Canada: Builders' Liens: You've Been Liened – Now What?

You are the owner of lands on which construction (also called an "improvement") is taking place. You have hired a general contractor, who has failed to make payments to his or her subcontractors or material suppliers who have filed liens on your property. Or, you've hired all of the trades yourself and one of them has "gone rogue" by demanding more money than initially quoted and filed a lien on your property. Whatever the scenario, the fact is that you have liens on your property and you need (or want) them off. What do you do?

Try negotiating a voluntary discharge

As a first resort, you may wish to try negotiating with the lien claimant to determine whether you can agree on an amount to pay in order to have them voluntarily discharge the lien. (As a word of caution, make sure that you get a signed and, preferably, filed discharge form before paying any money.) If you do not have a contractual relationship with the lien claimant, your liability to them is limited to the 10% holdback that you retained. Thus, any payment to the claimant would be limited to the claimant's proportionate share of holdback funds. This is a very complicated area and you should exercise caution and talk to a lawyer familiar with this area for a couple of reasons.

First, you must not pay out any holdback funds until the end of the holdback period. The Builders Lien Act requires you to retain holdback money until 10 days after the end of the lien period. The lien period is 45 days and starts to run on the occurrence of one of three triggers: completion of the head contract (or completion of the entire improvement if there is no head contractor), abandonment of the head contract (or improvement if no head contractor), or termination of the head contract (if there is one). The lien period expires 45 days after the applicable trigger and the holdback period expires 10 days after that. Holdback funds must therefore not be paid until 55 days after the applicable trigger event.

Second, if there are multiple lien claimants, you should try to settle with all of the lien claimants as a group rather than with only some of them. The Builders Lien Act requires everyone in the contractual chain, starting from the owner, to retain a 10% holdback from all payments made on account of the construction. If no liens have been filed by the time the holdback period expires, the holdback gets released to the parties from whom the funds were withheld. The holdback is reserved for situations like this, where there are lien claimants who have not been paid. If the lien claimants have filed before the lien period expires, those claimants are to be paid from the holdback funds. A detailed explanation of the distribution of holdback funds is beyond the scope of this paper but, in short, lien claimants share pro rata in the holdback funds, and paying out one lien claimant without paying all of them does not operate to reduce the owner's liability with respect to the holdback. In other words, paying one lien claimant out of holdback funds could expose you to having to pay those funds again later, when it comes time to distribute the holdback to the other lien claimants.

What if you can't negotiate the discharge of a lien?

You may not have the luxury of time to negotiate with the lien claimants. Your lender(s) may require you to immediately discharge any builders' liens filed against your property. The Builders Lien Act has a few tools that can be used to quickly have a lien discharged.

If you are an owner, contractor, subcontractor or mortgagee who does not have a direct contractual relationship with the lien claimant(s), you may wish to pay funds into court to secure the discharge of the liens and absolve yourself from further liability. Section 23 of the Builders Lien Act allows for the payment into court of the lesser of:

  1. the total amount of the claim or claims filed, and
  2. the amount owing by the payor to the person engaged by the payor through whom the liens are claimed provided the amount is at least equal to the required holdback in relation to the contract or subcontract between the payor and that person...

The money that is paid into court then stands in place of the land and the improvement and allows for the lien(s) to be removed from title. The party paying the money into court will then have no further liability in relation to those liens.

It is not always possible to use the mechanism in s. 23 of the Builders Lien Act to discharge a lien. Another way to clear title is to post security under s. 24 of the Builders Lien Act in the form of either money, a letter of credit, or a lien bond. The security can either be paid into or posted with the court or, if in money form, can be deposited into a lawyer's trust account. The amount of the security to be posted is not specified in the Builders Lien Act; s. 24 merely provides that "sufficient security" be posted. The case law suggests that, while s. 24(3) specifies that an amount less than the full amount of the lien claim may be sufficient as security, the Builders Lien Act does not provide for security in an amount that is more than as set out in the claim of lien (IDL Projects Inc. v. M3 Steel (Kamloops) Ltd., 2011 BCSC 1600). Typically, the full amount of the lien claim is posted as security, particularly when there is an urgent need to get the lien off title.

Posting security under s. 24 is often done by the consent of the parties. From the perspective of the party posting the security, this allows for the quick discharge of a claim of lien. From the perspective of the lien claimant, consenting to the posting of the security should satisfy it that there is sufficient money available to pay it out if it ultimately proves its lien. In other words, having the security available will allow the lien claimant to easily realize on any judgment that it obtains during the lien enforcement process without requiring it to force the sale of the land that was originally liened.

It is important to note that posting security under s. 24 does not determine liability for paying out a claim of lien; that dispute is dealt with later, in the claimant's lawsuit to enforce the lien. Further, posting security under s. 24 does not mean that a lien claimant will be paid anything at all. That is to be determined in the lien enforcement proceedings. Rather, the security is posted simply so that the claim of lien can be discharged. The claim of lien then attaches to the security (money, lien bond or letter of credit) rather than the land.

Getting rid of vexatious, frivolous, or abusive liens or liens filed against the wrong property

If a lien is clearly invalid, s. 25 of the Builders Lien Act allows an owner, contractor, subcontractor or lien claimant to apply to the court to have a lien cancelled. This section is used if the claim of lien has been filed against the wrong land, or if the claim of lien is "vexatious, frivolous or an abuse of process". This is a process that can be used to get rid of claims of lien that are obviously without merit.

Importantly, the purpose of s. 25 is not to either prove or disprove the validity of a lien. The only question that the court must consider under s. 25 is whether the lien is defective (for example, it contains an error in the name of the filing party or the party who engaged the filing party to do the work). The threshold for the lien claimant to defeat this assertion is low. It is only if it is plain and obvious that the lien cannot succeed that the lien will be cancelled under s. 25(2)(b) (West Fraser Mills Ltd. v. BKB Construction Inc., 2012 BCCA 89). This is a difficult test to meet, as the courts are reluctant to throw out lien claims unless they are very clearly defective. Thus, even if the claim seems "a bit farfetched", as long as there is at least an arguable claim, the lien will not be cancelled under s. 25 as being frivolous, vexatious or an abuse of process (Libero Canada Corporation v. Kwee, 2013 BCSC 1297).

Consider doing nothing

In order to enforce their lien, a lien claimant must start a lawsuit within one year of filing the claim of lien. If a lien claimant does not do so, the claim of lien will be extinguished. For this reason, some owners may find it prudent to do nothing when faced with a claim of lien having been filed on title. If there is no need to get the lien off title (e.g., there is no lender requiring its removal), an owner may choose to wait to see whether the lien claimant takes steps to enforce the lien. If it doesn't, the owner can have the lien discharged due to the effluxion of time.

Alternatively, an owner may want to force lien claimants to start the process of proving their lien claims. There is a mechanism under the Builders Lien Act that allows an owner to force lien claimants to start their lawsuits to enforce their lien claims. The owner can deliver a Notice to Commence an Action, which gives the lien claimant 21 days to start the lawsuit. If the lawsuit is not started within the 21 days, the lien will be extinguished.

This procedure can also be used by lien claimants which have commenced their actions to force other lien claimants to do the same. Since a lien claimant cannot have its claim resolved until all other lien claimants under the same holdback also resolve their claims, this mechanism can be an important tool in the resolution of lien claims.

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.

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