Construction Lien Litigation
- Preserving a Claim for Lien
- Perfecting the Claim for Lien
- The Construction Lien Action
- The Construction Lien Trial
Construction lien litigation in Ontario forms a particular branch of civil litigation. Although the procedure tends to follow that of regular civil litigation, there are special rules that govern the construction lien procedure. Those rules are a unique mixture of the provisions of the Ontario Construction Lien Act, the Ontario Rules of Civil Procedure, and how the Ontario Superior Court of Justice in each county prefers to process construction lien actions within that county.
The Ontario Construction Lien Act defines a contractor as one who has a direct agreement with an owner to supply services or materials. The owner might retain one contractor to manage a project (often regarded as the general contractor), or the owner might be active in the management and retain several contractors.
A subcontractor supplies services or materials to a contractor or another subcontractor. The important point is that the subcontractor does not have a direct agreement with an owner. On a large project, a subcontractor could have an agreement with more than one contractor or other subcontractor, and could even have an agreement with the owner, in which case they would be a contractor for the services or materials supplied to the owner, but remain a subcontractor to different contractors.
Knowing what was supplied, and to whom, is crucial, because there can be many roles being played, all of which fall into different categories under the Ontario Construction Lien Act. This will affect the timing of when a Claim for Lien must be registered and the holdback obligations of those who are obliged to make payment.
There are further definitions as to the terms “services” and “materials,” and qualifications for rental of equipment and drawings.
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. In some instances, the owner may have funds readily available to pay for the cost of construction. Here, the owner should be making regular payments as the work proceeds. In other instances, the owner may be borrowing funds to finance the construction. 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 frequent intervals, thereby minimizing the amount of credit extended. In reality, the ideal contract for a contractor would call for payments in advance. Indeed, many contractors, especially on residential projects, request a significant advance payment by way of a deposit. Their rationale is twofold: first, to ensure that they will be paid; and second, to ensure that they are not financing the construction project by paying for materials and labour from their own pocket. From the owner’s perspective, they do not want to pre-pay for the work that is scheduled to be done at a later time. They incur the risk that the work will not be done properly — or at all — once the payment has been made. The balance often comes down to a question of: Will the owner properly pay once the work is supplied, versus will the contractor properly complete the supply if paid in advance. Often, the solution is to find a method by which the risk being thrown upon each party can be minimized.
In scenarios where the owner does not make timely payments to the contractors, or where the contractors do not make timely payments to the subcontractors, those persons who supplied work or material to the construction project have a right to register a Claim for Lien against the land. As an aside, any contractor or subcontractor can register a lien once it supplies services or materials to the construction project. However, a question arises as to when that person was to receive payment under the terms of their particular agreement. 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 that is owed to them.
In scenarios where a subcontractor has supplied work or material to a contractor and has not been paid, then that subcontractor has a right to register a Claim for Lien against the owner’s interest in the land. Thus, the subcontractor, who does not have an agreement with the owner, might be able to look for some payment directly from the owner. This does not mean that the owner is automatically liable for the full amount that is owed to the subcontractor. After all, the subcontractor extended credit to the contractor, not to the owner. However, the owner does have certain obligations to protect the subcontractors. Those obligations are found in the holdback provisions of the Construction Lien Act, where some 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 supplied. However, if the subcontractor gives proper notice to the owner, then the holdback might be increased by the amount actually owed by the owner to the contractor. A subcontractor should never underestimate the difference that it makes to deliver proper notice before an owner pays the contractor, as opposed to the day after payment. The form of notice to be given, and the manner of giving the notice, must comply with the provisions of the Ontario Construction Lien Act.
The contractual relationship between the parties, and any required system of holdbacks, is often referred to as a pyramid, with the owner at the top; then, on the level below, each of the individual contractors who made an agreement with the owner. Below each contractor would be their particular subcontractors with whom they made an agreement. The levels may continue, with the result that there may be several groups leading up to the owner, and there may be several levels within each group. A material supply company that supplies to various contractors or subcontractors on the same construction project could find itself on the bottom of one branch of the pyramid, but close to the top of another branch.
At times, it is important to remember how the persons above any particular subcontractor may be liable to those below them. Although the Construction Lien Act does create responsibilities that flow from those above to those below, the Act also gives them protection and limits their liabilities, provided that 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 amount agreed upon with the particular contractor. However, where the owner prematurely pays out the holdback funds, the owner might have to pay those holdback funds to a subcontractor. An owner, by prepaying the contractor, or by paying the contractor before the holdback period expires, could find that they are making a second payment, this time directly to the subcontractor — the result being that the total paid out by the owner now exceeds the contract price with the contractor.
One interesting scenario is where someone supplies work or materials to several individual properties within a new subdivision or housing project. For example, $500.00 worth of materials was delivered to each of eight houses within the same project. In this scenario, the supplier may be permitted to register one general Claim for Lien for $4,000.00 against all 8 houses if it can establish one general agreement for that supply. 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, each with individual time limits and construction lien rights. One must always be aware of the particular agreement so that compliance with, and protection under, the Construction Lien Act is achieved.
The Construction Lien Act has very strict time limits for a lien to be registered. Although these are reviewed below, it is useful to mention it under two scenarios. Where a general lien can be registered, the time period for registration will commence with the last supply to the last house. However, if the orders were placed on a one-by-one basis, the time limits for each house will run from when the supply was completed for each particular house. Thus, the contractor can continue to work at the same subdivision, but have already lost the right to lien some houses. The concern for a subcontractor is greater because the subcontractor might not know the terms of the agreement or agreements between the contractor and owner. The subcontractor may think that lien rights have not expired based upon an erroneous presumption of the contractor-owner relationship.
Another problem area is when contractors and/or material suppliers are asked to supply work or material to a tenant at a commercial property. First, the supplier may not know that the person requesting the work is only a tenant, as opposed to an owner. Second, even if they know that the work is being requested by a tenant, certain steps are mandatory if the supplier 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 supplier could be left chasing the tenant, who may have absolutely no ability to pay for the work. To rub salt in the wound, the trade might be obliged to sit back while the landlord/owner receives the benefit of all of the work supplied. Interesting and often complicated scenarios arise when the landlord has agreed to compensate the tenant for the cost of the work, but the tenant is the one who actually orders the work to be supplied. The importance of knowing exactly whom you are dealing with, and their interest in the land, should never be overlooked.
One area of concern is the construction of new homes by builders or developers who intend to sell them to individual purchasers. 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 the contractor is well within the 45-day period to effect registration of a lien. The time to preserve would be the earlier of the normal 45-day period and the date that 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 a lawyer.
The goal in any construction lien action is to collect the amount that is owed. The ultimate remedy in any construction lien action is to sell the interest of the owner in the land if the amount that is found to be owed 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. Although a contractor might have a construction lien for work supplied to a public roadway, the contractor would never be able to sell the roadway as a remedy to collect on the construction lien.
Preserving a Claim for Lien
To review the steps to preserve a Claim for Lien and then to perfect the Claim for Lien, let us presume that you are either a contractor or subcontractor. Although there are some technical differences, the basic thrust of the Construction Lien Act remains the same.
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 to the construction project, will help determine 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 of materials or the last day when work was performed. Please note that the last day of supply or work means the last day that the supply or work 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 and has in fact expired.
In some instances, the time period may run from when the overall construction project is substantially performed. The Construction Lien Act defines the “substantial performance,” although it is not always simple to calculate and 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 who is the payment certifier. The certification will be published in the appropriate construction trade newspaper.
The definition of “substantially complete” is based upon the entire construction project and not upon the work supplied by a particular subcontractor.
As a result, a subcontractor might have started its work toward the end of the project and, part way through, find that the project has been certified as substantially complete. The 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 quickly want to rely upon.
The first step in preserving the Claim for Lien is identifying the legal description of the property and then conducting the appropriate title search. Although this is usually not difficult for land in the city, where the land is often found based on a municipal address, 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, a project manager might instruct a supplier to deliver the materials near, but not onto, the actual construction project. Although the material was not delivered directly to the actual construction project, the Ontario Construction Lien Act does afford protection. In that case, the supplier has the right to lien the construction project lands, not the lands where the materials were temporarily stored. This means that we have to identify the actual lands where the construction project is located, and we have to be clear that the materials will be used at that project. Complications arise when the materials are delivered to a more general storage area and there is no information on where they will be actually used. Where delivery is not direct to the project, there must be some solid evidence of the construction project where they will eventually be used.
Another difficulty arises when the properties appear, from the street, to be owned by the same person, but, in reality, are separate lots owned by different persons. This is often a problem for large commercial properties. However, it can also be found in residential scenarios. Again, knowing the location of the construction project and ownership of the lands is required. This is not something that is always easy or quick to determine.
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 that has to be registered.
The registration is effected in the local Land Registry Office where the construction project is situate. This is done electronically from our offices and can be completed in any Land Registry Office throughout Ontario. Another concern for timing is when the electronic registration closes, which, as a rule, is 5:00 p.m.
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 to make the payment. 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 Claim for Lien as an insurance policy: Make the arrangements and, if need be, register the Claim for Lien 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 attend to delivering 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 of the Claim for Lien requires several steps. First, with the information provided by you, we will prepare a Statement of Claim that outlines the basis upon which you are claiming the debt. Typically, the claim would be made against the person to whom you supplied the work or material, and everyone above that person, right to the owner. Because the ultimate remedy is the sale of the land, you might also make certain claims against persons who hold mortgages on the land. Particular issues arise with regard to mortgage lenders, especially if there is a concern that the mortgage money was to finance the construction.
The Statement of Claim must be issued in the office of the local Court Registrar for the Superior Court of Justice for the county in which the land is situate.
When the Statement of Claim is issued, we ask the Court to issue a document known as a Certificate of Action. The Certificate of Action states that an action has been commenced in respect of the Claim for Lien, and it 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 Claim for lien.
There is no extension for the 45-day period to perfect the Claim for Lien. There are several steps required to perfect the Claim for Lien. Starting those steps on the last day may mean that you do not complete them in time. As with the preparation and registration of the Claim for Lien, always leave ample time to ensure that all work can be completed prior to any time limit expiring.
There are certain scenarios where it may not be mandatory that you issue a Statement of Claim or that you 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 Claim for 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 Claim for Lien is required unless absolutely clear to the contrary. If you have mistakenly relied upon being sheltered, there is no way to correct that error and continue with your Claim for Lien.
As set out above, the ultimate remedy in any construction lien action is to sell the land so that the Claim for Lien can be satisfied. Persons above the lien claimant, such as the owner or perhaps the contractor, can apply to the Court to have money paid into Court and have that money take the place of the land. The general rule is that the amount to be paid into Court will be the amount claimed in the Claim for Lien, plus an additional amount to protect the lien claimant for some costs of the litigation. Thereafter, the owner can deal with the land as if there were never a Claim for Lien registered against same. In this case, the lien claimant would issue the Statement of Claim, but would not issue or register the Certificate of Action.
Another aspect to consider is that construction lien actions are a type of class action. If, for example, both you and another person supplied to the same contractor, then both of you are looking to the same holdback from the owner, and to 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. There are both benefits and detriments to this scenario.
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, it is common that a Judge will refer the action to a Master of the Ontario Superior Court of Justice. Masters are judicial officers who have 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 of great 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. Properly organized, the private adjudicator can save total costs and can greatly reduce the time for trial.
Next, we would consider asking the Court for permission to conduct certain procedures that 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 that is exchanged is referred to as the Scott Schedule. It is often used 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 change order to the agreement, whether it be extra work or a deduction from the scope of work. This will be followed by the position taken by each party the amount alleged for the change in work, and it will also reference any documents or particular evidence that any party wants to rely upon to support their respective positions. Also, if there are allegations that the work or material was defective, the Scott Schedule will list the deficiencies, the position of the parties as to the deficiencies, and the amounts sought in respect of those deficiencies; and it will reference the evidence to support the deficiencies. The Scott Schedule, if not filed as part of the Trial Record before the trial is commenced, will certainly be filed once the trial commences. 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, the parties may meet for a settlement conference. In some counties, this will be done before a judicial officer. In other counties, this is done privately by the parties. 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.
Prior to any trial, there will be a pre-trial conference. 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. Also, there will be discussion and resolution on the expected length of the trial, the date of the trial, and any particular procedures or problems that 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. The goal of a contractor or subcontractor is to prove the value of the services and materials supplied and to establish compliance with all of the required time limits for preservation and perfection of the Claim for Lien. Often, the goal of the owner, as against the contractor, or the goal of a contractor, as against the subcontractor, is to show that the amounts are not owed and that there has not been compliance with the Construction Lien Act.
At the end of trial, the Court will pronounce judgment. Typically, the Court will make certain findings and determinations, which include:
– whether the Claim for Lien is valid
– the amount owed to each contractor and subcontractor who made a claim
– the amount of the holdback obligations
– whether the holdback obligations have been complied with
– your recourse against other parties or the land
– your priorities over any mortgage
– what costs and interest are awarded to any party
For more information on the Construction Lien process, please contact us.