Homeowners and Construction Liens
If you are considering major renovation project or constructing your own custom dream home on your own property, the Construction Lien Act includes essential legal provisions that could apply to you. The aim of this article is to provide a brief introduction to some of those rules to a homeowner.
What is a Lien and why it exists?
The building industry is fundamentally unique in its vulnerability to the financial risks faced by those participating in the construction sector. These risks are distinctive to the construction industry since most building works are carried out by trades that do not have a direct contract with the land owner on which the work is being carried out and do not have any financial protection or payment guarantee.
For example, if you employ a contractor to do a kitchen renovation, they can subcontract the cabinet construction and installation to a cabinetmaker who constructs and instals the cabinetry. Although the cabinetmaker supplies and installs the new materials in your home, which will eventually improve your home’s value, there isn’t a contract that says you have to pay them. If the contractor who hired the cabinetmaker is not payed by the homeowner, the contractor does not have the money to pay the cabinetmaker. The cabinetmaker would then not be able to pay its suppliers. Some of whom may not sue the homeowner directly without a contract. You can see the weakness of subtrades and suppliers on a building project from this example.
It’s also described as a pyramid when trying to understand the flow of funds on a construction project.
You, the homeowner, are atop the pyramid. Below the owner is the party (or parties) with whom the owner has a direct contract and is sometimes referred to as a general contractor or simply contractors. The contractor can then employ other contractors, these are called subcontractors, to complete the job. Often, a subcontractor may subcontract a portion of their work and these will become sub-subcontractors, and this will move down the line.
When construction on a project continues, money normally flows down the pyramid and generally when work is finished, payment is made to the contractor by the owner and eventually to the different subtrades.
Centered on the facts of the movement of funds on a project and the insecurity of subtrades in the event of non-payment, the statute has devised a way to cover trades from the top of the pyramid to the bottom, and this is called the construction lien.
The basic principle is this: when a person / company provides an owner, contractor or subcontractor with services or materials to develop a property, they have a connection to the owner’s interest in the premises that are improved for the price of such services or materials (section 14(1), Construction Lien Act).
The lien itself is a security interest in your (owner’s) land; which interest may be reported against title to your land if you fail to make payment in the pyramid to a contractor or subcontractor below them as the owner or any of the other players in the construction pyramid. Ultimately, there is a danger that, if a construction lien action is successful, a contractor / subcontractor can enforce his lien rights and recover what he owes by selling a property to the extent of the lien value in the case of a contractor, or the statutory holdback value in the case of a subcontractor.
Basically, a building lien acts to prohibit you, as the owner, from obtaining improvements without making payment for the improvement and therefore, contractors and subcontractors are covered at all stages of the construction process, even though they have no contract with the owner.
It is necessary to remember that contractors and subcontractors have specific timeframes and legal provisions to file liens within either 45 days of completion of the project, whether it is a contractor, or within 45 days of the last delivery of materials or labour, whether it is a subcontractor. If these timetables are not met correctly, lien rights will be lost. It is also necessary for homeowners to monitor these timescales to know whether or not there are valid ties reported against their land.
Furthermore, not every contractor or subcontractor operating on a property is entitled to a lien and this depends on the nature of the work supplied. However, generally speaking, if the work raises the value of the land and is not merely repair or maintenance, it is the work that gives rise to the rights to lien.
If a construction lien is registered on the title, the biggest concern for any owner is that title to their house becomes burdened by the lien which may cause complications if you want to sell your home or refinance a mortgage. Also, if the contractor or subcontractor is not paid and they go on with their demand for reimbursement protected by the lien, there is the possibility of being sued in civil court.
The Holdback criteria
The holdback condition is a critical duty on homeowners under the Construction Liens Act.
Under section 22 of the Act, each “payor” on a construction contract is entitled to hold back 10 percent of the price of the services or materials when they are actually delivered under the contract until all liens that could be asserted against the holdback have expired.
As a homeowner, you are obliged to meet this obligation notwithstanding any language of your contract with a contractor that might provide otherwise.
When construction continues and payments are made during a project, you as a homeowner must make sure you subtract 10 per cent of the value of the services or supplied materials. You ‘d keep $600.00 for example on a $6,000.00 invoice. You should have kept 10 per cent of the amount of the work already completed and invoiced at the end of the project. If the project was a job of $60,000.00 the contractor should have kept the overall holdback will be $6,000.00.
The holdback is the last payment you may have to make to your contractor(s) as a landlord, and it can only be paid 45 days after the expiry of any claims against the project that could be paid. As a landlord, you can watch when a project is finished and when trades last attend on site. The most prudent course of action for an owner is to ask their lawyer to check title to their property on the 46th day after a contract has been signed to ensure that no liens against title to their property have been reported. If title is valid, the holdback can be charged and the owner does not make any further payments to the contractor and obtain legal advice if not.
Essentially, if a lien is reported, or you ‘re informed of a lien, your project payments will cease.
The holdback monies represent a trust fund for the good of the contractor or subcontractors working on a construction contract, and they must not be used for any reason other than contract payment, otherwise this will be a violation of confidence which may amount to an owner’s liability if the funds are not treated properly. (The Building Lien Act lays down clear guidelines on the fiduciary duties of owners and contractors / subcontractors to which another Article applies.)
For developers, the inherent chance of non-compliance with the Construction Lien Act holdback provisions is threefold:
Potential liability under the provisions of the Act respecting trust;
The risk of having to pay twice. In other words, while a homeowner may have paid their contractor in full, if the contractor fails to pay subcontracts or suppliers (or if a subcontractor fails to pay a subcontractor or supplier), any unpaid subcontracts / subcontracts or suppliers who have the right to file a lien or bring a claim against the holdback monies or the amount of the holdback monies even though they have been paid out. When this happens, an owner may be liable to pay the holdback value twice on the project, until he or she has made the original inappropriate full payment of the contract and the second time, for the subtrade(s) that have proved legal entitlement to the holdback monies; which the owner should have kept for the relevant 45-day duration. On a $100,000.00 renovation project, that could mean $10,000.00 for homeowners; and,
You will be identified as a party to a legal action by the lien claimant for both violation of confidence and under the Construction Lien Act if the lien claimant perfects its lien.
There are also special laws that apply that can raise the holdback value to the maximum amount stated by a subtrade if a proprietor receives a written notice of the lien.
If you need to sell your house, or deal with your mortgage, you can delete a lien from the title by “vacating” the lien by posting money in court. What this means is that the lien claimant(s) have a security interest in the money posted in court and no longer with the property of the owner, and the lien is stripped from title when a lien is vacated. It is then up to the parties to proceed by arbitration or otherwise settle the matter in court to assess the holdback funds entitlements.
It is important to remember that even though there is more than one lien claimant, the owner ‘s responsibility is usually restricted to the amount of the holdback (with exceptions like notice holdback requirements), and the lien claimants are entitled only to their proportional share. Owners can also be liable, as noted above, for breach of trust claims and, of course, for the full value of any outstanding contracts under the contract with any trade partners with whom the owner had a direct contract.
The above may seem overwhelming to many homeowners working on their houses, but it is intended to serve as a valuable introduction for homeowners to what are under the Construction Lien Act ‘s unknown obligations. Homeowners are advised to seek advice from a lawyer for detailed guidance on handling construction lien matters.
The information contained in this article is provided for general information purposes only and does not constitute legal or professional advice. Readers are advised to seek specific legal advice in relation to any decision or course of action.