Legal Blog

Early Release

We could be discussing prisoner parole or maybe even sexual dysfunction. Alas, such is not the case. We refer to the early release of statutory holdback and its effect on priorities under the Construction Lien Act. Can payment of some of the holdback to subs who have long finished their work on an extended project turn into a disaster for the payer? Such was the situation, with a twist, in Wellington Plumbing & Heating Ltd. v. Villa Nicolini Inc., a 2012 decision of the Ontario Superior Court of Justice.

Dispute

Like many projects, this project had a mortgagee, an owner, a general, and a group of subs. Unlike most projects, this one went bad. It had been expected to be completed by the fall of 2008, but by the spring of 2010, it was only 75% completed. The subs registered claims for lien, the owner was in default under its mortgage, and the mortgagee was selling the project. In order to do so, the mortgagee vacated all registered liens, about $960,000 in aggregate, by posting a bond for $1.2 million.

The dispute between the owner and the subs related to the quantum of the 10% statutory holdback for which the mortgagee was liable to the subs. The basic holdback was $497,000, but the owner, with the mortgagee’s blessing, had paid $212,000 of it to two subs who had completed their work earlier into the project. Accordingly, the dispute was whether the mortgagee was liable for $497,000 or $285,000. Regardless of the answer, the subs were going to take a bath. The amount of the bond was irrelevant because a mortgagee is liable for the holdback that the owner should have maintained; it is not liable for the amount necessary to be posted simply to clear title.

Justification

Section 33 of the Act allows a payment certifier on the prime contract to determine whether a subcontract has been totally completed and certify the completion on a prescribed form. The subcontract is then deemed to have been completed on the date of certification.

Section 25 of the Act allows each payer on a contract and any subcontract, without jeopardy, to release money from the 10% basic holdback monies otherwise required to be held under the Act, if a contract (usually a subcontract, but it could be a subsubcontract) has been certified complete under section 33.

Attack

The mortgagee produced a certificate purportedly under section 33 attesting to the completion of two subcontracts. The remaining subs argued that the certificate was not in strict compliance with section 33 – and they were correct. The judge analysed the Act to determine whether the irregularities in the certificate meant that the certificate was of no effect. He seemed to be leaning to the conclusion that the irregularities were sufficiently minor that they were saved under section 6 of the Act, which deals with minor irregularities. However, he ultimately decided that he did not have to decide the issue because there was something far more important.

The judge held that the payment certifier had not produced the certificate before the owner released part of the holdback to the general and it, in turn, paid the early release to the subs. Rather, it was produced after-the-fact in an attempt to cure payments already made in violation of section 25. Section 25 stipulates that the certificate comes first and the payments are made because of it, not the reverse. The judge decided that this breach of the Act was fatal.

Accordingly, the judge held that the holdback was the full $497,000. He noted that the mortgagee might feel that it was unfair for it to pay the same money twice. The judge held that there was nothing unfair about requiring an owner to comply with the provisions of the Act and, given that the subs were going to get at most 50 cents on the dollar, there was certainly no windfall to them.

Payment

Most prime contracts allow for the early release of holdback to subs, but do not require the owner to do so. In our experience, owners rarely do so; there is just too much danger in reducing the holdback. The fact that the owner is not paying interest on released holdback monies is another incentive weighing against the release.