On July 1, 2018, the Ontario Construction Lien Act will become the Construction Act (the “Act”). This name change reflects the broader scope of the legislation. Not only has the Act been revised, several entirely new sections have been added to the Act. Together, these amendments and additions dramatically change the scope of the law governing Ontario’s construction industry.
The sweeping amendments, which include a mandatory prompt payment regime, dispute adjudication and modifications to summary procedures, will affect all construction work in Ontario. However, several of these amendments will not take effect until October 1, 2019.
In this article, we set out five matters that have significant implications for all groups participating in the construction industry. Specifically, we discuss the broader application of the Act, changes to lien rights, the new holdback rules, the broader definitions of “substantial performance” and the rules on vacating liens.
The Act imports a grandfathering clause. The current Construction Lien Act will govern an “improvement” if the subject contract was entered into before July 1, 2018, or the subject procurement process (including Requests for Quotations, Proposals and Tenders) was issued before July 1, 2018.
2. Lien Preservation and Perfection
The amendments provide for a 60-day period (previously 45-day period) for contractors and subcontractors to register a lien. The time to perfect a lien by commencing an action will be extended from 45 days to 90 days. Taken together, claimants will have 150 days to register and perfect a lien. Further, the time for registering and perfecting a lien may be extended beyond 150 days where the claim is subject to interim adjudication under s. 13 of the Act.
Lien claims under $25,000 in value will now be referred to the Small Claims Court. While the objective is to make the process less expensive and easier for claimants to resolve lien disputes, the Courts of Justice Act significantly restricts cost awards in Small Claims Court. Successful parties may walk away from Small Claims Court with no more than 15 per cent of their own costs up to a maximum of $3,750.
Maintaining holdback can now be satisfied by a letter of credit, repayment bond or by other prescribed form (which will be set by the Regulations). Importantly, when certain conditions under the Act are met, it will be mandatory to release the holdback. However, the owner may withhold some or all of the holdback amount conditional upon publishing a notice of non-payment in the manner which will be prescribed by the Regulations.
Where contracts provide for it, holdbacks may be partially released on a phased or annual basis so long as: the completion schedule is longer than one year; the contract price exceeds the prescribed amount under the Regulations ($20,000,000 or greater); and no liens have been registered that have not been vacated or discharged.
4. Substantial Performance
The threshold for achieving “substantial performance” of a contract will increase by $500,000. Substantial performance will be achieved when the improvement to be made under a contract is ready for use or is being used for the purposes intended and is capable of completion, or where there is a known defect, correction, at a cost of no more than three per cent of the first $1,000,000, two per cent of the next $1,000,000 of the contract price and one per cent of the balance of the contract price.
5. Vacating Liens by payment into Court
Under the new amendments, it will be more expensive to vacate a lien in the amount of $200,000 or more. Prior to the amendments, it was possible to vacate a lien of any amount by posting security at Court in an amount equal to the value of the registered lien plus the lesser of $50,000 or 25 per cent of the lien amount as security for costs. After July 1, 2018, the cost of vacating a lien will increase to an amount equal to the value of the lien plus the lesser of $250,000 or 25 per cent of the lien amount as security for costs.
There are many other important changes taking effect on July 1, 2018, including landlords’ obligations with respect to holdback, bonding and set-off rights.