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Posted on February 21st 2006 in Legal Articles

The Construction Lien Act: Protection for suppliers of goods and services

The Construction Lien Act: Protection for suppliers of goods and services

The typical construction project is a tangle of contracts involving a large number of parties, most of whom will have no direct involvement or contract with the owner. If a party does not have privity of contract with the owner, that party cannot enforce its rights against the owner.

In order to remedy this obvious shortfall, the Construction Lien Act was passed. The Act provides four remedies to construction suppliers.

1. The Act creates a lien in favour of each supplier.

2. The Act mandates holdbacks.

3. The Act imposes a trust against the money used to finance the construction project.

4. The Act provides the right to have a trustee appointed, in certain cases, to protect the premises.

This is one of the most complex areas of the law. In an attempt to provide you with a general understanding of this area here are some common questions along with the answers.

What is a construction lien?
A construction lien is a right given to persons and businesses who supply services or materials to the improvement of real property (the construction project). A lien provides them with an enforceable remedy against the owner of the project, despite the absence of a contract with that owner. Specifically the lien becomes a charge against the owner’s interest in the property being improved.

Who are suppliers?
The right to a construction lien is given only to suppliers of materials and services to the improvement. Determining a supplier of materials is relatively straightforward, but a supplier of services may not be. Although the services that will benefit from a lien need not actually be performed on the construction site, the supplier must have a degree of connection with the making of the improvement. For instance, the brick layer will be entitled to a lien however, the trucking company delivering the bricks probably will not.

The right to a construction lien has been narrowly construed by the courts and the onus is on the claimant to establish that he or she is a supplier of services or materials to the project.

When is a supplier entitled to a construction lien?
The right to a construction lien arises and takes effect immediately upon the first supply of materials or services. The lien comes into existence automatically. However, it is essentially dormant until the lien holder takes the necessary steps to enforce it.

What is a construction lien worth?
The value of a lien is equal to the contract price, or the fair market value of the services or materials supplied, plus GST and PST. However, a supplier cannot recover more than is owed to his payer (i.e. the person who hired him). A lien does not provide for damages for breach of the contract.

When is a lien discharged?
A lien is discharged once the supplier has received full payment for the services rendered or the materials supplied.

Do liens expire?
Generally, a contractor’s lien will expire unless it is preserved and perfected within 45 days following the earliest of:

– the date the certificate or declaration of substantial performance is published, or
– the date the contract is completed or abandoned.

Generally, a subcontractor’s lien will expire unless it is preserved and perfected within 45 days following the earliest of:

– the date the certificate or declaration of substantial performance is published, or
– the date the subcontractor last supplied services or materials.

What are preservation and perfection?
A construction lien is preserved by registering a claim for lien, before expiry, on the title of the property being improved. The lien is perfected by commencing an action to enforce the lien claim and by registering a Certificate of Action on title to the property within the time period prescribed by the Act.

What is a holdback?
The holdback is the second major remedy provided to construction suppliers. Each payer involved in a construction project, is under an obligation to hold back an amount equal to 10% of the value of the services and materials that have been supplied to it. The payer becomes liable as soon as the services or materials have actually been supplied, irrespective of the payment arrangements that have been made. These amounts form an “insurance fund” for suppliers.

There must be a separate holdback for each contract entered into.

A payer is also obliged to withhold an amount sufficient to satisfy any lien claim for which he has received notice.

The holdbacks must be maintained until all liens that may be claimed have expired, been satisfied or been discharged.

How do the trust provisions work?
The Act’s third major remedy is the trust, which is imposed on all amounts received by the owner and that are to be used in the financing of the improvement. The owner becomes the trustee of the fund and he cannot appropriate the money for his own use. The trust will be imposed regardless of whether any money is then owing to the contractor.

A similar trust will be imposed on the net proceeds received by the owner if he sells the property prior to completion of the project.

When can a trustee be appointed?
An application to appoint a trustee can be brought at any time, by any person having a lien. The appointment of a trustee is considered an extraordinary remedy and its primary purpose is usually to complete the construction project.

Although this is a fairly complicated subject matter, Craig Colraine has developed an expertise in the area of construction liens. If you have specific questions or require advice about your particular situation contact Craig. 1