problems which might affect the trial.

The Construction Lien Trial

The construction lien trial is quite similar to any other civil trial. Depending on the parties involved, the particular process may be altered based upon the prior pre-trial or settlement conference. Your goal is to prove the value of the work done or the material supplied, and to establish that you have complied with all of the required time limits and steps to date.

At the end of trial, the Court will pronounce judgment. Typically, the Court will make certain findings and determinations, which include:

- whether your construction lien is valid;
- the amount owed to you;
- who owes the amount to you, including the holdback obligations;
- if the person who owes the amount does not pay, then what recourse you have;
- your priorities over any mortgage;
- what costs and interest are awarded to you.

For more information on the Construction Lien process, please contact us.