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    • Tag: Construction law

    Construction Law 101: Explaining Construction Liens

    What is a Construction Lien?

    Under the Construction Act a person who supplies services or materials to an improvement for an owner, contractor or subcontractor, has a lien for the price of the services or materials over the interest of the owner on the premises. In this respect, a lien functions as a security interest, securing payment of the individual providing services or materials.

    A lien arises and takes effect as soon as a person first supplies services or materials to the improvement. It is also important to note that a lien does not attach to the premises where the Crown (defined broadly under the Construction Act) is the owner of the premises.

    Preservation and Perfection of Liens

    Construction liens are typically (but not always) registered on title and recorded in the Land Registry Office. This means that the registered lien will be publically accessible to anyone seeking information about that property.

    However, not every construction lien can be registered on title ( i.e. when the land subject to the improvement is owned by the Crown) In such cases, a copy of the lien is given to the owner of the land.

    In order to perfect a lien, the claimant must commence an action in the Superior Court of Justice. Where the lien attaches to the premises, a lien claimant must also register a certificate of action on the title.

    There are strict deadlines for the preservation and perfection of liens.

    If you require assistance, pertaining to construction law matters, involving liens, holdbacks and contractual disputes, please contact the construction lawyers at Devry Smith Frank LLP to discuss your rights and options.

    This blog was co-authored by Law Student Amar Gill.

    “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.”
    By Fauzan SiddiquiBlog, Construction Law
    More Changes to the Construction Lien Act Are Coming in 2019

    More Changes to the Construction Lien Act Are Coming in 2019

    Ontario’s new Construction Lien Amendment Act (the “Act”) has significantly overhauled Ontario’s construction law rules. While the first set of the amendments have already come into force (see our previous blog here), the second set of changes with respect to prompt payment, a new adjudication process and procedural rules are set to come into force on October 1, 2019.

    Prompt Payment

    The Act imposes some tight timelines for payments to contractors and subcontractors in situations involving both public and private contracts. Under the Act, outstanding amounts between an owner and contractor must be paid within 28 days of a proper invoice. Subsequent payments to subcontractors must be paid within 7 days that the contractor receives the payment from the owner. If the contractor was not paid within the 28 day period, the contractor can either pay out its subcontractors anyways or issue a notice of non-payment in the prescribed form. If the owner disputes a portion of the funds, the owner must still pay out the undisputed amount within 28 days. If the contractor only receives partial payment from the owner, it must still distribute the funds to its subcontractors within 7 days, either in full or rateably.

    The sending of a proper invoice triggers these timelines and payment cannot be made contingent upon certification or the prior approval of the invoice by the owner. The owner is required to comply with these timelines or provide a notice of non-payment within 14 days. The contractor must give a notice of non-payment within 7 days after receiving a notice of non-payment from the owner or, if the owner has not issued said notice, within 35 days from the date of delivery of a proper invoice. Any payments made outside of the timelines will have interest accrue at a specified interest rate (as per the Courts of Justice Act, s.127(2)).

    As an invoice triggers these timelines, the Act sets out what is contained in a proper invoice:

    • the contractor’s name and address;
    • the date of the proper invoice and the period during which services or materials were supplied;
    • information identifying the authority (typically the contract) under which services or materials were supplied;
    • description, including quantity, of the services or materials supplied;
    • the amount payable for services or materials supplied and payment terms;
    • the name, title, telephone number, and mailing address of the person to whom payment is to be sent; and
    • any other information that may be prescribed by the contract.

     

    New Adjudication Process

    In an effort to facilitate the quick resolution of construction issues, the Act introduces a new interim adjudication process. The intention of the adjudication process is to allow parties to resolve issues while still pursuing the preservation/perfection of a lien under the Act. Parties are free to agree on any adjudication terms to be added to their agreement.

    Several types of disputes can be referred to adjudication, including, but not limited to, delays, set-offs, deductions, security, proper invoicing and the valuation of work, services and materials. The scope of the availability of adjudication is broad and includes “any other matter that the parties to the adjudication agree to.”

    Adjudicators are appointed from a Authorized Nominating Authority registry. Adjudicators cannot be appointed in advance and must be nominated only when a dispute has arisen.

    Delivering a Notice of Adjudication commences the process. Within 30 days of the Notice, the adjudicator must provide a written determination of his or her decision, with reasons. Adjudication decisions are binding in the interim and enforceable. As such, payment must be made as per the adjudicator’s determination within 10 days of the decision or else the amount is subject to non-waivable interest. The Act allows a party to suspend work as per an adjudicator’s determination but does not allow for the suspension of work until the adjudication is complete. Any decisions rendered outside 30 days are of no force or effect. If a party does not agree with the adjudicator’s determination, they are allowed to appeal it to the courts or an arbitrator as well as negotiate a written agreement varying the terms.

    Jurisdiction and Procedure

    As the Act will have an adjudication process, several provisions relating to jurisdiction and procedure will be repealed. For instance, leave for interlocutory steps is will no longer be required, lien and trust claims will be brought in a single action, and the requirement that a lien action must be commenced in the jurisdiction where the land is located will be removed.

    What this Means

    The laws with respect to construction in Ontario and elsewhere are changing. It is very important to consult an experienced construction law lawyer with respect to vetting your organization’s invoices, contracts and general practices.

    “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.”
    By Fauzan SiddiquiBlog, Construction Law
    Ontario Has a New Construction Act: What You Need to Know About the Transition Period

    Ontario Has a New Construction Act: What You Need to Know About the Transition Period

    On July 1, 2018, the first set of changes under Ontario’s Construction Lien Amendment Act (the “Act”) came into force. This Act overhauls Ontario’s construction regulatory framework. Not only should the changes be made note of by Ontario businesses in the construction sector, but the implementation of similar legislation is expected to follow in other provinces.

    The legislation was enacted after a 2016 report from the Ministry of the Attorney General called Striking the Balance: Expert Review of Ontario’s Construction Lien Act made 100 recommendations for modernizing Ontario’s Construction Lien Act. On May 31, 2017, the Ontario legislature passed the Act (Bill 142) adopting almost all of the recommendations in the report.

    The first amendments that came into force were those modernizing the construction lien and holdback rules as well as the alternative financing and procurement provisions. The second set of amendments deals with prompt payment, a new adjudication process and procedural matters (to be discussed in a subsequent blog) and will come into force on October 1, 2019.

    Transition Provisions

    It is important to note that the new Construction Act primarily applies to prime contracts that were entered into after the legislative provisions come into force. The old version of the Construction Lien Act still applies if the prime contract was entered into prior to the changes coming into force (regardless of when any subcontract under the contract was entered into), if the procurement process was commenced by the owner prior to the changes coming into force or if the premise is subject to a leasehold interest and the lease was first entered into prior to the amendments coming into force.

    Preservation and Perfection of Liens

    Prior timelines with respect to liens were often not workable given common delays in paying invoices in the construction industry. The Act extends the deadline for preservation of a lien to 60 days (from 45 days) and the deadline for perfection of a lien to 90 days (from 45 days) from the last day which a lien could have been preserved. This extension allows parties to have more time to negotiate payment as well as to utilize the new adjudication process, coming into force on October 1, 2019.

    What is lienable has also changed: prior to the amendments, the definition of improvement included general repairs. Now, the legislation has narrowed the term to a “capital repair” that extends the “normal economic life” of the land. While this may seem like a minor one word addition, the result is that true ordinary maintenance is expressly not considered to be an improvement and does not give rise to any lien rights.

    The definition of a “price” under the Act has also changed so that a lien can include any direct costs incurred by the contractor as a result of the delay, but “direct costs” excludes any indirect damage suffered such as a loss of profit, productivity or opportunity as well as any head office overhead costs.

    Holdback Payments

    The Act has also significantly modified the law with respect to holdback payments. It is now mandatory for an owner to release the statutory holdback funds once the lien period has expired, unless the owner publishes a notice of non-payment within 40 days of the certificate of substantial performance and notifies the contractor of the publication of the notice of non-payment. In reality, the new provision requires the owner to have a bona fide reason to refuse to release the holdback as an unjustified refusal would raise the material risks of disputes and liens as the 40 day period occurs prior to the expiry of the lien period (see above).

    Moreover, the Act now allows for the release of holdback payments on an annual basis or upon the occurrence of milestones or phases. This can occur if the following conditions are met:

    • The contract provides for an annual or phased release of accrued holdback;
    • The contract price is over the prescribed amount (currently set at $10,000,000)(not applicable for the design phase);
    • The contract time is scheduled for over one year, or provides for work to be completed in identified phases; and
    • There are no liens registered that have not either been vacated or discharged at the time the accrued holdback is to be released.

    There are also new duties imposed on contractors, subcontractors and owners as trustees of trust funds. In particular, trustees are required to deposit the price they received on their contract/subcontract price to a bank account in the trustee’s name. Moreover, they must maintain written records of the trust funds and keep all information regarding transfers in and out of the trust.

    In addition, the Act has limited a trustee’s right to set-off. Previously, the Construction Lien Act allowed for a trustee to set-off money owed for any outstanding debt or damages whether or not related to the improvement. Now, the right to set-off must be related to the specific improvement.

    Alternative Financing and Procurement

    Prior to the amendments, there was uncertainty about who was the owner on projects where a special purpose company contracts with a public sector entity to undertake a specific project. Now the Act deems the special purpose company to be the owner and the contract between the company and the contractor will be deemed to be the contract with respect to the provisions relating to substantial performance, calculating the lien period, certification of substantial performance, and information requests under the Act. For all other purposes the Crown, municipality or broader public sector organization who owns the premise continues to be the owner under the new Act.

    What this Means

    The laws with respect to construction in Ontario and elsewhere are changing. It is very important to consult an experienced construction law lawyer with respect to vetting your organization’s invoices, contracts and general practices.

    “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.”
    By Fauzan SiddiquiBlog, Construction Law, Corporate Law
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    Construction Trust Claims: How to Protect Yourself

    Caught up in the moment of construction work chaos and scrambling to complete jobs, it is all too easy for invoices to accrue and accounts to build up. While construction liens provide one way to secure payment due to contractors and subcontractors, preventing one’s lien rights from expiring requires meeting strict deadlines, which are often missed.

    Construction Trusts

    The Construction Lien Act creates a scheme for statutory trusts which exist for the benefit of contractors and subcontractors.

    All amounts received by an owner, other than the Crown or a municipality, that is to be used in financing a project constitute a trust fund for the benefit of contractors.

    Similarly, all amounts owing to a contractor or subcontractor, whether or not due or payable, or received by a contractor or subcontractor, on account of the contract or subcontract price of improvement, constitute a trust fund for the benefit of the subcontractors and other persons who have supplied services or materials to the improvement who are owed amounts by the contractor or subcontractor.

    Owners and contractors who hold funds in the trust can only apply those funds for purposes consistent with the trust. Otherwise, the corporation or person who is the trustee along with the officers and directors of a corporate trustee, and any person “who has effective control of a corporation or its relevant activities” which could include employees or agents of the corporation, may be held personally liable. This can often make a difference from a recovery perspective, especially if the payer is a corporation, and the corporation is insolvent.

    According to St. Mary’s Cement Corp. v Construc Ltd., the following elements must be proven to establish the existence of a trust:

    1. The plaintiff who is owed did supply services or materials:

    This can be established by oral testimony or substantiated through documentation including invoices, communication confirming services and materials provided (ie. By e-mail, text, etc), account statements, etc.

     

    1. The project is considered an “improvement” pursuant to the Construction Lien Act:

    According to section 1(1) of the Act, an “improvement” means, in respect of any land

    (a) any alteration, addition or repair to the land,

    (b) any construction, erection or installation on the land, including the installation of industrial, mechanical, electrical or other equipment on the land or on any building, structure or works on the land that is essential to the normal or intended use of the land, building, structure or works, or

    (c) the complete or partial demolition or removal of any building, structure or works on the land

    The contractor would have to describe its role in the project, the work it was hired to complete, the work that was in fact completed, and how it fits under one of the three categories above.

     

    1. The plaintiff is owed monies on the project

     

    1. The defendant(s) received money for the improvement:

    The plaintiff would need to demonstrate that the defendant(s) – be it the owner of the property, the general contractor, or a higher-up sub-contractor – has received funds for work completed.

    This information may be obtained by way of a request for information under section 39 of the Act.

    While construction trust claims may be a useful tool for contractors and subcontractors who are seeking to collect on unpaid accounts, the flipside of this is that owners, contractors, and sub-contractors who are trustees need to be cautious in order to avoid exposure. In addition to keeping proper records, trustees should keep trust funds separate from their general accounts. When trust funds for the project are mixed with other funding and expenses in one general bank account, it is much more difficult for a trustee to account for the trust funds and as a result, the trustee is more likely to become exposed.

    For more information or any other questions regarding construction trusts, please contact our construction law team of lawyers.

     

    “This article is intended to inform and entertain. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.”

     

     

    By Fauzan SiddiquiBlog, Construction Law

    Leaning on Liens for Payment

    Construction and renovation work can sometimes involve multi-layered contractual relationships between the various players in a construction project, where there are numerous complex areas of consideration. An owner or developer may hire a general contractor, who will then contract with subcontractors for various jobs such as carpentry, plumbing, and electrical work. In the same way, subcontractors may hire sub-subcontractors, those sub-subcontractors may hire sub-sub-sub contractors, and so on. This is often referred to as the “construction pyramid”. The pyramid dictates not only who works for whom, but also who pays whom: the owner pays the general contractor, who then pays its subcontractors, and who in turn pays the sub-subcontractors, all the way down to the bottom.

    One of the purposes of the construction lien is to ensure that the general contractor and any subcontractors down the pyramid are remunerated for the services and materials that they have supplied towards improvement, as stated in a recent discussion regarding proposed changes to the Construction Lien Act. Thus, a lien secures the payment that is due to the general contractor and subcontractors. A lien is one means of enforcement provided under the Construction Lien Act that allows a contractor the ability to potentially take steps to sell the property and gives the contractor and subcontractors priority over certain creditors who may have claims against the owner of the property.

    As soon as a contractor begins providing services or materials to improvement, it has a lien for the value of services or materials actually supplied to the improvement. However, that lien will expire unless certain steps are taken: (1) the lien must be “preserved”; and (2) the must then lien is “perfected”.

    To preserve a lien, a contractor must register it on the title to the property where the work was done. To perfect the lien requires the contractor to commence an action and register a certificate of action on the title to the property. There are strict deadlines for the preservation and perfection of liens, typically triggered by either the date of last supply or the publication of a certificate of substantial performance, although the complete framework for the timing of preservation and perfection of liens is somewhat complicated and depends on when the work was actually performed. Once a lien has been perfected, the action by which it was perfected must be set down for trial within two years of having been commenced otherwise the lien will expire (although the legal action itself may continue).

    For more information or any other questions regarding construction liens, please contact our construction lawyers.

     

    “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.”

    By Fauzan SiddiquiBlog, Real Estate