Acting as your own general contractor has its perks, however it unfortunately does not free you of the legal obligations that exist for both owners and general contractors within The Builders' Lien Act (the "Act"). Understanding the proper procedure to be followed, especially when it comes to builders' lien holdbacks, is essential in safeguarding against issues relating to payment throughout the construction process.
Pursuant to the Act, each payer in the construction pyramid is required to holdback 10% of the greater of (1) the value of the services or materials as they are actually provided under the contract or subcontract; or (2) the amount of any payment made on account of the contract or subcontract price. As owner and general contractor, you are required to maintain the same holdback for the contractors below you, and this obligation applies regardless of any payment terms under any contract or subcontract. The holdback that you maintain as owner should represent 10% of the value of the entire project.
As owner, you cannot use the holdback to complete the project or remedy a default if your subcontractors fail to complete or default on their contracts. You, as owner, are personally liable to each and any lien claimant who has a valid lien claim in the proportion that the lien claimant is entitled to the holdback. If you have a total holdback of $30,000, for example, and you have three lien claimants each with liens of $30,000, you would be personally liable to each lien holder in the amount of $10,000.
Why Does the Holdback Requirement Exist?
The holdback requirement exists to provide a level of security for the parties who have supplied materials and services to an improvement under a contract or subcontract, while protecting the owner's interest in land and allowing the payers to advance money on the contract or subcontract without incurring liability.
The holdback amount also provides a level of protection for any parties that may enforce a lien registered against your property up to the amount of the holdback. While the monies are being paid throughout the contract and subcontract, the lien claimants are protected through the maintenance of the holdback fund which remains available to partially satisfy their lien claims.
Term and Payment of Holdback
You are entitled to pay out the 10% holdback amount without liability upon 40 clear days following completion of the contract, or upon substantial completion pursuant to the certificate requirements of section 41 of the Act, provided that there have been no liens registered.
Failing to Pay Holdback
If you fail to release the holdback when you are required to do so, you can be liable to your subcontractors for any damages that they may suffer as a result.
To conclude, the Act requires that in the dual role of owner and general contractor, you must maintain a 10% holdback from your subcontractors. This holdback is to be paid out following 40 clear days of completion of the contractor or receipt of a substantial completion certificate.
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.