Construction is a billion-dollar industry in Canada. While most large projects at condominiums proceed relatively smoothly, there is always risk of friction for contractors and owners alike. Recently, changes were made to modernize the Construction Lien Act with regard to lien and holdback rules to make it easier and more likely that contractors get paid for their work in a timely manner and to improve the resolution of disputes. Here are some key takeaways for condominium boards, managers and owners.
After a long period of consultation with stakeholders, the Construction Lien Act became the Construction Act on July 1, 2018. At that time, new amendments to the construction lien and holdback regulations came into effect. Prime contracts signed after July 1, 2018 (and before October 1, 2019) must comply with these new regulations. On October 1, 2019, additional new rules regarding prompt payment and the adjudication process also came into effect. Contracts signed after this date must comply with all the new rules.
A lien is a form of security given or taken over an item of property to secure the payment of a debt or performance of some other obligation. In the case of construction, liens can be placed against titles of properties by constructors to allow them to get compensated for completed work.
A holdback is a statutory requirement in Ontario that an owner hold back 10 per cent of an invoice payment as a means of security to ensure all parties working on a contract are paid (eg. sub-contractors). The holdback can be released once the lien period has expired.
Lien Period Increases from 45 to 60 Days
Previously, the contractor had 45 days to register a lien. The new provision in the Act ups this to 60 days. Additionally, the lien perfection period is up from 45 days to 90 days after the last day to file a lien, which means the contractor has 90 days to start a lawsuit and register the action with the owner. Both of these make it easier for the contractor to make a claim against the title of the property, so extra diligence is required on the part of owners, managers and consultants to limit the risk.
Definition of Substantial Performance Revised
A project is “substantially performed” by definition after the majority of the work required under contract has been completed, and the “improvement is ready for use, being used for the intended purpose, and when the improvement is capable of completion…” Previously, substantial performance could be claimed when the work remaining was three per cent of the first $500,000, two per cent of the next $500,000 and one per cent of the contract balance. These have been revised to: Three per cent of the first $1 million and two per cent of the next $1 million. One per cent of the contract balance remains the same.
The net effect of this is to make it slightly easier for the contractor to claim that the project is substantially complete and should not materially impact the corporation and the engineer providing project oversight.
Calculation of Completion Revised
A project has to be deemed “complete” in order for the contractor to request holdback. Prior to July 2018, the calculation for completeness was “the lesser of $1,000 or one per cent of the contract value.” This has been revised to “the lesser of $5,000 or one per cent of the contract value.”
The impact of this is relatively minimal for the corporation, but fairer to the constructor who can now rightfully apply for release of holdback sooner. On a large project, $5,000 is a more just approximation of “minor” work remaining.
Prompt Payment Rules
For prime contracts struck after October 19, the Act introduces a 28-day time limit to pay the contractor on receipt of a “proper” invoice (a “proper” invoice has a specific definition in the Act, outlining exactly what an invoice must include). This enshrines fair payment for approved work for the contractor, and the deadline cannot be modified in the Supplemental Conditions of the contract. Significantly, the 28-day period includes the time required for the corporation’s engineer to process the invoice and CFP. This benefits the contractor and corporation as it requires the consultant to process CFPs almost immediately.
The Act also defaults to a monthly invoicing schedule if not specified in the contract. Corporations that wish to control the billing can choose to include a milestone payment schedule in the contract.
What happens if the owner disputes an invoice? The Act specifies provisions that work to protect the contractor: any party who wishes to dispute an invoice must issue a notice of non-payment within 14 days from receipt of a proper invoice; unpaid invoices are subject to interest; and the contractor has the right to suspend work on site.
As always, it is preferable to negotiate with the parties to avoid formal disputes, but non-payment of a progress invoice does not mean that work must stop.
In large projects, disagreements between parties will arise. The corporation’s engineer can often act to smooth them over, but some are inevitable. To facilitate and accelerate the resolution of disputes, the new Act mandates that the parties enter binding (temporarily) adjudication. The adjudicator can be chosen or is assigned.
Adjudication services are available for on-going projects for disputes that may include valuation of services or materials, payments including change orders, and notice of non-payment under the new prompt payment rules.
A party who wishes to file a dispute must deliver a written notice of adjudication. The adjudicator must file a decision within 30 days of receiving the documents. The adjudicator’s decision is binding on the parties unless and until the issue goes to court or the parties settle. This mechanism could have a major impact on construction activity and imposes short timelines on all parties, so diligent and organized project management is even more essential to forestall and respond to disputes.
It is clear that these updates to the Construction Act will impact how construction projects are administered and managed in Ontario. For condominiums and their consultants, it will require additional oversight and likely some advance planning, particularly around the prompt payment rules—to get procedures in place before the work starts in order to ensure the major repair progresses smoothly and their hard-earned reserve fund savings are protected.
Gerard Gransaull, P. Eng. is Director, Building Science – Building Condition Assessment, for WSP in Canada.
NOTE: The material and information contained in this article does not constitute legal advice in any way. Condos needing more in-depth information should consult their counsel.