Introduction to the Builders’ Lien Holdback12-Feb-18
Many of us have heard of a construction holdback, and may have even experienced the standard 10% deduction from outstanding accounts in relation to the holdback. But what is the holdback for and who does it benefit?
Pursuant to sections 18 and 23 of the Builders’ Lien Act, Owners1 are required to maintain major and minor lien funds. The major lien fund is based on 10% of the value of the work actually done or materials actually provided and must be held for 45 days after either a certificate of substantial performance2 is posted, or the contract is complete (where no certificate of substantial performance is issued).
The minor lien fund is based on 10% of the value of work actually done or materials actually provided after the date a certificate of substantial performance is issued and must be held for 45 days after project completion. (The minor lien fund only exists after a certificate of substantial performance is issued).
Although an Owner is required to maintain both major and minor lien funds (as applicable), the Owner is not required to dedicate a special account to this or otherwise segregate the funds in question. However, if an Owner has paid all amounts owing in full and failed to maintain a holdback, and if a builders’ lien is registered, the Owner may be required to pay the lien fund into Court before the builders’ lien will be discharged. This means that if an Owner fails to holdback 10% from accounts payable, it may be forced to “double pay” this amount. Likewise, if the Owner does not ensure that there are no builders’ liens registered before releasing the holdback, the Owner may still be required to pay the amount of the lien fund into Court in the event a builders’ lien has been registered.
Once a Contractor3 (or subcontractor) has proven its builders’ lien is valid, they are entitled to be paid from the lien fund or foreclose on the lands. Often, this occurs when an insolvent general contractor has failed to pay numerous subcontractors – leading to multiple builders’ liens on one project. In these circumstances, the lienholders are paid from the lien fund, pro-rata, based on the amount of their claim. Unfortunately for lienholders, this sometimes means that the lien fund is inadequate and the lienholders are paid significantly less than what is actually owed.
Further, the Courts have continued to confirm that the government has priority over the lien fund where outstanding taxes are owed. Most recently, in the case of Canadian Natural Resources Limited v Thermal Energy Service Inc., Her Majesty the Queen in Right of Canada, as represented by the Minister of National Revenue (“Minister”), was entitled to deduct 100% of outstanding taxes owed to it by a general contractor, before lienholders were paid from the lien fund.
In this case, Canadian Natural Resources Limited (“CNRL”) was the Owner who had hired Thermal Energy Services Inc. (“Thermal”) as a general contractor. Thermal went bankrupt, leaving several of its subcontractors unpaid. The unpaid subcontractors registered builders’ liens.
Thermal also owed $558,000 in taxes to the Minister. CNRL held the amount of $815,000 for the lien fund in question. The Minister sought to be paid in full, from the lien fund, leaving only $257,000 to be distributed amongst the numerous lienholders. The lienholders objected, arguing that the lien fund was reserved for lienholders.
The Court rejected the lienholders’ argument, ordering that the Minister receive payment in full and the remaining lien fund be shared amongst the lienholders on a pro-rata4 basis.
As a result, the Minister was able to take advantage of the lien fund, leaving the unpaid lienholders to recover what was likely a very small fraction of what was actually owed to them.
The moral of the story? Owners beware – make sure you are maintaining a holdback and have ensured that there are no Builders’ Liens registered to avoid double payment. Subcontractors beware– even though the Builders’ Lien Act provides security in the form of a builders’ lien, this does not guarantee payment. Subcontractors should do their best to ensure that general contractors and owners are in good financial standing and register builders’ liens to protect their interests where invoices are unpaid.
1Owners: As defined in the Builders’ Lien Act, “owner” means a person having an estate or interest in land at whose request, express or implied, and
- on whose credit,
- on whose behalf,
- with whose privity and consent, or
- for whose direct benefit,
work is done on or material is furnished for an improvement to the land and includes all persons claiming under the owner whose rights are acquired after the commencement of the work or the furnishing of the material.
2Performance: As defined in the Builders’ Lien Act, a contract or a subcontract is substantially performed
- when the work under a contract or a subcontract or a substantial part of it is ready for use or is being used for the purpose intended, and
- when the work to be done under the contract or subcontract is capable of completion or correction at a cost of not more than
- 3% of the first $500 000 of the contract or subcontract price,
- 2% of the next $500 000 of the contract or subcontract price, and
- 1% of the balance of the contract or subcontract price.
3Contractor: As defined the in the Builders’ Lien Act, “contractor” means a person contracting with or employed directly by an owner or the owner’s agent to do work on or to furnish materials for an improvement, but does not include a labourer; and “subcontractor” means a person other than
- a labourer,
- a person engaged only in furnishing materials, or
- a person engaged only in the performance of services, who is not a contractor but is contracted with or employed under a contract.
4Pro-rata: proportional; i.e. assigning an amount to a fraction according to its share of the whole.