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General Lien

Posted on July 4, 2016 | Posted in Construction

Most, if not all, contractors recognise that, under the Construction Lien Act, they have lien rights against a project on which they worked. We suspect that not as many contractors recognise that they have possible rights to a general lien.

general lien

What is It

If an owner enters into a single contract with a general contractor to perform work on several premises (or projects), section 20(1) of the Act allows the contractor or a subcontractor to register a general lien against all of the projects for monies owed for all of the services or materials supplied to all of the projects. In essence, the contractor is not limited to separate liens for the separate amounts claimed on each project; it can claim the full amount against each project. The utility of a general lien usually arises in subdivision or condominium projects, but we can envisage a situation in which an owner has two commercial buildings being renovated under one contract.

A general lien gives as good or better security for monies due than specific liens on specific projects. For example, $30,000 may be owed on project #1 and $20,000 may be owed on project #2. It is far better to have a general lien of $50,000 on both projects than $30,000 on one and $20,000 on the other. One project may be deficient in equity or in holdback and that deficiency can be offset by a surplus in the other.

Constraint

Be warned, however, that what the Act giveth, the Act (can sometimes) taketh away. Section 20(2) of the Act eliminates the right to a general lien if the relevant contract provides that all liens must arise and expire on a lot-by-lot basis. Thus, the parties can contract out of the right to the general lien that section 20(1) gives. Once the written contract between an owner and general eliminates the right to a general lien, the general is limited to liens on a project-by-project basis. What happens when the contract between the owner and the general eliminates the right to a general lien, but the contract between the general and the sub does not? Does the sub have a right to a general lien or is the sub bound by the prime contract? This question was answered in Yorkwest Plumbing Supply Inc. v. Nortown Plumbing (1990) Ltd., a 2016 decision of the Ontario Court of Appeal.

Gone

The sub, whose subcontract did not deal with general liens, registered a lien against two projects (and the individual lots within them) for $64,000. It did not allocate its claims to the individual lots. The sub commenced an action to perfect its lien. The general and owner each moved for summary judgment on the basis that the sub was not entitled to register a general lien because the prime contract stipulated that any liens were to arise on a lot-by-lot basis.

The sub argued that section 20(2) referred only to a “contract” and not to a subcontract and therefore did not apply to a subcontract. The motions judge, Divisional Court, and Court of Appeal did not agree. It made no sense for an owner to be able to contract out of a general lien with a general and then still find that the general’s subs had the right to a general lien. Expressed differently, the right to a general lien under section 20(1) can only arise under the contract between the owner and the general; a subcontract cannot create that right.

Forever

The sub argued, in the alternative, that it should at least have its general lien converted into specific liens against the specific lots on which its lien rights were still outstanding at the time of registration. It relied on section 6 of the Act, which gives a court power to cure errors in claims for lien. However the Court noted that section 6 can only be used to correct procedural errors. Since section 20(1) gives a substantive right to a general lien in specifically defined circumstances, the misuse of the section is not a procedural error. A contractor who chooses to register a general lien incorrectly is out of luck.

The sub claimed against the owner, not just as the owner of land subject to a lien, but for quantum meruit and unjust enrichment. Once its lien was discharged, the sub requested that its action against the owner on those two issues continue. The court refused this request. Section 55 of the Act allows the plaintiff in a lien action to join a claim for breach of contract or subcontract. Accordingly, the sub could join a claim against the general for quantum meruit or unjust enrichment, but not the owner; the sub had no contract with the owner. Once the lien died, the action died.

The Court of Appeal dismissed the appeal with costs of $10,000 to each of the general and the owner. We suspect that the Divisional Court and the motions judge made similar costs awards. It seems that the action, the motion, and the two appeals were a very expensive way to obtain the answer to the question that we originally posed.

 

Image c/o AimeeLow

 

Jonathan Speigel

 

Written by Jonathan Speigel Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.

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