|
The Construction Lien Act and your holdback obligations
Written by Administrator
Wednesday, 06 May 2009 18:37
|
 |
 |
 |
|
A home owner should first understand that a renovation project, whether a complete renovation of an older home or a partial renovation such as a new kitchen has, in each case, a structure resembling a pyramid with the home owner at the top, the renovator next from the top, and the sub-contractors and those claiming under them. As soon as a business supplies service, materials or labour to the project, the business is entitled to a lien on the interest of the home owner for their value. The reason for this construction lien is to prevent the owner from getting the benefit of the supply of services and materials without paying for these. Specifically, the Act requires the home owner to maintain a statutory holdback for the benefit of those sub-contractors third in line in the pyramid being sub-contractors hired by the renovator to provide services and materials to the project. For example, if the home owner has entered into a renovation contract with a renovator for a fixed price of $50,000,00, the Act requires the owner's holdback to be 10% of the value of the services, materials or labour supplied under the contract. The owner's obligation is to hold back 10% on each progress payment to the renovator until the end of the project such that the accumulated holdback will represent 10% of the contract price or $5,000.00. Unless the owner receives written notice of a lien, the owner is able to make payments on the contract up to 90% of the contract price and is not required to subsearch title at the time of each progress payment. If the owner receives written notice of a lien, the owner's obligation is to retain the amount claimed in the written notice until otherwise ordered by a Court in addition to the statutory holdback. If written notice of a lien is received, the owner should consult a lawyer before making any further payments on account of the contract. In our example, the accumulated holdback of $5,000.00 is then only released by the owner to the renovator 45 days following the date on which sub-contractors of the renovator in our construction pyramid last supplied their services or materials under their sub-contracts with the renovator. The evidence of last supply is usually by way of a Statutory Declaration of Last Supply which the renovator will obtain from each of its sub-contractors and are produced to the owner for inspection. The owner then conducts a subsearch of title to ensure that no liens are registered prior to the release of holdback to the renovator. If the owner fails to maintain the holdback or pays the holdback too quickly to the renovator and a lien is registered against the owner's interest claiming payment of holdback, the owner may be responsible for payment of holdback twice. There are very few exceptions where an owner is not obliged to retain a holdback. One exception would be a kitchen renovation where the price of appliances such as a refrigerator and stove would be deducted from the contract price in order to determine the amount of holdback as the supply of appliances does not improve the value of the property and as such is not lienable. The holdback is not a fund that can be used by the owner to set off any costs the owner may incur to complete the project or to correct any faulty work including any damages for non-completion or delay. These items can only be charged to the renovator from any monies owing by the owner to the renovator over and above the holdback amount. Is there a price point below which taking a holdback is more trouble than it is worth? If the renovation contract was for a lesser sum i.e. $10,000.00, the owner's exposure is then reduced proportionally to a holdback liability of $1,000.00. Given the amount of the exposure, an owner may not wish to retain a holdback account where exposure for personal liability may not exceed $1,000.00. (If a renovator tries to convince you that a holdback does not apply for your project, he is probably thinking of his cash flow more than he is of your legal liability. Look for another contractor!) Usually, an owner will have to retain a lawyer to administer and release holdback if the owner is borrowing funds to finance the project by way of a mortgage. The mortgage lender will insist on a holdback to be maintained by either the lender or the lawyer. In any case, the owner should retain a lawyer to subsearch title at the time holdback is paid and the lawyer should review the documentation submitted by the renovator to obtain the holdback release to ensure that the owner has satisfied his holdback obligation under the Construction Lien Act. John Callan is a partner with Hamilton/Appotive/Callan, Barristers and Solicitors. |
