Understanding the Construction Pyramid and Subcontractor Liens
Construction and renovation work can sometimes involve multi-layered contractual relationships between the various players in a construction project, where there are numerous complex areas of consideration. An owner or developer may hire a general contractor, who will then contract with subcontractors for various jobs such as carpentry, plumbing, and electrical work. In the same way, subcontractors may hire sub-subcontractors, those sub-subcontractors may hire sub-sub-sub contractors, and so on. This is often referred to as the “construction pyramid”. The pyramid dictates not only who works for whom, but also who pays whom: the owner pays the general contractor, who then pays its subcontractors, and who in turn pays the sub-subcontractors, all the way down to the bottom.
The Role of Construction Liens in Protecting Subcontractors
One of the purposes of the construction lien is to ensure that the general contractor and any subcontractors down the pyramid are remunerated for the services and materials that they have supplied towards improvement, as stated in a recent discussion regarding proposed changes to the Construction Lien Act. Thus, a lien secures the payment that is due to the general contractor and subcontractors. A lien is one means of enforcement provided under the Construction Lien Act that allows a contractor the ability to potentially take steps to sell the property and gives the contractor and subcontractors priority over certain creditors who may have claims against the owner of the property.
Preserving and Perfecting a Lien
As soon as a contractor begins providing services or materials to improvement, it has a lien for the value of services or materials actually supplied to the improvement. However, that lien will expire unless certain steps are taken: (1) the lien must be “preserved”; and (2) the must then lien is “perfected”.
To preserve a lien, a contractor must register it on the title to the property where the work was done. To perfect the lien requires the contractor to commence an action and register a certificate of action on the title to the property. There are strict deadlines for the preservation and perfection of liens, typically triggered by either the date of last supply or the publication of a certificate of substantial performance, although the complete framework for the timing of preservation and perfection of liens is somewhat complicated and depends on when the work was actually performed. Once a lien has been perfected, the action by which it was perfected must be set down for trial within two years of having been commenced otherwise the lien will expire (although the legal action itself may continue).
Key Takeaways
- The construction pyramid defines who pays whom in a multi-tiered subcontracting system.
- A subcontractor can hire another subcontractor, creating further layers of the contractor pyramid.
- Construction liens protect subcontractors and suppliers by securing payment for labour and materials.
- Perfecting a lien requires following strict timelines and procedures, including preservation and registration on the property title.
- Failure to preserve or perfect a lien can result in the loss of legal protection and an inability to enforce subcontractor rights.
For subcontractors and contractors alike, understanding subcontractor liens and perfecting a lien is crucial to ensuring payment security. Ontario’s construction lien laws provide essential protections for subcontractors, particularly when a general contractor fails to pay.
For legal assistance regarding construction liens, subcontractor liens, or contractual disputes, contact our construction lawyers.