CAIRP EXCHANGE
Mid-Market Breakout:
Construction - Liens
Presenters:
Jane Dietrich, Cassels, Brock & Blackwell LLP
Howard Krupat, DLA Piper Canada LLP
Dan Wootton, Grant Thornton Ltd.
CAIRP EXCHANGE
Construction Lien and Trust Claims
The Purpose of the Construction Lien Act
The construction industry can lead to high risk scenarios where there are multiple parties involved on a
construction project and where such parties are effectively unsecured creditors. For example, Suppliers
and Subcontractors may work on a project without any direct contract or relationship with the project
Owner.
The Construction Lien Act (Ontario) operates to provide relief for unpaid suppliers and subcontractors in
particular, in the event of non-payment or the insolvency of the Owner or other Contractors. It does so
through two distinct remedies: (i) construction lien claims; and (ii) construction trust claims.
The challenge with the CLA is that the lien and trust remedies can be perceived to conflict with and
change the priority landscape under an insolvency and restructuring process.
This presentation will focus on liens, trusts and how they impact the various stakeholders in an
insolvency and restructuring process.
CAIRP EXCHANGE
Construction Lien and Trust Claims
Lien Claims and Holdback - The First Line of Defence for Unpaid Contractors and Suppliers
Construction Lien Act - R.S.O. 1990, CHAPTER C.30
Creation of a lien
A person who supplies services or materials to an improvement for an owner, contractor or
subcontractor, has a lien upon the interest of the owner in the premises improved for the
price of those services or materials. R.S.O. 1990, c. C.30, s. 14 (1).
Holdback Requirement – The Construction Pyramid
Each payer on a contract or subcontract must hold back 10% of the price of the services or materials as
they are supplied until all lien periods have expired or have been discharged. The holdback fund
provides for a pool of proceeds that is available to lien claimants. Any party who preserves a valid claim
for lien has a charge against the project property that is capped at the lesser of the amount owing to
them and the available holdback fund. The CLA includes a priority scheme for the distribution of
holdback funds among competing lien claimants.
CAIRP EXCHANGE
Construction Lien and Trust Claims
Lien Claims and Holdback - The First Line of Defence for Unpaid Contractors and Suppliers
Lien Registration
Liens must be preserved (through registration on title or delivery, depending upon the type of project and
property) within 45 days from the earliest of:
• publication of a certificate of substantial performance;
• the date the contract is completed (contractors);
• the date the contract is abandoned (contractors);
• the date of last supply (subcontractors); and
• the date of the issuance of a certificate of completion (subcontractors).
Lien Perfection
Liens must be perfected in order to remain enforceable and to avoid expiration. In order to perfect a lien,
legal action must be taken within 45 days of the deadline to preserve the lien. Legal action in this instance
would include the commencement of the lawsuit and, for most liens where the lien has not been vacated
through the posting of security, the registration on title to the lands of an issued “certificate of action”.
CAIRP EXCHANGE
Construction Lien and Trust Claims
The second line of defence for unpaid contractors and suppliers.
Generally, all amounts received to finance and pay for a construction project represent a trust for the
other contractors and subcontractors working on the same project.
Owners must ensure that any project proceeds be used for the specific project only. Otherwise they
may be found in breach of the construction trust.
Contractors and Subcontractors have the same responsibility for when they receive payment for their
work and where they have engaged their own subcontractors to assist with their work.
Any Owner, Contractor or Subcontractor must pay those who are working for them prior to applying the
residual proceeds to their own use and benefit.
Directors, officers and responsible employees of the Owner, Contractor or Subcontractor can be held
personally liable for a breach of trust by their company.
CAIRP EXCHANGE
Construction Lien and Trust Claims
Trust Claims - The Basics
• Owner’s Trust (s.7):
All amounts received by the owner for the improvement constitute a trust fund for the benefit of the
contractor
• Contractor’s and Subcontractor’s Trust (s. 8):
All amounts owing to a contractor or subcontractor under a construction contract constitute a trust
fund for the benefit of a supplier of services or materials to the improvement who is owed money by
that contractor or subcontractor
• Vendor’s Trust (s. 9):
Proceeds of sale by the owner less certain sale expenses constitute a trust fund for the benefit of
the contractor
• To comply with the above trust obligations, all payers under a contract ought generally to ensure that
all funds they receive for a project are traceable and identifiable and retained for the benefit of the
trust beneficiaries. They otherwise risk a finding that they have breached their trust obligations.
CAIRP EXCHANGE
Construction Lien and Trust Claims
How does this impact stakeholders?
Construction Lien and Trust claims rank ahead of secured creditors and proven trust claims rank ahead
of professional fees. Statutory trust claims and deemed trust claims can provide further complexity.
Secured lenders can mitigate this exposure by monitoring a borrower's projects (i.e. percentage of
completion vs. budget, WSIB certificates, segregation of accounts, inter-company/project borrowing).
Additional collateral and guarantees can also assist in mitigating losses from an insolvent borrower.
Professionals (i.e. receivers, trustees and counsel) should consider seeking third party deposits and
guarantees for their fees as the debtor's assets may be subject to significant trust claims.
The following is an example of the primary stakeholders that may be affected when a general contractor
becomes insolvent.
CAIRP EXCHANGE
INTERESTS AT STAKE ON AN INSOLVENT CONSTRUCTION PROJECT
Project
Owner
Surety
(Performance
and Payment
Bond)
Insolvent General
Contractor
Subcontractor/
Creditor
Subcontractor/
Creditor
Secured
Lender
Unsecured
Creditors
Supplier/
Creditor
8
CAIRP EXCHANGE
INTERESTS AT STAKE ON AN INSOLVENT CONSTRUCTION PROJECT
Project
Owner
Surety
(Performance
and Payment
Bond)
Insolvent General
Contractor
Subcontractor/
Creditor
Subcontractor/
Creditor
Secured
Lender
Unsecured
Creditors
Supplier/
Creditor
9
CAIRP EXCHANGE
INTERESTS AT STAKE ON AN INSOLVENT CONSTRUCTION PROJECT
Project
Owner
Surety
(Performance
and Payment
Bond)
Insolvent General
Contractor
Subcontractor/
Creditor
Supplier/
Creditor
Subcontractor/
Creditor
Secured
Lender
Unsecured
Creditors
CAIRP EXCHANGE
INTERESTS AT STAKE ON AN INSOLVENT CONSTRUCTION PROJECT
Project
Owner
Surety
(Performance
and Payment
Bond)
Insolvent General
Contractor
Subcontractor/
Creditor
Supplier/
Creditor
Subcontractor/
Creditor
Secured
Lender
Unsecured
Creditors
CAIRP EXCHANGE
INTERESTS AT STAKE ON AN INSOLVENT CONSTRUCTION PROJECT
Project
Owner
Surety
(Performance
and Payment
Bond)
Insolvent General
Contractor
Subcontractor/
Creditor
Supplier/
Creditor
Subcontractor/
Creditor
Secured
Lender
Unsecured
Creditors
CAIRP EXCHANGE
Where Are We Going?
• Update on Ontario's Construction Lien Act
review process
• Potential areas of reform
• How insolvency filings may be impacted
CAIRP EXCHANGE
Questions?
Dan Wootton, CIRP
Senior Vice President
Grant Thornton Limited
T +1 416 360 3063
E [email protected]
Howard Krupat
Partner
T 416.365.3510
F 416.777.7421
E [email protected]
Jane O Dietrich
Partner
T 1 416 860 5223
F 1 416 640 3144
E [email protected]