COVID-19 Construction Law Update #2 – Holdback Release

The Ontario government has confirmed that the suspension of limitation periods will not apply to construction liens. The expiration of liens will allow owners and mortgagees to release holdbacks to pay contractors and subcontractors after a project has ended.

As background, under the Construction Act, each “payer” in a construction project must hold back 10 percent of the price of services and material supplied plus the amount of any liens for which it receives written notice. As a general rule, holdbacks cannot be released until all liens “have expired or been satisfied, discharged or otherwise provided for under this Act”.

An owner is personally liable to lien claimants for holdbacks, and construction mortgagees lose priority to lien claimants for a deficiency in the holdback. If an owner or mortgagee fails to retain proper holdbacks, they risk paying the same amount twice.

On March 20, 2020, the Ontario government suspended all limitation periods, arguably deferring the lien period indefinitely. As a result, if owners and mortgagees released the holdback, they risked exposing themselves to liability to unpaid lien claimants who came out of the woodwork later on. The safest option was to simply retain the holdbacks during the pandemic. Unfortunately, this prevented contractors and subcontractors (in an industry already severely impacted by the virus) from getting paid for their work.

Beginning on April 16, 2020, the suspension will not apply to construction liens. Once the suspension is lifted, parties will have the same amount of time to lien a project that was remaining before the suspension began. The expiration of liens will allow owners and mortgagees to release holdbacks without fear of liability, which is good news for contractors and subcontractors.