North America

On July 1, 2018, the modernization provisions of the Construction Lien Amendment Act, 2017 (the “CLAA”) came into force.

In amending the Construction Lien Act (the “Old Act”), the Province had three primary objectives: (i) to introduce a mandatory prompt payment regime to address the enforceability and efficiency of payments for both public and private sector projects; (ii) to establish an adjudication process to deal with construction disputes on an interim basis without disrupting projects; and (iii) to modernize the Old Act with technical and definitional amendments and provide for alternative financing and procurement (“AFP”) arrangements involving public-private-partnerships (“P3”).

Staggered Enforcement:

The amendments to the Old Act will take effect on the following staggered dates:

1. The first amendments came into force on December 12, 2017, and relate to certain non-substantive, housekeeping changes that are relatively minor and technical in nature.

2. The modernization provisions of the CLAA came into force on July 1, 2018, and are summarized in this bulletin.

3. The most substantive amendments, the prompt payment and interim adjudication provisions, come into force on October 1, 2019, and will be summarized in an upcoming bulletin.

Modernization Provisions in Force as of July 1, 2018:

1. Title: The title of the Construction Lien Act has been changed to the Construction Act (the “New Act”).

2. “Grandfathering” Provisions: Transitional rules set out how the New Act will apply to contracts and leases. The new amendments in force as of July 1, 2018, do not apply to a project or improvement where: (i) the prime contract between the owner and contractor for the improvement was entered into before July 1, 2018 (regardless of the date that any subcontract relating thereto was entered into); (ii) the procurement process for the improvement commenced prior to July 1, 2018; or (iii) if the premises are subject to a leasehold interest, the lease was first entered into before July 1, 2018. The Old Act, as it read prior to July 1, 2018, will continue to apply to these contracts and leases.

3. Holdback Requirements: Under the New Act, the basic 10% holdback requirement remains the same, however, a payer under a contract is now required to release the holdback once all liens have expired or been satisfied, discharged or otherwise provided for under the New Act. This payment obligation is subject to an owner’s right to publish a notice of non-payment in the form prescribed by the regulations under the New Act not later than 40 days after receipt of the certificate of substantial performance. Contractors and subcontractors are not required to release holdback funds following the expiry of the lien period if they have (i) not received holdback payments from the owner, (ii) referred the non-payment to adjudication and (iii) provided a notice of non-payment to their payees.

Security with respect to holdbacks can now be offered in a variety of forms, including cash, a letter of credit or a bond.

For projects with a duration of more than one year or phased projects, parties will be able to contract for holdback release on an annual basis or on the completion of specified project or design phases, provided that the contract price is at least $10 million. The New Act also provides that a single contract pertaining to multiple improvements will be deemed to be a series of separate contracts for the purpose of determining substantial performance and total completion if (i) each of the improvements is to lands that are not contiguous and (ii) the contract provides for such right.

4. Lien Rights:

(a) Time Periods for Lien Preservation and Perfection: The New Act increases the total period for preservation and perfection of a lien from the previous 90 days to 150 days. The time period for the preservation of liens (registration and delivery) has been increased from 45 to 60 days following the relevant “triggering event”, i.e. the earlier of the date of publication of the certificate of substantial performance and the date the contract is completed, abandoned or terminated. Accordingly, title subsearches to confirm that no lien claims have been registered should now be conducted 61 days after publication of the certificate of substantial performance. The time period for perfecting liens (i.e. registration of a certificate of action) has increased from 45 to 90 days following the last date upon which the lien could be preserved. The extended lien preservation and perfection periods are intended to provide parties with more time to negotiate and resolve any disputes before having to register a lien claim and commence an action.

(b) Landlord Liability for Liens: Under the Old Act, landlords could provide notice to contractors disclaiming liability for improvements being made by tenants to the leased premises. The New Act prohibits landlords from providing such a notice. If there is an improvement to a leasehold property and payment for the improvements is accounted for under the lease terms or any agreement to which the landlord is a party in connection with the lease, then a lien will attach to the interests of both the tenant and the landlord. The landlord’s liability is limited to the extent of 10% of the amount of the requisite payment. The New Act also provides that a landlord will be deemed to be the “owner” if it meets the criteria in the definition of “owner” under the New Act and will be subject to full liability for the lien amount.

5. Definitional Amendments:

(a) “Improvement” now includes reference to “any capital repair to land”.

(b) In support of the above, the term “capital repair” is now defined specifically to include any repair intended to extend the normal economic life or to improve the value or productivity of the land or of any building, structure or works on the land, but to exclude maintenance work performed to prevent the normal deterioration of the land, building, structure or works or to maintain the land, building, structure or works. This is intended to distinguish capital repairs from day-to-day repairs and maintenance (to which liens do not apply).

(c) The term “price” is now defined to include any direct costs incurred as a result of an extension of the duration of the supply of services or materials to the improvement for which the contractor or subcontractor is not responsible.

(d) Substantial performance is now deemed to occur when the improvement or a substantial part thereof is ready for its intended use or is being used for the purpose intended, and the cost to complete or correct any known defect is not more than: (i) 3% of the first $1,000,000.00 (raised from

$500,000.00) of the contract price; (ii) 2% of the next $1,000,000.00 (raised from $500,000.00) of the contract price; and (iii) 1% of the balance of the contract price.

(e) The New Act also provides that a contract is deemed to be completed and services or materials deemed to be last supplied to the improvement when the price of completion, correction of a known defect or last supply is not more than the lesser of (i) 1% of the contract price and (ii) $5,000.00 (raised from $1,000.00).

(f) “Contractor” now includes a joint venture entered into for the purposes of an improvement.

6. AFP/P3 Projects: The New Act expressly recognizes and provides a legislative framework for AFP and P3 projects. If (i) the Crown, a “municipality” or a “broader public sector organization” (“BPSO”) (as defined in the New Act) enters into a contract with a special purpose entity (i.e. Project Co) to finance and undertake an improvement on behalf of the Crown, municipality or BPSO, and (ii) the special purpose entity enters into an agreement with a contractor with respect to the improvement, then the special purpose entity will be deemed the “owner” of the premises with respect to certain deemed sections of the New Act (including prompt payment and interim adjudication) in place of the Crown, municipality or BPSO. For all other sections of the New Act, the Crown, municipality or BPSO would remain the owner.

7. New Trust Fund Requirements: The New Act no longer requires project-specific bank accounts, but it does include new rules relating to the deposit, administration, recording and traceability of project trust funds. For instance, trustees under the New Act are required to deposit trust funds into a bank account and to keep written records detailing the receipt, payment and transfer of such funds for each project. In addition, if trust funds from separate trusts are deposited into a single bank account, then the funds are deemed to be traceable. Finally, in determining the amount of the trust funds to be retained by a trustee and the amount of a related lien claim, set-off can only be asserted in relation to debts, claims and damages directly relating to the improvement.

8. Court Procedure: Lien claims for $25,000.00 or less can now be referred to the Small Claims Court.

Where Are We Now?

The amendments to the Old Act are intended to enhance the efficiency and competitiveness of construction industry stakeholders. They introduce, among other things, new administrative forms and statutory obligations and, as a result, will require owners, contractors, subcontractors and other stakeholders to modify and/or implement new procedures to deal with such changes.

Should you have any questions, please contact a member of Fasken’s Real Estate and Construction Groups.

 


 

Authors

Scott Ma
ASSOCIATE
Toronto, ON
Robert Iaccino
ASSOCIATE
Toronto, ON
Nora Kharouba
ASSOCIATE
Toronto, ON
Martin Emmons
Partner
Toronto, ON
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