Change to the construction payment and lien landscape has been rolling towards us for several years and it’s finally upon us. So, ready or not, it’s time to learn and implement these changes. Fortunately, to stagger their impact and give people a chance to adjust a bit more gradually, the in-coming changes to the Construction Lien Act (to be renamed the Construction Act) will take effect in two separate phases. The first set of changes will come into effect on July 1, 2018 and the second set of changes will come into effect 15 months later, on October 1, 2019.
The changes are a result of the passing of the Construction Lien Amendment Act, 2017 in December 2017 and the changes have, as their objectives, improving promptness of payment in the construction industry and “modernizing” the construction lien and trust regime in the Province of Ontario.
The first set of changes are the focus of this post. A future post will delve into the (arguably more dramatic and complicated) changes coming in 2019.
If you’re inclined to comb through the legislative changes themselves, you can click here to link to the Construction Lien Act and you can click the following links to the new regulations (relating to general matters, forms, and procedures for actions under Part VIII of the Construction Act).
Transition provisions for projects
The first thing to note is that, while a raft of changes take effect July 1, 2018, they won’t necessarily apply to every project. The transition rules are set out under section 87.3 of the Construction Act and the old Construction Lien Act will continue to have effect if, before July 1, 2018:
- a contract for the improvement between the owner and the contractor was entered into; or
- a procurement process for the improvement was initiated; or
- the premises in question is subject to a leasehold interest, with the lease being entered into before then.
So, no existing construction work or projects will be subject to the new regime under the Construction Act and even projects at a procurement (tendering, RFP) stage at any time prior to July 1, 2018 will remain under the old Construction Lien Act.
So…what’s the big deal? What’s changing on July 1, 2018?
The changes coming into force July 1, 2018 are wide-ranging and scattered throughout the legislation and regulations. This post doesn’t aim to identify or discuss each and every one of them. Rather, the following is a summary of the most significant changes and those likely to be of the most interest to those in the industry.
Alternative Financing and Procurement (AFP or P3)
There are some new provisions dealing with these unique projects which seek to clarity how the Construction Act will apply to projects with this delivery model having different processes and requirements than “typical” projects. Because these changes are of targeted application and are quite lengthy, they aren’t discussed in detail here but (for those interested) they can be found at the new section 1.1 of the Construction Act.
Perhaps one of the most iconic changes is the demise of the 45-day lien periods with which everyone is so familiar. The current 45-day period to register (preserve) a lien will now be 60 days and the current further 45 days to perfect a lien will be 90 days.
In addition, “termination” is added as an express 60-day trigger and, in cases of termination, there is a new requirement to publish a notice of the termination as prescribed by regulation.
A word of caution – when it comes to preserving or perfecting a lien, if there is any doubt as to whether a project falls under the old Construction Lien Act or the new Construction Act under the transitionary rules, unpaid parties with lien rights would be wise to assume that the shorter 45-day periods apply in order to avoid the risk of the inadvertent expiry of lien rights.
New Provisions re Trust Funds
Everyone below the owner (contractors and subcontractors) who is a statutory trustee will have new obligations in dealing with trust funds and these include:
- depositing trust funds in a bank account in the trustee’s name; and
- maintaining written records regarding the trust funds (debits, credits, transfers) for each trust.
Provided the new rules are followed, funds can be held in a single bank account though it might wind up being prudent and good practice to establish separate project or contract specific accounts to make compliance and accounting easier and less susceptible to error.
The new Construction Act makes it mandatory for an owner to release the statutory holdback once the lien period has expired unless the owner
- publishes a notice of non-payment in the prescribed form within 40 days of the publication of the certificate of substantial performance, and
- notifies the contractor of the publication.
This new provision requires the owner to have a legitimate reason to refuse to release the holdback and to make it known so that others (contractors and subcontractors) can make decisions and take action accordingly.
Another change related to holdbacks permits the release of holdback on an annual basis or phase/milestone basis where:
- the contract provides for an annual or phased release of accrued holdback;
- the contract price is over the prescribed amount (currently $10,000,000);
- the contract time is scheduled for over one year or provides for work to be completed in identified phases; and
- there are no liens registered that have not been either vacated or discharged at the time the accrued holdback is to be released.
Mandatory Labour and Material Payment Bonds
All contractors (except architects and engineers) working under a “public contract” (newly defined) are now required to provide labour and material bonds and performance bonds for 50% of the contract price for contracts valued at $500,000 or more. However, the minimum coverage limit is 50% of the contract price for contracts valued at $100 Million or less, and a minimum coverage of $50 Million if the contract value is $100 Million or more where the project falls under section 1.1 (AFP/P3).
Some Other Miscellaneous Changes to Note
Some of the other notable changes that are a little more difficult to group together include:
- The “3-2-1 Formula” for determining when substantial performance has been achieved now uses percentages of $1 Million in contract price as opposed to the old $500,000;
- When a section 39 request for information is sent to a mortgagee and the mortgage funds were advanced, in part, to buy the land and, in part, to finance construction, the mortgagee must identify the amounts advanced under each segment in its response;
- Condominium unit owners can now expressly bring a motion to vacate liens for work done to common elements from their own units by posting security (this could be done before but required a cobbling together of the Construction Lien Act, the Condominium Act, and caselaw);
- Lien claims for less than $25,000 can now be brought in Small Claims Court;
- lien claims and trust claims can now be joined in an action;
- When vacating a lien by posting security in Court, the maximum security for costs that must be posted increases from $50,000 to $250,000;
- Appeals from interlocutory orders are now permitted but only with leave of the Divisional Court.
While far from a comprehensive description or analysis of the incoming changes, hopefully the foregoing provides a useful overview of some of the ones of broad application and a sense of what sort of changes to practices and procedures will be required. If you have any specific questions or would like to consider engaging us to assist you with implementing and navigating the Construction Act please contact me at email@example.com or 519-741-8010 x 248.