Construction Lien Act Amendments, Part 3: Lien, Holdback, and Trust Rules

Certain amendments to the Construction Lien Act took effect on July 1, 2018, significantly changing the legal landscape for property owners, developers, contractors, and trades involved in construction projects in Ontario. The amended Act (which will be called the “Construction Act”) was brought in response to a government-commissioned report. In previous articles, we summarized the rules relating to prompt payment and interim adjudication.

What follows is a brief summary of the changes to the Act relating to lien timelines, holdback, and trust accounting.

A. Construction Liens:

A construction lien is intended to be a fast, cheap, and easy way of collecting a construction debt. A lien is a statutory remedy providing some protection for suppliers of services or materials to a construction project. Parties who may be entitled to a lien include: contractors, subcontractors, labourers, suppliers of materials, lessors of equipment, engineers, and architects.

A lien is registered as a charge on title to the property that was improved in the amount equal to the price of the services or materials provided.

To register and enforce a lien, the Act imposes strict time periods to preserve the lien (by registering a claim for lien), perfect the lien (commencing a court action and registering a certificate of action), and set the matter down for trial.

Time periods to register and enforce a lien have been extended in the amended Act. A summary of the changes are below:

B. Holdback:

Each payer in the construction pyramid must hold back 10 percent of the price of services and material supplied plus the amount of any registered liens for which it has received notice. An owner is personally liable to lien claimants for holdbacks that it is required to retain. If a payer fails to retain proper holdbacks, it risks paying the same amount twice.

Under the amendments, in addition to being retained in cash, the holdback can be retained in the form of a letter of credit, demand repayment bond, or other prescribed form.

Payment of holdback will be mandatory when all lien claims have expired or been satisfied or discharged, unless the payer notifies the contractor that it will be asserting a set-off (e.g. for deficiencies). Furthermore, the holdback may be paid on an annual or phased basis for larger and long-term or phased projects.

C. Construction Trusts: 

All amounts received by owners, contractors or subcontractors in a project constitute a trust fund for the benefit of persons who supply work or materials to complete the project. Using trust funds for any other purpose until all trust beneficiaries are paid can amount to a breach of trust. This can be an extraordinarily powerful remedy; any directors, officer, or person with effective control of a corporation can be held personally liable for breach of trust.

The amendments create new detailed bookkeeping rules for trust funds. Any person who is a trustee must:

1. Deposit the trust funds in a bank account in the trustee’s name(s);
2. Maintain written records respecting the trust funds, detailing amounts received into and paid out of the funds, and any transfers made for the purposes of the trust; and
3. So long as sufficient written records are maintained, trust funds for multiple trusts can be deposited together in a single bank account. Co-mingling of trust funds does not, in itself, constitute a breach of trust.

In light of these recent amendments, companies involved in construction clearly have evolving legal rights and obligations with respect to liens, holdback, and trusts. The Litigation, Real Estate, and Corporate groups at Perley-Robertson, Hill & McDougall LLP/s.r.l. can assist companies navigate these rights and obligations throughout the entire lifecycle of a construction project.

Bryce and Keith are both lawyers in the Litigation Law Group at Perley-Robertson, Hill & McDougall LLP/s.r.l.