The Construction Lien Act: Recent Changes a Subcontractor Should Consider

By September 24, 2018Uncategorized
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By: Anthony J. Gabriele, Associate
Email: gabriele@paveylaw.com

On July 1, 2018, some of the long-awaited amendments to the Construction Lien Act, R.S.O. 1990, c. C.30 came into force. It is expected that the second set of amendments will come into force on October 1, 2019. The recent and future changes will send shockwaves throughout the construction industry and change the way that owners, contractors and subcontractors conduct (or should conduct) business. As it relates to the recent amendments, subcontractors should be aware of the following changes and adjust their business practices as required.

  1. Extended Lien Deadlines:

    On July 1, 2018, the deadlines to preserve and perfect construction liens were extended in accordance with the table below. However, it should be noted that, the previous and shorter deadlines will continue to apply to projects where (i) a contract for the improvement was entered into before July 1, 2018, (ii) a procurement process for the improvement was commenced before July 1, 2018, and (iii) the premises are subject to a leasehold interest, and the lease was first entered into before July 1, 2018.

Step Old Time Limit

(From Last Day/Certificate Publishing)

New Time Limit

(From Last Day/Certificate Publishing)

Preserve Lien 45 Days 60 Days
Perfect Lien 90 Days 150 Days

 

When applicable, these amendments should update the Construction Lien Act to represent the extended payment deadlines that parties to a construction contract commonly encounter.  The new and extended deadlines will provide stakeholders with a greater opportunity to negotiate payment and, hopefully, avoid the costs and disruptions associated with unnecessary construction liens.

 

However, because of the Construction Lien Act’s transition provisions, specifically Section 87.3, subcontractors should be aware that the previous and shorter deadlines will continue to apply to ongoing and some upcoming projects. Subcontractors should be aware that the previous deadlines may continue to apply, even if their subcontract was created after July 1, 2018.  Therefore, subcontractors need to approach the extended deadlines with extreme caution. An improper attempt to rely on the new and extended deadlines could have fatal consequences to a subcontractor’s lien rights and consequently their ability to recover debts owing.

 

  1. Mandatory Surety Bonds on Public Contracts:

    As of July 1, 2018, all contactors retained to complete “public contracts” of $500,000.00 or more will be required to post a labour and material bond equal to at least 50% of the contract price.

The requirement that contractors post labour and material bonds on larger public projects will ensure that subcontractors have different avenues and greater opportunities to recover funds owing. Although bonds were already quite common on public projects, the newly legislated requirement will provide greater protection to subcontractors and Crown agencies.

In order for a subcontractor to take advantage of these greater protections, they should take the following precautions to ensure that they can advance a claim on a labour and material bond:

  • Request a Copy: Subcontractors should request a copy of the labour and material bond prior to commencing work on the public project. This will avoid potential delays should a claim on the subject labour and material bond become necessary.

 

  • Diarize the Dates: Subcontractors should diarize the appropriate dates and deadlines that must be met in order for them to make a claim on the subject labour and material bond. Similar to construction liens, labour and material bonds commonly contain contractual limitation periods or deadlines which are established based on the subcontractor’s last date of supply. A failure to provide the proper notice and/or commence an action within the required deadlines can severely hinder a subcontractor’s ability to make a claim on the bond and, as a result, recover funds owing.

 

  • Contact Legal Counsel: The importance of a labour and material bond cannot be understated. It will provide a subcontractor with the opportunity to recover debts owing should a project implode. Remaining in constant contact with legal counsel is important when advancing a claim on a labour and material bond. The deadlines can be stringent and attempting to submit a claim at the last second can be difficult.

 

  1. Higher Duty to Account:

    As of July 1, 2018, the trust provisions of the Construction Lien Act were amended to require that:

 

  • The trust funds (i.e. funds paid by those involved in a project to those below them in the construction pyramid) be deposited into a bank account in the name of every trustee;

 

  • the trustee(s) maintain written records respecting the trust funds and detailing the amounts received, paid out, and any transfers made for the purposes of the trust; and

 

  • if the trust funds are deposited into a single account, the trustee keep the proper records.

The majority of the changes to the trust provisions appear to be the legislation of the already established common law. However, the legislation of such requirements further establishes a concrete burden being placed on all owners, contractors and subcontractors.

Subcontractors must be aware that these amendments to the Construction Lien Act further serve to require that they maintain proper accounting records. Although required on all projects, subcontractors will especially want to ensure that they maintain the proper records on larger projects where they could face potential cash flow issues if the project goes south. On larger projects subcontractors should strongly consider:

  1. Opening a separate bank account for that individual project;
  2. Emphasizing that their bookkeepers or accounting departments maintain detailed and precise records of all funds received, paid out and/or transferred; and
  3. If possible, avoid using trust funds for overhead expenses.

A failure to comply with these requirements could have serious consequences. Specifically, should a project implode, officers, directors and/or persons with effective control of the subcontracting corporation could face personal liability for the improper use of trust funds.

Overall, the amendments to the Construction Lien Act provide some much-needed updates. These amendments should update the Construction Lien Act to better represent the current climate in the construction industry. With that being said, to protect their interests, subcontractors need to adjust their business practices as required.