This is our 4th instalment on the changes to the Construction Lien Act (“CLA“), which, on July 1, 2018, became the Construction Act (the “Act“).
Section 39 of the CLA gave beneficiaries of a trust claim, including lien claimants, the right to obtain information from an owner, general, or sub regarding contract provisions and the state of accounts relating to the players higher up in the construction ladder than they. Section 39 gave trust beneficiaries the means to determine whether a lien or trust action or, indeed, an action under a labour and material payment bond might be warranted.
The Act amended section 39 to give it more teeth – although we feel that the teeth are not nearly sharp enough.
Owner or General
Under the CLA and the Act, the owner or general has to provide, within at least 21 days, the names of the parties to the contract and the contract price. Under the Act, instead of merely noting that the information must include a state of accounts, it sets out specific information that the state of accounts must include: (i) contract price; (ii) amount that a landlord has paid as a tenant’s allowance under a lease; (iii) amount of the applicable holdbacks; (iv) balance owed; (v) any amount retained as a setoff by a trustee under section 12 or as a lien setoff under section 17(3); and (vi) any other information that may be prescribed by regulation (none yet).
This information is inadequate to determine whether to bring a trust action for non-payment down the construction ladder of money owing. A claimant would need to (i) see the payment certificates, (ii) know when payments had actually been made to determine whether its payer had paid down that payment; and (iii) be provided with any statutory declarations that its payer may have given as a condition to receiving payment.
Both the CLA and the Act require an owner and general to provide, on request, a copy of any relevant labour and material payment (“LMP“) bond.
In keeping with the new provisions of the Act dealing with release of holdback, the owner or general has to confirm whether payment under the contract is based on the completion of a specified phase or other milestone.
General or Sub
Under the Act, if a subsub makes the section 39 request to a sub or general, these parties must provide the following: (i) the names of the parties to the subcontract, (ii) the state of accounts with specified information, (iii) whether there is a subcontract provision providing for certification of the subcontract, (iv) whether the subcontract has been certified as complete, and (v) a copy of any LMP bond that the sub may have posted.
Under the CLA, a landlord was not required to give any information. If the lease had not been registered against title, then, without more information, the lien claimant was not able to confirm the correct name of the tenant or, sometimes, even the exact legal description of the property.
The Act rectifies this problem. A landlord, whose interest in premises is subject to a lien, must provide the names of the parties to the lease, the amount of the leasehold improvement payment, and the state of accounts between the landlord and the tenant with specified information.
In general, LMP bonds and performance bonds are still optional depending upon the terms of the prime contract or subcontract. However, for any public contract (i.e. the owner is the Crown or a municipality or a broader public sector organisation), new rules apply.
For every public contract exceeding $500,000, the general must provide a minimum 50% performance bond and a minimum 50% LMP bond (to a maximum of $50 million) that protects subs and persons supplying labour or materials to the improvement. This is a key change to the previous construction practice; the sphere of people who can be claimants has increased exponentially. However, the regulations setting out the LMP form temper this expansion. Subsubs are protected only to “such amounts as the (general) would have been obligated to pay the (subsub) under the” Act. We are unsure of this obligation. When does one determine the amount the general was obligated to pay? What happens if the lien rights have expired? If the surety is still liable after expiry, then a general will be at significant risk because it may not have known of any claims by subsubs and may not have held back any money from the sub of those subsubs.
Every claimant under an LMP bond has a right of action against both the principal under the bond (e.g. general) and the surety if the principal defaults in making a payment the bond guarantees. Similarly, the owner has a right of action against the surety to enforce a performance bond. If the surety makes any payment under a bond, it has a right of subrogation to all the rights of the person to whom it made that payment. Accordingly, if the surety makes a payment to a subsub under the bond, then the surety has a right, in addition to its own contractual rights with the principal, to claim against the principal for the amount paid and, if there were a breach of trust, to claim against the principal’s officers and directors.
Under the CLA, any one of the contracting players could post security to vacate a lien. The security was the amount of the lien plus, for costs, the lesser of 25% of the claim and $50,000. $50,000 has now been increased to $250,000. Accordingly, a lien for $1 million will require security of $1,250,000.
Notice of Lien
Under the CLA, a claimant who had not yet preserved a claim for lien could stay the paymaster’s hand by providing a written notice of lien. The recipient then had to retain the basic holdback plus the amount in the written notice of lien. A simple letter that gave sufficient details sufficed as a notice of lien. Under the Act, a claimant must give a notice of lien in a prescribed form and serve it pursuant to the rules of court.
Under the CLA, there were no statutory rules to vacate a written notice of lien. A general or owner had to bring a full motion. It had to argue that, if it had the ability to vacate a registered and preserved claim for lien, it should also have the ability to vacate a written notice of lien (i.e. why would it be prejudiced in clearing title of an unpreserved lien claim when it had the right to vacate a preserved lien claim). The Act now gives statutory authority to move to vacate a written notice of lien.
We will comment briefly on a number of other changes. The following matters used to be referenced in the CLA and are now referenced in the regulations:
- an action to enforce a claim for lien is brought in the jurisdiction in which the land is situate
- no third party actions or interlocutory steps without leave
- rules for consolidation and carriage of actions and for settlement meetings
The following matters are now changed:
- claimants may now join a lien action with the trust action
- a Superior Court judge may refer a matter to a Master (as usual in Toronto) and, now, also to a Small Claims Court judge if the amount at stake is within Small Claims Court jurisdiction
- actions are set down for trial under the regular rules of court
- an interlocutory order may now be appealed, if leave is obtained
- there is no appeal of a judgment or order on reference if the amount of the claim is $10,000 or less
- all documents and notices under the Act must be served pursuant to the rules of court (but, as before, other than for written notices of lien, service by registered mail will suffice)
Image courtesy of DodgertonSkillhause.
Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.