On July 1, 2018, the first set of changes under Ontario’s Construction Lien Amendment Act (the “Act”) came into force. This Act overhauls Ontario’s construction regulatory framework. Not only should the changes be made note of by Ontario businesses in the construction sector, but the implementation of similar legislation is expected to follow in other provinces.
The legislation was enacted after a 2016 report from the Ministry of the Attorney General called Striking the Balance: Expert Review of Ontario’s Construction Lien Act made 100 recommendations for modernizing Ontario’s Construction Lien Act. On May 31, 2017, the Ontario legislature passed the Act (Bill 142) adopting almost all of the recommendations in the report.
The first amendments that came into force were those modernizing the construction lien and holdback rules as well as the alternative financing and procurement provisions. The second set of amendments deals with prompt payment, a new adjudication process and procedural matters (to be discussed in a subsequent blog) and will come into force on October 1, 2019.
It is important to note that the new Construction Act primarily applies to prime contracts that were entered into after the legislative provisions come into force. The old version of the Construction Lien Act still applies if the prime contract was entered into prior to the changes coming into force (regardless of when any subcontract under the contract was entered into), if the procurement process was commenced by the owner prior to the changes coming into force or if the premise is subject to a leasehold interest and the lease was first entered into prior to the amendments coming into force.
Preservation and Perfection of Liens
Prior timelines with respect to liens were often not workable given common delays in paying invoices in the construction industry. The Act extends the deadline for preservation of a lien to 60 days (from 45 days) and the deadline for perfection of a lien to 90 days (from 45 days) from the last day which a lien could have been preserved. This extension allows parties to have more time to negotiate payment as well as to utilize the new adjudication process, coming into force on October 1, 2019.
What is lienable has also changed: prior to the amendments, the definition of improvement included general repairs. Now, the legislation has narrowed the term to a “capital repair” that extends the “normal economic life” of the land. While this may seem like a minor one word addition, the result is that true ordinary maintenance is expressly not considered to be an improvement and does not give rise to any lien rights.
The definition of a “price” under the Act has also changed so that a lien can include any direct costs incurred by the contractor as a result of the delay, but “direct costs” excludes any indirect damage suffered such as a loss of profit, productivity or opportunity as well as any head office overhead costs.
The Act has also significantly modified the law with respect to holdback payments. It is now mandatory for an owner to release the statutory holdback funds once the lien period has expired, unless the owner publishes a notice of non-payment within 40 days of the certificate of substantial performance and notifies the contractor of the publication of the notice of non-payment. In reality, the new provision requires the owner to have a bona fide reason to refuse to release the holdback as an unjustified refusal would raise the material risks of disputes and liens as the 40 day period occurs prior to the expiry of the lien period (see above).
Moreover, the Act now allows for the release of holdback payments on an annual basis or upon the occurrence of milestones or phases. This can occur if the following conditions are met:
- The contract provides for an annual or phased release of accrued holdback;
- The contract price is over the prescribed amount (currently set at $10,000,000)(not applicable for the design phase);
- The contract time is scheduled for over one year, or provides for work to be completed in identified phases; and
- There are no liens registered that have not either been vacated or discharged at the time the accrued holdback is to be released.
There are also new duties imposed on contractors, subcontractors and owners as trustees of trust funds. In particular, trustees are required to deposit the price they received on their contract/subcontract price to a bank account in the trustee’s name. Moreover, they must maintain written records of the trust funds and keep all information regarding transfers in and out of the trust.
In addition, the Act has limited a trustee’s right to set-off. Previously, the Construction Lien Act allowed for a trustee to set-off money owed for any outstanding debt or damages whether or not related to the improvement. Now, the right to set-off must be related to the specific improvement.
Alternative Financing and Procurement
Prior to the amendments, there was uncertainty about who was the owner on projects where a special purpose company contracts with a public sector entity to undertake a specific project. Now the Act deems the special purpose company to be the owner and the contract between the company and the contractor will be deemed to be the contract with respect to the provisions relating to substantial performance, calculating the lien period, certification of substantial performance, and information requests under the Act. For all other purposes the Crown, municipality or broader public sector organization who owns the premise continues to be the owner under the new Act.
What this Means
The laws with respect to construction in Ontario and elsewhere are changing. It is very important to consult an experienced construction law lawyer with respect to vetting your organization’s invoices, contracts and general practices.