The first wave of changes to Ontario’s Construction Lien Act (now called the Construction Act) (the “Act”) came into force on July 1, 2018.
Lenders in the construction industry should be aware of the Act’s new provisions, which, amongst other things, allow for the annual or phased release of holdback funds. This may increase an owner’s borrowing needs while simultaneously affecting the owner’s ability to pay back the lender.
Under certain circumstances, the Act prioritizes construction liens over registered interests against lands. This means that lenders to a construction project may ultimately end up accepting financial responsibility with respect to construction liens.
Accordingly, lenders should turn their mind to the following issues which may arise as a result of the changes to the Act:
i) Timing
The new holdback rules will not apply where the contract for the improvement was entered into before July 1, 2018 or if the owner began the procurement process before July 1, 2018. In addition, the changes under the Act will not apply if the premises is subject to a leasehold interest entered into before July 1, 2018.
Lenders should note that the date of the lending agreement bears no significance as to whether the changes to the Act effect them.
Under section 26.1 of the Act, which is new, a payer under a contract or subcontract can opt to pay holdback funds on an annual basis. For this new section to apply: (1) the contract price must exceed the prescribed amount under the Act, which is currently set at ten million dollars; (2) all liens on the premises must be satisfied or discharged by the annual holdback release date; (3) the contract must stipulate the annual payment of holdback funds; and (4) the completion schedule for the contract must be longer than one year.
The Act has also added section 26.2, which allows a payer under a contract to pay holdback funds on the completion of phases of an improvement.
ii) The Terms of a Contract Between an Owner and General Contractor
Lenders should now consider whether the contract between the owner and the general contractor stipulates that holdback will be paid on an annual or phased basis. In addition, it is prudent for lenders to require that the general contractor satisfy their concerns as to why the release of holdback on an annual or phased basis is the appropriate way to proceed.
iii) The Preservation Period for Lien Claimants will Affect a Lender’s Ability to Claim Under the Loan
Lenders should be alert to when the lien preservation for certain trades expire so that lenders can assess their risk prior to the next contemplated advance.
It is important to remember that the Act increased the time period for lien preservation from 45 to 60 days and the time for lien perfection from 45 to 90 days.
