On July 1, 2018, the first round of amendments to the Ontario Construction Lien Act – including its new name, the Construction Act – will come into force.
Importantly, this first set of amendments does not include the two most substantial and perhaps, controversial, changes to the Act: (1) the introduction of a prompt payment scheme, and (2) the creation of a mandatory adjudication system for certain disputes. These changes, among others, will not come into force until October 1, 2019.
This post is meant to refresh readers on the amendments coming into force next month on July 1st. Separate posts will follow that will provide practical advice for owners, general contractors, and subcontractors on how to prepare for the new prompt payment and mandatory adjudication regimes before they come into force next year.
Are you and your project affected by the new amendments?
At the outset, it's important to note that the amendments will not apply to any project where:
- The contract for the improvement (ie. the project) was entered into before the amendments come into effect on July 1, 2018, even if subcontracts are entered into after July 1, 2018;
- The procurement process for the improvement was commenced by the owner before July 1, 2018 (e.g. if there has been a RFQ, RFP, or call for tenders prior to July 1, 2018); or
- The premises are subject to a leasehold interest and the lease was first entered into before July 1, 2018.
For currently contemplated projects, the prime contract for the project must be executed, or the procurement process started, before July 1, 2018. Otherwise, the first tranche of amendments of the Construction Act will apply. As with past provisions of the Construction Lien Act, parties will remain unable to contract out of the provisions of the legislation.
What is changing on July 1st?
Of the amendments coming into force on July 1st, the two most significant are the clarification of how the Act applies to Alternative Financing and Procurement ("AFP") model projects, and changes regarding the release of statutory holdback.
Alternative Financing and Procurement
In relation to AFP model projects, the amendments seek to bring clarity as to how the Act applies to these projects, whose longer duration and multiple levels of contracts are ill-suited to the existing regime.
The new Construction Act will provide that for certain of the statutory provisions, the special purpose vehicle, or "Project Co." who contracts with the public sector entity to undertake the project will be deemed to be the owner, and the contract between Project Co. and the contractor will be deemed to be the contract. The applicable statutory provisions include:
- Determining substantial performance;
- Calculating the lien period;
- The certification of substantial performance; and
- Information requests made pursuant to the Act.
For all other purposes, the Crown, municipality, or broader public sector organization who owns the premises continues to be the owner for the purposes of the Act.
The new Construction Act will make it mandatory for an owner to release the statutory holdback funds once the lien period has expired, unless the owner publishes a notice of non-payment in the prescribed form within 40 days of the publication of the certificate of substantial performance, and notifies the contractor of the publication.1Practically, this new provision requires the owner to have a bona fide reason to refuse the release of holdback, since such refusal raises a material risk of disputes and liens at the conclusion of the project. This is because the non-payment of holdback notice must be published within 40 days of the publication of certificate of substantial performance, which is prior to the expiry of the lien period.2 Accordingly, contractors and trades will have the opportunity to lien, and will likely exercise that right, once notification is published that holdback won't be released.
The amendments to the Act will also permit the release of holdback on an annual basis or phase/milestone basis, where certain conditions are met:
- The contract provides for an annual or phased release of accrued holdback;
- The contract price is over the prescribed amount (currently set at $10,000,000) – note this threshold will not apply if the only phase for which holdback will be released is the design phase;
- The contract time is scheduled for over one year, or provides for work to be completed in identified phases; and
- There are no liens registered that have not been either vacated or discharged at the time the accrued holdback is to be released.
Other changes to the Act
Several other notable changes will be coming into force on July 1st, including:
- Extension of the lien period from 45 to 60 days, and extension of the period to perfect a lien from 45 days after the last day to lien to 90 days;
- Increased obligations in relation to trust funds, including depositing trust funds in a bank account in the trustee's name and an obligation to maintain written records regarding the trust funds;
- Changes to the monetary thresholds in the formula for determining substantial performance;3
- Revising the definition of "improvement" to include any "capital repair" that extends the "normal economic life" of the land – as a result, true ordinary maintenance work is expressly not considered an improvement and does not give rise to lien rights;
- Revising the definition of "price" to include any direct costs incurred by the contractor as a result of delay that is not caused by the contractor – such amounts can accordingly be included in a lien; and
- Requiring all contractors working under a "public contract" to provide labour and material bonds and performance bonds with a minimum coverage limit of 50% of the contract price for contracts valued at $100M or less, and a minimum coverage of $50M if the contract value is $100M or more.
Key takeways and looking ahead
The legislature has opted to ease the construction industry into the new legislation by grandfathering in the new amendments.
The first phase of amendments will primarily change the landscape surrounding timeliness of liens, holdback requirements for larger projects, and provisions related to public-private projects.
The second phase will see far more substantive changes to the legislation. Be sure to check back on what those changes mean and how they may affect your projects.
1 Ultimately, the contractor will likewise be able to withhold payment of holdback if the owner has refused to pay and the contractor refers the issue to adjudication and provides notice to all affected subcontractors. Similar provisions will apply to subcontractors down the chain. These rights, however, will not come into force until October 2019 since they require recourse to the mandatory adjudication provisions.
2 The lien period for contractors will be extended to 60 days after the publication of the certificate of substantial performance, as discussed below.
3 The formula is now 3% of the first million dollars (increased from $500,000), 2% of the next million dollars (increased from $500,000) and 1% of the remainder of the contract price.
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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.