How vacating liens just doubled in price
Construction liens are an unfortunate reality of virtually every large construction project, and many smaller ones as well. Designed to ensure that building trades are protected from non-payment, they have a history in Canada that dates back more than 100 years. Site owners who have ever had to deal with an insolvent contractor are well familiar with paying twice – once to the contractor, and once more to the unpaid trades who filed liens. However, in light of a recent Manitoba Court of Appeal decision, contractors are now facing that issue as well, at least on a temporary basis.
While the rules of construction liens are complex, the concept is very simple – unpaid contractors or trades can claim a lien against the underlying land. Since the land has value, the party who claims the lien will ultimately get paid, either because the owner has to remove the lien and pay out the party who filed it, or because the land is sold and the party who filed the lien is paid out of the proceeds of sale.
Much less well known than construction liens are construction trusts, despite the fact that virtually every jurisdiction in Canada provides for them. The statutory construction trust provisions written into lien legislation across Canada stipulate that where a site owner or contractor receives monies for the purpose of construction on a site, those funds constitute a trust in favour of those parties to whom money is owed for work on the site.
For example, for a site owner, the construction trust provisions mean that where money is advanced under a construction mortgage, the owner cannot use that money for any purposes until the general contractor has been paid. For a general contractor, it means that money received from the owner under contract cannot be used until the subtrades have been paid. Lien statutes provide for fines and jail time where these trust provisions are breached. While the construction trust provisions are frequently treated as a lien’s “poor cousin,” they can be quite useful, primarily because they apply even if a party missed the deadline for register a claim for lien.
Once a claim for lien has been registered, parties frequently find themselves in a scramble to remove (or “vacate”) the lien from title for a variety of reasons. For instance, a bank may refuse to advance additional money under a construction mortgage until the lien is removed. Conversely, a contractor may have a “no lien” clause in its contract and face pressure from the site owner to have the lien vacated. Fortunately, construction lien litigation makes it relatively easy to do so, generally requiring the full amount of the claim for lien, plus some provision for costs, to be paid into court, either in cash or by way of a lien bond obtained from a financial institution. The parties can then take their time to fight the merits of the claim out in court or negotiate a settlement. Lien bonds are particularly popular in cases where paying the full amount into court would cause a serious cash flow problem. Based on the recent Manitoba Court of Appeal case of Olson (Stuart) Dominion Construction Ltd. v. Structal Heavy Steel [2014 MBCA 8], such cash flow issues will likely become much more frequent.
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The case involved a claim for lien by a steel subcontractor totalling approximately $15.5 million to construct a steel roof for Winnipeg’s new football stadium. The general con- tractor took out a lien bond for the full claim amount and paid the money into court to have the lien vacated from title under subsection 55(2) of The Builders’ Lien Act of Manitoba. The subcontractor then demanded payment under the trust provisions of the statute and indicated that it would sue if the contractor did not use monies received from the site owner to pay the subcontractor.
Faced with this demand, and having already posted the lien bond, the general contractor sought a declaration from the court that since the full claim amount had already been posted into court, the trust provisions should not apply and the contractor could use the money received from the owner to pay other parties. The court of first instance agreed with the contractor. It found that if the trust obligation was not removed, the contractor would effectively have to pay twice. However, the Manitoba Court of Appeal reversed that ruling. It found that the trust obligations are separate from the lien obligations and that:
It is important to remember that it is the owner or con- tractor, not the party claiming the lien, who chooses to act in such a way as to vacate a lien. It need not do so. It is true that the vacating of a lien will permit the continuation of the flow of money and is thus in the interests of those doing work on the project whereas the non-vacating of the lien will stop the flow of such money. Nevertheless, it is the decision of the party responsible for payment under a contract, whether owner, contractor or subcontractor, who determines what, if anything, to do in respect of a lien filed against the property upon which the contract work is being performed.
From a commercial standpoint, this makes little sense, since leaving the claim for lien on title is frequently not a viable option. The practical implication of the ruling is that a contractor facing a $1 million lien claim in a construction dispute may now have to retain up to $2 million while the dispute is being fought out – $1 million to vacate the claim for lien by payment into court, and another $1 million in their trust account to avoid violating the trust provisions. While at the end of the day, no owner or contractor will actually pay twice (since a trust payment would reduce the amount ultimately payable under the lien claim and vice versa), this situation can result in significant short- and medium-term cash flow problems, especially for smaller companies. Fighting a construction claim in court takes two years at minimum, and frequently longer. Shrewd subcontractors embroiled in litigation will likely leverage the case into more advantageous settlements as contractors cannot afford to tie up large sums of cash for several years.
The short-term lesson to take from Olson (Stuart) Dominion Construction Ltd. v. Structal Heavy Steel is to think long and hard before using cash to vacate a lien. While lien bonds are not cheap, using a bond rather than cash to vacate the lien may be a good insurance policy against serious cash flow problems down the road.
In the long term, contractors and site owners may take comfort in the fact that the Supreme Court of Canada has agreed to hear an appeal from the case, with a ruling expected sometime in 2015. Until then, more than one Manitoba contractor is certain to shake in his (steel-toed) boots when the next claim for lien is filed.
Sven T. Hombach is a partner with the law firm of Fillmore Riley LLP, practising litigation and regulatory law. He has a civil engineering background and frequently handles construction disputes.
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