Apr 9, 2020
Does the Suspension of Limitation Periods and Procedural Steps pursuant to the Provincial Emergency Orders inadvertently Suspend Release of Construction Lien Holdbacks?
By: Leor Margulies
Many of you have already read conflicting comments from lawyers around the province that Section 7.1(2) of the Emergency Management and Civil Protection Act (the "Order") will have the inadvertent impact of suspending the obligation of a construction lien claimant to file his construction lien claim in the 45 or 60 days it is required to do so under the Construction Act and its impact on release of lien holdbacks.
One analysis goes like this. The Order suspends, for the period of the COVID-19 emergency, the impact any "limitation period" or any "statute establishing any period of time within which any step must be taken in any proceeding in Ontario, including any intended proceeding". Some lawyers view the filing of a construction lien claim under Section 31 within the applicable time period as the establishment of a limitation period or alternatively, may be a step in a proceeding, or an intended proceeding and, therefore, the time for filing is suspended.
As a result of this analysis, because the time period to register a lien does not expire, the ability to release holdbacks which occurs after lien periods have expired, will be suspended indefinitely. Releasing a holdback then would expose homeowners and lenders to double jeopardy if this interpretation is correct during the period of the COVID-19 emergency.
I have reviewed contrary opinions and case law which take the position that the filing of a lien is not a proceeding or an intended proceeding and as such, is not covered by the Order. There is case law that deals with similar sections of the Construction Lien Act, Section 37 for instance, which have held that "Section 37 extinguishes a lien. It is not a limitation." There is no reason to believe that Section 31 should be treated any differently. https://tinyurl.com/rszu94a
Nonetheless, until the government provides a clarification to this quandary, owners and certainly lenders may not be prepared to risk releasing holdbacks and then finding out that lien registrations were suspended by the Order, and liens which are registered after a release of a lien holdback will have priority over the lender's advances and create double liability for owners. Discussions are under way between BILD, OHBA and the government to see if this issue can be rectified. Clearly, the government does not want to limit the flow of funds to trades and workers as a result of its inadvertence and hopefully, it will be clarified soon.
In the interim, there are some mitigating steps or alternatives that should be considered in order to permit the flow of funds. These can include:
- Obtaining indemnities from the contractors whose subtrades may claim the lien holdback rights and could be given to both owners and lenders.Depending on the credit worthiness and reputation of the contractors, this could have some value;
- Most construction projects are done on a construction management arrangement.This means that there is not one general contract for all of the trades but a series of individual ones.If there is a quantity surveyor engaged by the lender, it could review each major trade contract and determine who the subtrades were.Holdbacks could be paid out to the subtrades and their suppliers and subcontractors as against receipt of releases and confirmation of completion of the work over 60 days before from all subtrades in the chain.There is of course the risk that one subtrade might be missed in the chain or that its declaration was false.The process may only work in projects where there is a quantity surveyor to complete this analysis.The other issue is who would absorb the quantity surveyor cost;
- There could be a reliance on the views enunciated in this bulletin that registration of liens are not covered by the suspension relating to proceedings and limitation periods.There is the risk that this view is wrong and liens get registered in priority to the lender's advances;
- The lender assesses the maximum holdback liability.If the equity cushion is substantial, it may still be prepared to take the risk of double jeopardy as its security portion will ultimately be fully realized; and
- Additional security or covenants are obtained to address this potential risk.
There is clearly no one easy answer and every project should be dealt with on its merits, the credit worthiness of the borrower, contractor and the trades. Input from the financial industry to the province regarding this conundrum has created may also accelerate rectification or clarification of the Order as it impacts on the registration of construction liens.
For further information, please feel free to contact me.