Construction Alert

Many participants in the Ontario construction industry will breathe a big sigh of relief as the result of an announcement released on April 9, 2020 by the Ontario Attorney General.

As many are aware, the COVID-19 crisis has resulted in a broad range of emergency measures in the Province of Ontario with respect to dispute resolution proceedings. One of the most significant steps was the passage on March 20, 2020, of Regulation 73/20, which suspended limitation periods and procedural time periods by an Order under s. 7.1 of the Emergency Management and Civil Protection Act, retroactive to March 16, 2020.

Although there was some debate about whether this suspension applied to the statutory deadlines to preserve and perfect construction liens as set out in sections 31 and 36 of the Construction Act, the general consensus was that construction lien deadlines were indeed suspended but that lien claimants should nonetheless take the conservative approach of preserving and perfecting their liens within the time periods prescribed by the Construction Act.

An unfortunate consequence of this suspension was the corresponding extension of the date upon which the 10% statutory holdback fund that is required to be maintained under the Construction Act is due for release. Although the current version of the Construction Act makes holdback release mandatory upon the expiry of the applicable construction lien deadlines (other than where the requisite notice of non-payment of holdback is published by the prescribed deadline), payers are also obliged to retain holdback funds as long as lien rights are alive, failing which they will be held directly liable for any deficiency in the holdback fund. Similarly, project lenders are vulnerable to priority claims against their secured interest in the project property by lien claimants where there is a deficiency in the statutory holdback fund.

The result of the indeterminate extension of construction lien deadlines was therefore that there was effectively no date upon which it was safe to release holdback without taking other complicated measures - as long as the suspension of limitation periods remained in place. The impact of this was to potentially choke the flow of funds on construction projects, which could be devastating to many in a time of crisis.

This cash flow problem has now been addressed through the Attorney General’s April 9, 2020 announcement. Effective April 16, 2020, the Province of Ontario’s order suspending limitation periods will not be applicable to construction lien deadlines. This means that after April 16, 2020, holdback can once again be released in the ordinary course.

It should be noted though that the Province’s announcement effectively provides that there is still a standstill period between the date the limitation period suspension first took effect and the date that it is being lifted with respect to construction lien deadlines. In other words, once the suspension is lifted on April 16, 2020, lien claimants will have the same time remaining to preserve and/or perfect their liens as they had when the suspension took effect on March 16, 2020. Accordingly, payers of holdback funds will have to take that period of time into consideration in calculating how long they are required to retain statutory holdback.

As a reminder, there are various mechanisms under the Construction Act that facilitate early holdback release on a voluntary basis, none of which can be imposed upon the party retaining the holdback funds:

  • where a certificate of completion is issued for a subcontract under section 33 of the Construction Act, it is permissible under section 25 for holdback to be reduced to the extent of the holdback fund corresponding to the completed subcontract - provided that all liens in respect of that subcontract have expired or been satisfied, discharged or otherwise provided for;
  • for contracts that, based upon the applicable transition provisions, are governed by the lien modernization changes to the Construction Act that took effect on July 1, 2018, section 22(4) of the Act allows for alternative methods of holdback in the form of a letter of credit or a holdback repayment bond, in the prescribed forms. These are on demand instruments the payer can call upon if any lien claims arise, thereby providing the payer with the security it needs to release holdback funds early without jeopardy. Accordingly, these alternate forms of holdback can be used, in the right circumstances, to facilitate the early release of cash holdback; and
  • also for contracts that are governed by the July 1, 2018 lien modernization provisions, parties are permitted to incorporate holdback release on an annual or phased basis into their contracts, provided that the criteria prescribed by the Construction Act are met. For example, the current regulations under the Construction Act set the minimum contract price for this option to be exercised at $10 million. In addition, parties are only permitted to take advantage of this progressive release of holdback if their contract specifically allows for it.

The steps required to facilitate early holdback release can be technical and complicated; it is therefore advisable to seek appropriate advice in deciding whether to exercise any of these options. With the Attorney General’s April 9, 2020 announcement, however, it will no longer be necessary for parties to resort to such complex measures just to maintain the flow of holdback funds during the COVID-19 crisis.