Construction projects involve inherent financial risks. Subcontractors and suppliers often lack direct contact with the property owner, the ultimate payer, making them vulnerable. To mitigate these risks and safeguard the interests of subcontractors, suppliers, and other service providers, legislation across Canada, such as the Builders’ Lien Act, mandates owners to withhold a portion of contract payments. This article provides a basic guide to understanding the Builders’ Lien Act and its implications.
Understanding the Builders’ Lien Act Holdback
The Builders’ Lien Act (referred to as “the Act”) establishes the requirement for a “Holdback,” a specific sum of money deducted from all payments made by the owner under a contract. This Holdback is held by the owner in a separate trust account.
The purpose of the Builders’ Lien Act holdback is to ensure funds are available to pay contractors and subcontractors for completed work or supplied materials if a lien is filed. The percentage required varies by province. For instance, Manitoba mandates a 7.5% holdback of the contract price (or the value of work/materials if no contract price exists). In Ontario, this figure is 10% of each payment.
Crucially, the Holdback can facilitate the discharge of a valid lien filed by a contractor or subcontractor and limits the owner’s liability. The statutory Holdback rate and the requirement to maintain it are non-negotiable. Parties to a construction contract cannot contract out of this requirement.
Who is Responsible for Maintaining a Holdback?
According to Section 24(1) of the Act, the “person primarily liable for payment under a contract” is responsible for holding back funds. This typically falls on the owner, who is obligated to hold money back for the benefit of those lower down the construction pyramid. Owners must maintain Holdback funds for each contract and from every payment made.
The Holdback money constitutes a trust fund for the benefit of workers, contractors, subcontractors, and material suppliers. It must be held in a separate account and not used for any purpose other than to satisfy valid claims against the Holdback, in accordance with the Act.
Failure to properly maintain the Holdback or improper disbursement can have severe consequences. The person responsible for payment may be forced to pay those amounts again and may be held personally liable for breach of trust if Holdback funds are misused.
Releasing Holdback Funds: When and How
Holdbacks are released in two primary situations:
- No Liens Registered: If no liens are registered, the Holdback can be released 40 days after substantial completion or completion of a contract or subcontract.
- Liens Registered: The Holdback can be used to obtain a discharge of a registered lien.
It’s critical to understand that Holdback funds cannot be used to remedy the default of the contractor from whom the funds were withheld.
Holdback funds can be released from their trust accounts 40 days (or more, depending on the jurisdiction) after either substantial performance or completion of the project, provided no liens are registered against the land. Substantial performance signifies a state where the structure is ready for use or is being used for its intended purpose, remaining work can be completed or corrected for an amount calculated according to the Act, and a certificate of substantial performance has been properly issued.
Partial Holdback releases are permissible before project completion, allowing subcontractors, suppliers, and other service providers to receive their share of the Holdback fund once their work is certified as substantially performed. By waiting 40 days following substantial completion of their subcontracts and confirming the work is certified as substantially performed with no valid liens filed, contractors and subcontractors can be paid out, reducing the Holdback fund.
When a valid lien has been registered against the land, the Holdback can be released to discharge the lien, unless an action under the Act has been commenced to enforce the registered liens. After all lien claims have been satisfied and the other requirements of the Act have been met, the owner can disburse the remaining Holdback funds.
Once all statutory Holdback obligations are satisfied, the Holdback funds are to be paid out by the contractors and subcontractors. Releasing Holdback funds does not indicate the owner’s satisfaction with the completed work.
Essential Takeaways for Owners and Contractors Regarding the Builders’ Lien Act
The potential consequences for failing to hold back funds, including personal liability, make it crucial for owners and contractors to understand the Builders’ Lien Act. Key considerations include:
- Importance of Holding Back Funds: Understanding the legal and financial implications of complying with Holdback requirements.
- Required Holdback Amount: Knowing the specific percentage of funds to be held back based on the project’s location.
- Separation of Funds: Maintaining Holdback funds in a separate account, distinct from operating accounts.
- Release Timelines: Adhering to the prescribed timelines for releasing Holdback funds.
- Requesting Release: Understanding the process for requesting the release of Holdback funds.
Keep in mind that construction holdback statutes are subject to change. Staying up-to-date with the latest amendments and legal interpretations is critical. This information is intended as a general guide and should not be considered exhaustive legal advice. Always consult with a legal professional for specific advice tailored to your circumstances.
