Sweeping changes have been made to Ontario’s Construction Lien Act which has been re-named the Construction Act. These changes are coming into effect in two phases. The first phase will come into force on Canada Day – July 1, 2018. This phase involves the introduction of modernization provisions which encompass:
(1) amendments to the definitions under the Construction Act;
(2) amendments related to lien, holdback, and trust rules and procedures; and
(3) the introduction of surety bonding provisions.
In addition, the current regulations (R.R.O. 1990, Reg. 175) will be revoked and three new Regulations will come into force. This article offers a brief overview of the above noted changes which are taking effect on July 1, 2018 as part of Phase 1.
The second phase will involve the introduction of prompt payment and adjudication provisions which will come into force on October 1, 2019.
Key amendments to the Definitions section under the Construction Act (s. 1 (1)) include changes to the definitions of “improvement”, “price”, “contractor” and “subcontractor”, as well as the addition of the new defined terms “capital repair” and “direct costs”. Furthermore, the new subsection 1.1 (1) of the Act introduces provisions concerning alternative financing and procurement arrangements (“AFPs”).
Improvement and capital repairs
Under the Construction Act, an “improvement” includes “repairs”. The amended definition of “improvement” (in tandem with the new defined term “capital repair”) clarifies the types of repair that are subject to the lien provisions of the Construction Act. The amended definition of “improvement” specifies that it includes only “capital repairs”, defined as “any repair intended to extend the normal economic life of the land or of any building structure or works on the land, or to improve the value or productivity of the land, building, structure or works, but does not include maintenance work performed in order to prevent the normal deterioration of the land, building, structure or works or to maintain the land, building, structure or works in a normal, functional state.”
Price and direct costs
The new Construction Act also amends the definition of “price” so as to clarify what is included in “the price of those services or materials” for which a lien can be registered. The amended definition of “price” – in tandem with the new definition of “direct costs” – specifies that, where a contractor is not responsible for the delay, extended duration costs associated with the supply of services or materials are included, while indirect costs, such as overhead costs, loss of profit, productivity, or opportunity are not lienable.
Contractor and subcontractor
The definitions of “contractor” and “subcontractor” are amended so as to include joint ventures “entered into for the purposes of an improvement or improvements.”
- Rules and Procedures
a. Extended timelines for lien preservation and perfection
As of July 1, 2018, and subject to the transition rules under Section 87.3 of the Construction Act:
- the time period for lien preservation will increase from 45 to 60 days; and
- the time period for lien perfection will increase from 45 days to 90 days following the last day to lien.
b. Higher thresholds for substantial performance and deemed completion
- The formula for the calculation of substantial performance is amended to:
- 3% of the first $1 million (increased from $500,000);
- 2% of the next $1 million (increased from $500,000); and
- 1% of the remainder of the contract price.
- The threshold for determining deemed completion / deemed last supply of services and materials is increasing from $1,000 to $5,000.
c. Alternative Financing and Procurement
Among the most significant amendments coming into force July 1, 2018, are the new provisions concerning AFP projects under section 1.1 of the Construction Act. These provisions clarify how the Construction Act applies to AFP projects by providing that the special purpose entity (or “Project Co.”) that contracts with the public sector entity for a given project is deemed to be the owner of the premises and the contract between Project Co. and the contractor is deemed to be the contract for the purpose of certain provisions under the Construction Act, including:
- for the calculation of the lien period;
- for the determination and certification of substantial performance; and
- information requests under section 39.
d. Mandatory and Phased Holdback Release
The new Construction Act makes it mandatory for an owner to release the statutory holdback once the lien period has expired, unless the owner publishes a notice of non-payment in a construction trade newspaper within 40 days of the publication of the certificate of substantial performance, and notifies the contractor of its publication within three days.
Furthermore, the new Construction Act provides for the release of holdback funds on an annual or phased/milestone basis, where the contract provides for such release and the applicable conditions are satisfied, namely:
- the contract price exceeds the prescribed amount (currently, $10 million; unless the design phase is the only phase for which holdback release is provided for);
- work under the contract is scheduled for a period of more than one year, or work is to be completed in specified phases; and
- no unvacated liens remain at the time the accrued holdback is to be released.
e. Expanded Contractor Duties under Trust Provisions
Section 8.1 of the Construction Act introduces a number of new requirements for contractors in respect of project trust funds, including more onerous record-keeping provisions whereby contractors must maintain written records detailing:
- amounts received into and paid out of funds;
- any transfers made for the purposes of the trust;
- any other prescribed information.
Trustees will be required to deposit project trust funds into a trust account in the trustee’s name. The new Construction Act permits a trustee of multiple trusts to deposit separate project trust funds into a single bank account, provided that records of each trust fund are properly maintained. Furthermore, separate trust funds deposited into a single bank account are deemed to be traceable.
- Surety Bonds for Public Contracts
Under section 85(1) of the new Construction Act, contractors that enter into a contract with a public sector entity will be required to provide a performance bond and a labour and material payment bond where the contract price is $500,000 or more (the contract price is prescribed in the new O. Reg. 304/18, which comes into force on July 1, 2018). There are certain limits placed on bonds in relation to AFP projects (i.e., a minimum coverage limit of (a) 50% of the contract price, if the contract price is $100,000,000 or less; or (b) $50,000,000, if the contract is more than $100,000,000).
- Regulations coming into force July 1, 2018:
In addition to the changes to the Construction Act itself, there are several major changes to the structure of the regulations under the Construction Act. In particular, the current General Regulations to the Construction Act (R.R.O. 1990, Reg. 175) will be revoked effective July 1, 2018, pursuant to section 15 of the new O. Reg. 304/18. Three new regulations are coming into force on July 1, 2018:
– O. Reg. 304/18, which addresses general matters;
– O. Reg. 303/18, which addresses the prescribed forms under the Construction Act; and
– O. Reg. 302/18, which addresses procedures for actions under Part VIII of the Construction Act.
Importantly, procedures and rules of court that were formerly described under the Construction Act were moved to the O. Reg. 302/18. A further regulation (O. Reg. 306/18) in relation to Adjudication will come into force on October 1, 2019.
- Transition Provisions
In addition to the key changes outlined in the foregoing, all participants in construction projects must be aware of the transition provisions set out under section 87.3 of the new Construction Act. The transition provisions are discussed in some detail in our article entitled Somewhat Lost in Transition?, which can be found here.
Each of the above changes will present new complexities to participants in the construction industry, however, these complexities can be addressed with the assistance of counsel.