Ontario's Construction Act ("the Act")1 has undergone significant changes pursuant to Bill 216: Building Ontario For You Act (Budget Measures), which received Royal Assent on November 6, 2024. The amendments fall under three categories: payment of holdback, adjudication and administrative matters. The amendments are not yet in force.
The Act amendments will have important implications for owners and contractors alike. Part 1 of our look at these amendments will focus on changes to the timing of the release of holdback.
Key Takeaways
Subject to the amendment's transition provisions, annual holdback release will soon be mandatory across all construction agreements in Ontario, payable on the anniversary of the date the contract was entered into (the "Contract Anniversary Date"):
- Annual payment of holdback will be mandatory for all contracts entered into after the amendments come into force.
- Construction contracts that had procurement processes start, or have their Contract Anniversary Date, on or after July 1, 2018, but before the amendments come into force, will gradually transition to mandatory annual payment of holdback. For those contracts, annual holdback release becomes mandatory on the second Contract Anniversary Date that follows the date the amendments come into force.
- Contracts that had procurement processes start before July 1, 2018, or were entered into before July 1, 2018, are exempt from the amendments.
While the transition to mandatory annual holdback release across all Ontario construction projects is likely to significantly increase the flow of construction funds, it will also impose a greater administrative burden on both owners and contractors. Lien rights will soon expire on an annual basis, potentially resulting in more frequent disputes, but of lesser value.
Background
Under Ontario's Construction Act, basic holdback is 10 percent of the value of services or materials supplied under a contract or subcontract required to be withheld from payment under Part IV of the Act. Holdback may be retained in cash, a letter of credit or a demand-worded holdback repayment bond in the Act's prescribed form.2 When owners fail to retain holdback, they face potential personal liability to lien claimants with valid liens against the owner's interest in a given property.3
Prior to the Act's 2024 amendments coming into force, payment of basic holdback by owners was by default after the expiration of lien rights (following publication of the certificate of substantial performance, completion, abandonment or termination of the contract, as the case may be, in accordance with Section 31 of the Act). The Act expressly permitted owners and contractors to opt into either phased or annual release of holdback (provided certain conditions were met). Neither was mandatory.
Holdback continues to only be releasable once all liens claimable against the holdback are expired, satisfied, discharged or otherwise provided for under the Act. The expiry of contractors' and subcontractors' lien rights depends on whether the improvement had a certification or declaration of substantial performance of the contract and the timelines specified in the Act. Pre-amendment, there was no automatic annual lien expiry following the Contract Anniversary Date.
Annual Holdback Process
What contracts are subject to the annual holdback requirements?
Whether and when the mandatory annual holdback payment amendments to the Act apply depends on when a given contract between an owner and contractor is entered into.
- Contracts that had procurement processes start before July 1, 2018, or were entered into before July 1, 2018, remain subject to the legacy Construction Lien Act and are exempt from the mandatory annual holdback amendments.
- Contracts that had procurement processes start on or after July 1, 2018, or were entered on or after July 1, 2018, but were entered into before the amendments come into force, will transition gradually into mandatory annual release of holdback. For those contracts, annual holdback release becomes mandatory on the second Contract Anniversary Date that follows the date the amendments come into force. For example, if the Contract Anniversary Date is December 15, 2024, and the amendments come into force on January 15, 2025, then first mandatory annual holdback release date is December 15, 2026.
- All construction contracts to which the Ontario Construction Act applies entered into after the amendments come into force will have mandatory annual payment of holdback.
When is the annual holdback released?
Owners will be required to publish a "notice of annual release of accrued holdback" no later than 14 days after the Contract Anniversary Date. The notice must be in the prescribed form, to be determined by the regulations, and specify the payment amount and date.
Where a lien arises from the supply of services or materials to an improvement that are included in a release of holdback notice, that lien expires on the 60th day after the notice is published.
Owners are required to release holdback 14 days after the expiration of this lien period, except in the two circumstances articulated in the Act's new section 26(4):
- A lien has been preserved or perfected in respect of the contract that attaches to the premises and it has not been discharged, and there is no order declaring that the lien has expired, been discharged, or vacated, or the certificate of action has not been registered.
- A lien has been preserved or perfected in respect of the contract that does not attach to the premises, and it has not been satisfied or discharged, and there has been no order declaring that the lien has been expired or vacated.
Any holdback that is not otherwise paid under the annual release provisions due to a preserved or perfected lien must be paid no later than 14 days after all such liens have been satisfied, expired or discharged.
The contractor is required to make payment of a holdback to its subcontractor no later than 14 days after receiving holdback payment from the owner, and so on down the subcontractor chain.
Phased Holdback Release Repealed
The Act's "opt-in" annual and phased holdback provisions will be repealed and replaced by Schedule 4 of Bill 216 when the amendments come into force.4 Sections 31(2)-(7), dealing with contractor liens will similarly be repealed and replaced.
The amendments to the Act are a major change from the current holdback regime, where payors can release holdback on an annual or phased basis if provided for by the contract and subject to lien conditions outlined under s. 26.1(2).
Practical Insights
The province-wide adoption of mandatory annual holdback release will introduce a major change in the way most construction contracts are managed.
Owners and contractors will bear the burden of administering the new holdback and notice provisions. Public and large private owners with multiple concurrent projects will have regular and recurring Contract Anniversary Dates that may trigger holdback payment and notice obligations throughout the year. Owners and contractors should both ensure they invest in robust systems for tracking contract anniversary dates to comply with the tight 14-day turnaround time for notice and release of the holdback. Failure to do so could result in enforcement by contractor and subcontractor-initiated adjudication.
The requirement for owners to publish the amount of holdback released each year grants transparency to parties to the construction pyramid regarding the amount of services completed and materials used on any given project. This level of public disclosure of annual spend on all construction projects may have been an unintended consequence of the amendments, especially on private development projects.
What is more clear is that the lien remedy – a mainstay in construction industry for more than a century in Ontario – has been significantly attenuated by these amendments. When the annual holdback amendments are in force in a given contract, contractors and subcontractors will have lien rights expire on an annual basis. Until an awareness of these changes fully permeates the construction industry, contractors and subcontractors may not be aware that their liens rights that arose in the preceding 12 month period expire every year 60 days after the Contract Anniversary Date. Annual lien expiry may result in more frequent disputes, but of lesser value.
All construction industry stakeholders should familiarize themselves with the amendments in advance of the date they come into force, in order to anticipate and adapt to necessary changes that they bring in the administration of holdbacks in Ontario.
Footnotes
2 Construction Act, section 22(4).
3 Construction Act, section 23(4).
4 Bill 216 - Building Ontario For You Act (Budget Measures), 2024, Schedule 4, ss. 26-27.1.
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