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Construction Lien Act of Ontario: What is a Construction Lien?
The Construction Lien Act of Ontario regulates how payments are made to parties who provide services or materials to a construction project. Construction liens may be filed when a project owner does not make prompt payment to the contractors or suppliers. You can register a construction lien on the title if you have provided materials or services to improve the property.
Having enacted amendments to the Construction Lien Act of Ontario (now the Ontario Construction Act, R.S.O. 1990, c. C.30), Ontario is achieving its plans to modernize provincial construction laws in order to improve efficiency and competitiveness for construction firms.
In this Brandon Blog, I examine the recent Ontario court decision regarding the treatment of court-appointed receiver fees when mortgagees and construction lien claimants disagree over the priority of their claims.
Construction Lien Act of Ontario: Construction lien and holdback rules
Disclaimer: I am by no means an expert in this area. Nevertheless, as a licensed insolvency trustee, I have acted as a court-appointed receiver over incomplete construction projects. Therefore, I have encountered various construction lien issues in receiverships.
General changes made to the Construction Lien Act of Ontario are related to prompt payment rules and the establishment of new dispute resolution mechanisms (adjudication). According to provincial construction law, prompt payment refers to the payment of an invoice after a “proper invoice” is issued.
A general contractor’s invoice must be paid within 28 days of receipt by the owner. The owner has 14 days to notify the contractor if he disapproves of the amount, quality, or invoice of the work as outlined in the invoice. In place of the old requirement of 45 days, liens must be filed/preserved within 60 days now.
This policy change aims to improve cash flow within the construction pyramid by resolving conflicts more quickly. The dispute resolution procedure is now an adjudication process for the adjudication of construction disputes are handled by qualified adjudicators. The is also a code of conduct for adjudicators.
In the absence of an agreement to extend the timeline, the adjudication procedures state that the adjudication decision will be made within 46 days after it is initiated. If an adjudicator’s decision is not followed, the party expecting payment is also entitled to suspend the work under the contract or terminate it.
Holdbacks are what they sound like. The holdback process requires that for any project owner, contractor, or subcontractor to hold back 10% of the price of materials or services they provide is known as a holdback. With the amendments to the Construction Lien Act for Ontario, holdbacks remain at 10% of the value of improvements, but security can be offered in lieu of cash. Now a letter of credit or repayment bond can be used to maintain holdback.
In light of modern-day construction projects’ long-term nature, the Act expands the options for the make-up of holdback payments. They may now be made annually or in phases or portions, depending on the terms of the agreement.
Lien Filing under the Construction Lien Act of Ontario
Now for the case. The decision of the 3 Judge panel in the Ontario Superior Court of Justice Divisional Court was released on October 5, 2021. This case essentially deals with the ranking between the fee and costs of a Court-appointed receiver, the interest and costs owing to a mortgagee whose mortgage was registered prior to the registration of construction lien actions and the construction lien claims which then arose.
It was an appeal from a Judge’s decision on appeal from a Master’s (now called Associate Judge) decision who regularly dealt with construction lien cases. This appeal is primarily about the interpretation of section 78(3) of the then Construction Lien Act of Ontario. Prior mortgages have priority over lien claimants when there are arrears in interest charges, fees, or expenses related to the mortgage. The case also discusses how priority is determined when a previous mortgage is in default.
The report by the Associate Judge was issued on May 24, 2018. At trial, the issue was a priority contest between lien claimants, who were now bankrupt and represented by their licensed insolvency trustee, and the mortgagees. There was a court-supervised receivership over the property. During the receivership, my Firm was managing the court-supervised receivership on behalf of the husband and wife who owned the company which owned the property.
According to the Associate Judge, the mortgagee had priority over the lien claimants. As a result, the court-approved receiver fee and costs, mortgage interest, mortgage principal, and other charges ranked ahead of the construction lien claims.
The Trustee appealed that decision. The appeal was successful insofar as it was determined that the Associate Judge’s report was in error and that she failed to determine whether the mortgagee had priority over lien claimants with respect to a deduction for the court-approved receiver‘s fee and costs, mortgage interest, mortgage principal, and other charges. Consequently, the Judge ruled that the mortgagee did not have such priority for interest arrears, enforcement costs, and charges and that any funds paid into court should be given to the Trustee on behalf of the claimants of construction contracts.
Now, the mortgagee has appealed the Judge’s decision. Prior mortgages and building mortgages are covered in section 78(3) of the then Construction Lien Act of Ontario. Mortgages used for property acquisition are known as prior mortgages, and building loans are used for construction funds. For the mortgage advances to be entitled to priority, they must have been made before the registration of claims under the construction lien regime.
The court decision of this Construction Lien Act of Ontario case
According to the Judges hearing this appeal, the arrears of interest and the reasonable expenses, and fees that relate to enforcing security (i.e., the mortgage) cannot be adjudicated in a priority proceeding. Arrears in interest and reasonable expenses incurred on a defaulted mortgage should be determined through proceedings such as the power of sale proceedings, bankruptcy proceedings or the appointment of a Trustee.
The court overseeing the receivership administration approved the sale of the property during the court-supervised receivership proceedings. That same court also affirmed the receiver’s fee and costs, as well as reviewing the evidence and rendering an opinion regarding what the mortgagee was entitled to under the mortgage registered and advanced before a construction lien claim arose. All stakeholders were served with the original court application to appoint the receiver. Lienholders were included in this process as well. The Appointment Order specifies the priority of the receiver’s fee and costs. Nobody questioned the priority and even the lien claimants did not object to it.
All things considered, the judicial panel had to agree with the Associate Judge that all the amounts approved by the Judge ruling on the receivership and all the advances made before any construction lien claims arose ranked in priority for all legitimate costs and arrears of interest. In deferring to the assessment of the receivership Judge, this panel showed deference. As a result, the lower court Judge’s decision was reversed and the Associate Judge’s decision was upheld. The Trustee was ordered to pay costs.
Construction Lien Act of Ontario summary
I hope you found this Construction Lien Act of Ontario Brandon Blog informative. This case was really one big construction dispute resolution process. The provincial court deals with receivership matters to adjudicate under the applicable insolvency law.
With too high debt levels and not enough wealth, you are insolvent. You can choose from several insolvency processes to get the debt relief that you need and deserve. It may not be necessary for you to file for bankruptcy.
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We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic.
Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.
