Payment disputes resulting from the provision of construction services can arise at any time. Failure to make payment is the most common disagreement, which can be caused by changes in a party’s financial situation, a breakdown in communication, or even stubbornness. When disputes arise, the party providing goods and services is usually hit the hardest and should take the necessary steps to ensure or maximums the probability of payment.
A contractor who supplies goods and services is naturally expecting to be paid. In order to secure their entitlement to payment, a contractor can generally register a construction lien against an owner’s interest in the property. A construction lien will generally act as security for a contractor’s contributions to an improvement. Just like how a lender can take possession of a property if a mortgage is not paid, contractors generally have the ability to claim an interest in a property to which they have supplied their services.
Amongst other things, Ontario’s Construction Act, R.S.O 1990 c. C.30 (the “Act“) details the process by which a contractor may assert its lien rights. To take effect, liens must first be preserved and then perfected within the prescribed deadlines.
The challenge for property owners is that liens registered upon title can impact their ownership interest therein. Amongst other things, a property owner will be unable to sell or re-finance their property until the subject lien has been dealt with. This commonly leads to the question of how property owners can avoid the prejudice of a construction lien prior to resolving the underlying dispute. The response is that, even when a lien has been registered upon title to an owner’s property, they still maintain the ability to defend themselves in the dispute and they can deal with the property by vacating the construction lien.
What is a vacated lien?
If an owner is attempting to sell or deal with a property but is unable to do so because of a construction lien registered on title, it can create a difficult situation. Buyers and financiers are not generally willing to deal with a property subject to a construction lien. However, to deal with property that is subject to a construction lien, the owner has the option of vacating the lien by posting security with the Court. Once the security is posted, the construction lien will no longer attach to the owner’s interest in the property. Rather, the lien will then attach to the security posted in the form of funds, an irrevocable letter of credit, or lien bond.
Section 44 of the Act states that in order for the Ontario Superior Court of Justice to issue an Order vacating a construction lien, the party seeking to vacate the lien must post security with the Court equal to the sum of (i) the full amount of the lien and (ii) the lesser of either $250,000 or 25% of the lien amount as security for costs (see: https://www.ontario.ca/laws/statute/90c30#BK91).
Contractors and builders may be nervous at the concept of a vacated lien, but they should be aware that their potential payment is still secured. The obligation to pay does not simply ‘go away’ once a lien is vacated. Instead, when a lien is vacated, the contractor’s security transfers from the property to the security posted with the Court.
What needs to happen to vacate a lien?
A party can bring the motion to vacate a lien without notice to the lienholder. In other words, a contractor may not receive advanced notice that their lien is being vacated. However, if the party seeking to vacate a lien is seeking to post security for an amount less than the value of the lien, the lienholder must be notified before the lien can be vacated.
Security can be paid in the form of funds, lien bond, or an irrevocable letter of credit. Once the Order to vacate has been obtained and security has been provided to the accountant for the Ontario Superior Court of Justice, the vacating party may have the lien removed from title to the property.
Final Thoughts
Construction disputes can be notoriously messy, so having the right security in place to recover monies owing is important. If an individual leasing a car fails to make their payments, the dealership will repossess the car. If a homeowner has a mortgage and fails to make the payments, the lender will repossess or sell their home. Similarly, a contractor who supplies goods and service to a property, has security in the form of their lien rights. Maintaining those lien rights is critical in maximizing their ability to recover funds owing.
The Cambridge, Kitchener and Waterloo areas are a hotbed for construction, with new builds and improvements going on all the time. We are pleased to work with builders, contractors, and property owners alike to help resolve even the most complicated of contract disputes. Difficult situations may arise, but options such as vacating liens mean that the parties are able to resolve their dispute without extreme prejudice. Check out our construction law team members and contact us today to learn more about how we can help.