Construction or Renovation Work and a Blueprint for Disaster

You want to know a secret? Every time you hire a contractor to do some construction or renovation work on your property, you must hold back from the contractor 10% of the contract price until 45 days after the work has been completed. This retained sum is called “holdback” and it is the law in Ontario pursuant to the Construction Lien Act, R.S.O.1990, c.C. 30, (the “Act”) and in most other provinces and territories with slight variations.

It is a secret because it is the rare contractor that will inform you of this obligation. However, if you do not hold back 10% of the contract price, an unpaid subcontractor or supplier can tie up the title to your property by registering a Claim for Lien that will prevent you from selling, refinancing or otherwise dealing with the property until the lien is removed. The owner of the property will not be allowed to remove the Claim for Lien from the title until they have paid that 10% portion of the contract price to the lien claimant – even if the owner has already mistakenly paid it out to the contractor. Thus, you may end up paying it twice: once to the contractor and once to a lien claimant.

The holdback obligation applies to all contracts with an owner, contractor, or subcontractor for the supply of services or materials to an improvement on the land of the owner. The building, repair, renovation, or even demolition of a barn or other farm building is an “improvement” under the Act. Any renovation to your home is an “improvement” – even that simple paint job in your living room. In each of these cases, the 10% holdback must be retained.

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Breach of trust situations

The holdback is a trust fund held for the contractor or subcontractors working on the contract. It cannot be used for purposes other than payment of the contract or the trust would be breached. For example, if an owner was retaining $20,000 as holdback on a $200,000 construction project and these funds were maintained in a bank account with a bank that had concerns about the owner’s solvency, the bank may try to scoop money from the account to pay outstanding indebtedness. If this situation occurred, or if the owner gave the bank the holdback funds to reduce the owner’s personal indebtedness, this would be a breach of trust. The contractors and subcontractors would be entitled to take back the holdback funds from the bank.

An owner cannot contract out of the obligation to retain holdback. The contractor may complain and tell you that a holdback isn’t necessary on his job. However, if the job involves construction, or more particularly, the supply of services and materials for an “improvement,” the owner of the property must retain 10% of the contract price or risk paying the sum out twice if a subcontractor places a lien on the property for unpaid services or materials.

Releasing the holdback

Holdback monies can only be released when all lien rights of the contractor and subcontractors under the Act have expired. Specifically, lien rights expire after 45 days following the earliest of one of these events:

a) the date the contract is completed;

b) the date the contract is abandoned;

c) the date on which a copy of the certificate of substantial performance is published in a construction newspaper.

Paragraphs a) and b) are fairly obvious. Paragraph c) is usually used on larger projects. The owner or project manager will certify the contract to be ‘substantially complete’ when it is roughly 98% completed and ready for use. A special certificate is filled out indicating the date of substantial performance of the contract and this information is published in a construction newspaper to give notice to all subcontractors on the project that the contract is substantially completed. The subcontractors have 45 days from the date of publication to file their liens for unpaid services or materials supplied to the project, or from the last date of supply of services or materials. After this 45-day period, all lien rights of the subcontractor expire and the owner can release the 10% holdback funds to the contractor without risk.

Landlords and lenders beware

An owner is defined in the Act as any person having an interest in a premises at whose request and upon whose credit, behalf, consent, or for whose direct benefit, an improvement is made to the premises. As such, landlords, tenants, and mortgagees have all been considered “owners” in some situations and liable to subcontractors for the 10% holdback. An unpaid subcontractor, if he is wise, will cast the net as wide as possible and all these parties will be named in a lawsuit for the collection of monies owed.

For example, if you own a farm and rent it to a horsey tenant who puts up some new fencing on the property, you may be liable to the contractor or its subtrades for the 10% holdback even though you had nothing to do with the construction. Section 19 of the Act allows a contractor to serve a landlord with notice of the improvements to be made on behalf of a tenant. If, within 15 days of receiving this notice, the landlord does not reply in writing that he or she will not be held responsible for the improvement, he will be subject to a Claim for Lien to the same extent as the tenant.

If you have loaned a person money to purchase or make improvements to a property and secured the debt with a mortgage, as a mortgagee you can be liable for the holdback obligations. This liability would depend on the purpose of the mortgage, the timing of the payments, and certain notice requirements.

Even a simple job, such as the hiring of a painter to paint a tack room, falls under the Act. If the painter does not pay his suppliers for the cost of the paint or his workers for the time they spent on the job, they can go after the owner for the 10% holdback.

Other liabilities facing property owners

If a construction worker is injured on the property, the property owner can be sued personally for the damages. WSIB coverage is now mandatory on most construction projects, although there is an exemption for some home renovations, and the property owner must ask for and obtain a WSIB clearance certificate from his or her contractor.
A written contract is very important before commencing construction. It is best that this contract be reviewed by a construction lawyer before the shovel breaks ground to ensure that you are protected in all usual circumstances. This is a complicated area of the law and the costs can get very expensive if you don’t have the proper paperwork.
Notify your insurance company of any construction or renovations to be done on your property. Let your broker advise you regarding any appropriate amendments to your policy to protect you and consider what insurance coverage you require the contractor to possess. All legitimate construction contractors are insured for builders’ risk and are willing to show you proof of this.
Stay on top of the project. Take pictures. Insist on written notice of any changes in the construction and approve changes in writing.
Update budgets at least once a month. You will often spend more than you originally estimated on the project, so be prepared for this. Communicate clearly and regularly with your contractor and identify and resolve disagreements early.

As with everything, exercise caution and be informed, as prevention is a lot easier than the cure.