Life can be hectic for the party that is responsible for keeping builders liens off property title. This is because the filing of a lien against a construction project can affect the flow of construction-related funds.
For instance, in order to maintain priority over other interest holders, a mortgage lender will not make further construction advances to a developer while there is a lien on title. Similarly, owners, general contractors and subcontractors will not make further progress advances until sub-subtrade liens are removed by the intermediate contracting party. Further, purchasers of property require that it be conveyed with clear title and commercial leases require tenants to keep the leased property clear of liens.
The constriction of the flow of funds in such circumstances potentially provides to lien claimants leverage for getting their claims paid in short order. However, it is not the intention of the Builders Lien Act to give a lien claimant a knife to hold at the throats of parties that have contractual or holdback liability to the claimant. This is why Sec. 24 of the act allows such parties to remove liens from title by putting up funds or cash-equivalent bond or letter of credit security to take the place of the liened property as a source of recovery of unpaid construction-related debt.
Posting lien security is not an admission of liability to pay any amount. It leaves with the lien claimant the onus of proving its contractual entitlement and preserves to the defending party all of its potential lien defences, including any applicable limit to holdback liability under the multiple holdback system.
Even so, the ability to secure liens comes with its own complications.
Ability to secure
Securing a lien obviously requires that the securing party has the financial resources to do so. A party with limited resources could find itself with the dilemma of needing further mortgage funds to secure liens but being unable to obtain the advance of such funds while the liens remain on title. Even in less dire circumstances, financial strain can be increased by having to secure liens in what may arguably be excessive or duplicative amounts. In the first instance and, particularly, when there is urgency to remove liens, a securing party cannot necessarily rely on obtaining the court’s reduction of the amount required to be posted to a figure that is less than the usual measure, which is the face value of each lien being secured.
Lien security is committed until the resolution of the lien claim, usually by settlement or trial of the related lien enforcement legal action. Even if the lien claimant opts to commence action quickly, either of its own volition or in response to a notice to commence an action served on it, the dispute may wind its way through pleadings, discovery of documents, examination for discovery and trial procedures for many months. When a securing party’s holdback liability will be significantly less than the security amount required to be posted in the first instance, the extended tying up of “excess” funds may be a burden.
Funds out of pocket or cash-equivalent security accessed from bonding or credit facilities are not available for other business purposes, and have interest, premium or fee charges. Securing liens also requires incurring legal expense.
For a lien claimant, the posting of security is a good second-best to obtaining payment because it means that, subject to applicable defences, the eventual recovery will not require potentially protracted proceedings to sell the property or be subject to a possible shortfall in equity to satisfy a judgment.
However, the securing of its lien also has challenges for a lien claimant.
Unless a lien serendipitously creates a crisis for a paying party, filing one is unlikely to result in immediate recovery of funds if a substantive payment dispute exists or it is otherwise too early to determine payment entitlement and liabilities. After security is posted, resolution of the claim can become a low priority for a securing party if it is not too inconvenienced by that use of its resources. The lien claimant may then be in for a long haul of either waiting for extraneous events to result in payment or pursuing the claim by litigation, eventually having to commence a lien enforcement action or have the lien be extinguished.
J. Marc MacEwing is associate counsel with Shapiro Hankinson & Knutson Law Corp.