The decision in Chandos Construction Ltd. v. Twin Peaks Construction Ltd 2016 ABQB 296 (Chandos Construction) serves to offer greater protection to the diligent owner, and potentially reduce the lien rights of any complacent subcontractor. The Court of Queen Bench of Alberta held that upon issuance of a Certificate of Substantial Performance and payment of the major lien fund, subcontractors and suppliers are unable to validly claim a lien for work done or materials supplied prior to the Certificate being issued.
Under section 18 of the Builders Lien Act (the "BLA"), an owner is required to hold back ten percent of each payment due to any contractor or supplier retained to improve its land. This amount is generally referred to as a holdback, and forms part of the major lien fund.
How long the owner has to maintain the major lien fund will depend on whether a Certificate of Substantial Performance is issued. The BLA does not require that a Certificate be issued; however, in the wake of the Chandos Construction decision, it is likely this Certificate will become increasingly important for both owners and subcontractors alike.
If a Certificate is not issued, then the owner must retain the major lien fund until at least 45 days (or in the case of an oil or gas well, 90 days) from the date on which the contract is completed. The exact date a contract is completed is not always clear, adding to the complexity of when the owner liability for the major lien fund should end. In situations where no Certificate is issued, no minor lien fund arises.
If a Certificate is issued, then the owner must retain the major lien fund for at least 45 days (or, again, in the case of an oil or gas well, 90 days) from the date on which the Certificate is issued, after which it may pay the major lien fund to the contractor provided no liens have been registered. The contractor then holds the funds in trust for the benefit of those subcontractors who provided work or materials in respect of which the Certificate was issued (see section 22 of the BLA).
In such circumstances, however, the owner is not quite off the hook just yet. It must then commence holding back ten percent of payments for work done or materials supplied after the Certificate is issued, pursuant to section 23 of the BLA. This amount is known as the minor lien fund.
It is clear, however, that under the BLA that an owner is not liable for more than the major lien fund and, if applicable, the minor lien fund. Should liens be registered against the lands, an owner can be released of its liability under the BLA upon payment into court of the appropriate lien fund.
The case involves the construction of a hotel in Calgary. Chandos, the general contractor, posted a Certificate of Substantial Performance and issued it to the owner. No lien was registered at the time the Certificate was issued and posted, nor within the following 45 days. The owner subsequently paid Chandos the major lien fund holdback as allowed under section 21 of the BLA. Thereafter, one of Chandos subcontractors, Twin Peaks Construction Ltd., registered a lien in the amount of $118,756.29, of which all but $80.00 related to work done prior to the date of the Substantial Performance. The issue, therefore, was whether the lien attached to the major lien fund, already released, or the minor lien fund.
Master A.R. Robertson, Q.C. found that pursuant to section 24 of the BLA, a lien for work done before the Certificate of Substantial Performance is issued is a charge on only the major lien fund. If the owner has paid the major lien fund, whether into Court or to the general contractor in accordance with the BLA, there is nothing for the portion of the lien relating to work performed prior to the issuance of the Certificate to attach to, as the funds stand in place of the land. The Court directed that Twin Peaks lien be discharged on the condition that the owner pay into court only the amount of the lien claimed for work done after the Certificate was issued.
As an owner, including owners of oil and gas assets, ensuring that a Certificate of Substantial Performance is a requirement under the contract with your contractor will likely assist in limiting your liability under the BLA and provide a defined period of exposure for this liability.
Conversely, subcontractors and suppliers should be aware that the Chandos Construction decision essentially prevents them from sheltering work performed prior to the payment of the major lien fund within a lien for services performed after the major lien fund is released. Subcontractors and suppliers must be aware of the 45 day (or 90 day, in the case of an oil or gas well) deadline from the date on which the Certificate is issued to register a lien for work done or materials supplied before substantial performance was achieved. After that, if the major lien fund is paid, subcontractors suppliers are left only with the right to lien for work performed after the issuance of the Certificate. In essence, a subcontractor ability to lien for work performed prior to such payment expires, as there are no funds to which the lien may attach. The subcontractor becomes entitled only to a lien for work done post Substantial Completion, and that lien attaches only to the minor lien fund.
This decision, however, does not affect a subcontractor right to claim against the contractor for breach of contract. A subcontractor may also claim against a contractor under the trust provisions of theBLA in relation to funds paid by the Owner after the issuance of the Certificate. The decision in Chandos Construction simply means that any lien registered after the proper release of the major lien fund, to the extent that it relates to work performed prior to the issuance of the Certificate, will be invalid.
Finally, for both owners and subcontractors, it is imperative to maintain evidence respecting when work was performed or materials supplied. This can help determine the amount of an Owner liability to subcontractors for liens claimed, and determine for subcontractors whether their work attaches to the major or minor lien fund. This distinction will then inform the timeframe in which the related lien must be registered.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.