Legal Blog

Blackmail

There are two reasons to register a lien against lands on which a construction project (the “Project”) is being built. First, there is a measure of security, which in many cases is illusory, if the person with whom the lien claimant has contracted (the Payor”) is unable or unwilling to pay the monies owed under the contract. Second, blackmail; the lien claimant, who may have an otherwise shaky claim and hopes that the very act of a placing a lien against the Project causes the funds, otherwise to be paid to the Payor, to be cut off. The lien claimant then hopes that the spectre of a restricted cash flow will cause the Payor to pay up. Unfortunately, the second reason is being used all too often.

Vacating Liens

The best way for the Payor to deal expeditiously with a lien claim that is unreasonable or improper is by posting appropriate security and thereby removing the lien as a claim against the Project. Once the lien has been removed, monies begin to flow down the payment chain as if the lien had not been registered.

There are three usual ways in which to post security: cash, bond, and letter of credit. Payors who do not have a bonding facility or a credit relationship with a financial institution will have to pay money into court. The usual amount is the amount of the lien claim plus 25 percent of that claim for costs. Of course, any monies paid into court are only paid as security. The ultimate entitlement to the monies will depend upon the result of the court action commenced by the lien claimant.

Each of the three methods has costs. The use of cash results in less cash to run the business. If the monies are borrowed, there is an interest cost. However, this cost is partially offset by the interest being paid on the monies that were paid into court. If a bond is posted or a letter of credit is deposited, the bonding company or financial institution will expect a premium to be paid for the bond or the letter of credit. Depending upon the relationship between the Payor and a bonding company or financial institution, this premium could be as high as 2% per year of the face amount of the bond or letter of credit.

Switch Security 

There may be times when a huge draw is being held up as a result of the claim for lien and it is crucial to vacate the claim as soon as possible. In that case, the fastest way to do so is by paying money into court. Later, the Payor may post a bond or letter of credit in substitution for the cash.

This is exactly what happened in Tom Jones Corp v. OSBBC Ltd., a May 20, 1997 Ontario Court (General Division) decision. The judge stated that “there is no difference between the posting of a letter of credit and a payment of money into Court or, for that matter, the filing a lien bond in lieu of cash. On the other hand, it would make a difference to the person moving to vacate the lien in that the posting of a lien bond would free up working capital which could be put to better use, to facilitate the completion of the project.”