Friday, 4 January 2019

Lien Rights – When the Developer Doesn’t Have an Interest in the Land

Lien Rights –When the Developer Doesn’t Have an Interest in the Land

In an earlier article, we warned of the risk of loss of lien rights if a transfer of land occurs during construction.  A 2018 court decision reminds us that there is also a risk of loss of lien rights if the party contracting the work doesn’t have a legal interest (ownership) in the land, such as when (for example) an expected transfer of land doesn’t go through. 

The Recent Example

In Georgetown Townhouse GP Ltd v Crystal Waters Plumbing Company Inc, 2018 ABQB 617, the developer/owner Georgetown agreed to sell 48 lots to ReidBuilt Homes.  The contract between Georgetown and Reidbuilt allowed ReidBuilt to occupy the lands and begin construction.  However, the lands would be transferred by Georgetown only upon sale of the lots to individual homebuyers. 

When ReidBuilt came into financial problems, many trades registered liens against the lots in question.  The problem is, the trades were working for ReidBuilt but the lands were owned by Georgetown.  On a court application to determine if the liens (against the lands owned by Georgetown) were valid, Master Prowse determined that Georgetown was not “sufficiently involved” in the construction process to make Georgetown an “owner” as defined in the Builders’ Lien Act (BLA).  The liens were all invalid.

That Quirky Legislation

This issue arises in large part because the BLA has a unique definition of “owner,” and it is only the interest of an “owner” as defined that is subject to claims of lien.  Section 1(j) of the BLA defines an owner as follows:
“owner” means a person having an estate or interest in land at whose request, express or implied, and
(i)   on whose credit,
(ii)   on whose behalf,
(iii)   with whose privity and consent, or
(iv)   for whose direct benefit,
work is done on or material is furnished for an improvement to the land and includes all persons claiming under the owner whose rights are acquired after the commencement of the work or the furnishing of the material.

There is now a substantial body of case law around the question what it means to expressly or impliedly request the work.   Mere knowledge by the registered owner that the work is being done is not sufficient.  Rather, the courts have decided the registered owner must be actively involved in the building process for lien rights to exist.

What is Sufficient Involvement to Trigger Lien Rights?

In the Georgetown case, the lien claimants argued that the registered owner Georgetown expressly or impliedly requested the work based on the following facts:
- Georgetown had the right to approve the style and colours of the homes to be constructed.
- ReidBuilt was required to obtain Georgetown’s approval for the plans for the house before applying for a building permit.
- ReidBuilt was to provide utility servicing within the lot boundaries but only with contractors approved by Georgetown, and the work was to be supervised by Georgetown’s engineers.
- ReidBuilt was required to keep the lots with an orderly and tidy appearance to the satisfaction of Georgetown.
- Georgetown was to provide marketing support to ReidBuilt for the sale of homes on the lots.
- Georgetown’s approval was required for ReidBuilt’s onsite signage and advertising.

However, despite all of these obligations, there was no evidence that Georgetown in fact gave any of the approvals, or participated in any of the ways contemplated in the agreement between Georgetown and ReidBuilt, aside from Georgetown setting up and maintaining a website that referred to ReidBuilt as the builder for the subdivision.  The court concluded that Georgetown’s contractual authority over the development is a relevant factor to consider, but not as significant as what in fact happened.  With no evidence of Georgetown’s active involvement in the building process, the liens were invalid.

Not An Isolated Case

Similar situations have led to similar conclusions by the court in the past. 

In Stealth Enterprises Ltd. v Hoffman Dorchik, 2000 ABQB 311 (CanLII), S & U Homes Ltd. was the registered owner of an apartment building. They made an agreement to sell the building to the developer (632766 Alberta Ltd.) who intended to convert it into condominiums. 632766 refinished four of the apartment suites into show suites and spent other money on refreshing the lobby, before the land transfer was completed. The deal collapsed and an unpaid contractor (hired by 632766) registered a lien against S&U’s title.  The only evidence of active participation by S &U related to some directions regarding cleaning the apartments for rental.  The court determined the lien was not valid. 

In E. Gruben’s Transport Ltd. v Alberta Surplus Sales Ltd., 2010 ABQB 244 (CanLII), the landowner Alberta Surplus Sales agreed to sell 150 acres of land to 1327923 Alberta Ltd.  Alberta Surplus allowed 1327923 to move ahead with development (road construction) prior to closing the deal.  The roadbuilding subcontractor (E. Gruben’s Transport) liened the lands when the deal fell through (and consequently Gruben’s didn’t get paid).  The court determined that Alberta Surplus Sales “had no direct or indirect involvement in arranging for the road work to be done;” so the lien was not valid. 

Finally, in Acera Developments Inc. v Sterling Homes Ltd., 2010 ABCA 198 (CanLII), the issue went to the Alberta Court of Appeal.  Acera was the developer/landowner who agreed to sell the land to Sterling and allowed Sterling to build on the land prior to completion of the purchase and subdivision of the land.  When subdivision approval of the land was refused, and Sterling did not get paid, Sterling registered a builders’ lien. Acera's architectural and construction guidelines required that Acera approve the construction plans, elevations, finished grades, finishing materials and colours, final grade slips, setbacks, foundation designs, auxiliary buildings and fencing, and landscaping. All such plans were in fact approved prior to construction. Further, the construction was inspected by Acera as work progressed.  In these circumstances, the court sided with the lien claimant – the lien was valid because there was sufficient evidence of Acera’s active involvement in the work.

Three Categories of Similar Cases

As Master Prowse states in the Georgetown case: “There are three common categories of cases where this issue arises:
(i)         a landlord (registered owner of land) disavows liens placed on its land by unpaid contractors of a tenant,
(ii)        a purchaser who agrees to buy land upon which a building is to be built, and later takes a transfer of the land after the structure has been built, disavows liens subsequently placed on his/her land by unpaid contractors of the builder,
(iii)      a developer/vendor (registered owner of land) who agrees to sell land, and allows the purchaser to build on the land prior to completion of the sale, disavows liens placed on its land by unpaid contractors of the purchaser.”

The present article deals with category (iii – contracting with purchaser of lands before completion of the sale of the lands).  We have addressed the other two categories in prior articles: (i – landlord and tenant) and (ii – vendor and purchaser).

Room For Mischief

Contractors should be very attentive to these risks.  Most of the time, these situations arise innocently enough when a developer becomes insolvent.  But we have also seen developers deliberately arrange their affairs to protect the project from claims of lien (i.e. isolating the registered owner of the lands from any active involvement in the work).  In either case, contractors should be alert to situations where their statutory lien rights may be compromised.

In the present context, this means making some investigation if the party who is contracting the work has a legal interest in the lands.  If the party contracting the work has no legal interest in the lands, further inquiry is required to determine if the party who actually owns the lands is actively participating in (requesting) the work.  Keep in mind, the registered owner’s right to actively participate in the work is not sufficient; there must be active participation by the registered owner in fact.  If these inquiries suggest that lien rights may not exist, the prudent contractor will mitigate risk in some other fashion, such as requiring other security for payment from the party contracting the work.

Monday, 17 December 2018

Certificate of Substantial Performance Limits Lien Rights Even Without Posting

By Corbin Devlin

It has always been my view that a Certificate of Substantial Performance (CSP) must be properly posted to be valid, but the Court of Appeal has recently determined otherwise.

The CSP and The Builders’ Lien Act

 

The Builders Lien Act (BLA) of Alberta requires a lien to be registered within 45 days of completion or abandonment of the contract for which the lien is claimed (90 days in the case of an oil or gas well site), failing which it expires. But lien claimants must also be aware that there is a deadline triggered by the issuance of a CSP relating to their contract or subcontract.

45 (or 90) days after the CSP is issued, the owner may safely release the “major lien fund” (i.e. 10% of the value of the work actually done and materials actually furnished under the contract at the date of issue of the certificate of substantial performance, plus any additional amounts owing on the contract), provided no liens are registered. All that remains as security for lien claims registered after the owner releases the major lien fund in accordance with the legislation is the “minor lien fund” (i.e. 10% of the value of the work actually done and materials actually furnished on or after the date of issue of the certificate of substantial performance). This can drastically reduce the security available to lien claimants pursuant to the Builders’ Lien Act.

Prudent lien claimants will take note of the issuance of a CSP, and consider if the financial circumstances of the project require them to register a lien within 45 (or 90) days from that event to protect themselves.

Posting Requirement

 

The BLA expressly requires the person issuing a CSP to post a signed copy of it in a conspicuous place on the job site within 3 days from the date of issuing the certificate so that persons working or furnishing materials have a reasonable opportunity of seeing the certificate.  And there is a penalty for non-compliance: “Where the person issuing a certificate of substantial performance fails to comply with this section, that person issuing the certificate is liable for legal and other costs and damages incurred by and resulting to a person by reason of the non-compliance.”

Discrepancy Between Issuance and Posting

 

The problem is that the BLA does not say that the CSP takes effect from the date it is posted.  It says that it takes effect from the date it is “issued.”  We now know (the Court of Appeal has made it clear) that posting and issuance are not the same thing.  “Posting” is defined in the legislation (i.e. a conspicuous place on the job site).  “Issuance” is not.

In the recent case H20 Plumbing & Heating Ltd v. Maximum Tank Truck Services Ltd, 2018 ABCA 381, the contractor issued a CSP, and the subcontractor registered a lien more than 46 days later.  There was conflicting evidence if and when the CSP was posted in accordance with the requirements of the Builders’ Lien Act.  The Court of Appeal held that the uncertain evidence regarding the date of posting was not material because the time for the owner to withhold the major lien fund runs from the date of issuance of the CSP.  The Builders’ Lien Act is quite clear: for the purpose of determining the relevant timelines under the Act (for the owner to retain the major lien fund), only the date of issuance matters, not the date of posting.

This decision invites more questions.  Is a CSP “issued” as soon as it is signed by the contractor?  Can a CSP be backdated?  The concept of issuance has been considered by the courts to include “some communication” of the document [Alterra Property Group Ltd v. Doka Canada Ltd, 2008 BCSC 1880]  But this still begs the question, communication to whom?  It seems that a CSP may be validly issued once it is communicated from the contractor to the owner.  But what about communication to the subcontractors who are most affected by the document?

It should be a significant concern to subcontractors that they may lose the right to attach the major lien fund without getting any notice of the issuance of a CSP.  If a CSP is issued but never posted, lien rights may be lost with the passage of 45 (or 90) days, without any notice to them at all.  The subcontractor awaiting payment of a significant receivable may end up with grossly insufficient security (i.e. a share of the minor lien fund, at most) despite following the requirements of the BLA to the letter.

Alternate Remedies

 

The only direct remedy for the lien claimant who suffers a loss due to failure to register a lien on time – because a CSP was “issued” but not properly “posted” -  is to make a civil claim against the party who failed to properly post the CSP.  But that is an empty remedy if the party who failed to post the CSP is also insolvent, a fairly common scenario in lien cases.  This point was not lost on the Court of Appeal, but the court concludes: “This potential unfairness is insufficient to override the express wording of the Alberta BLA...”

(In some circumstances, the subcontractor adversely who loses out on attaching the major lien fund may also find some protection in the trust provisions of the BLA, but these provisions are extremely narrow. Reference our prior article on this topic for more information. )

Looking Forward

 

Did the legislators really mean for lien rights to be affected by the (undefined) date of issuance?  There appears to be no good reason the CSP takes effect as of the date of “issuance” instead of the date of “posting.”  Given the acknowledged unfairness to subcontractors, this discrepancy begs for correction by the legislature.

Meanwhile, prudent subcontractors will consider the financial status (ability to pay) of the parties above them in the chain of contracts, and seek additional security for payment, or otherwise mitigate their risk, where appropriate.  Lien rights are a valuable safety net in many cases but, once again, we see that they are no guarantee of payment.

Tuesday, 23 October 2018

Lien Holdbacks and Deficiency Holdbacks

By Corbin Devlin

A frequently-asked question is, can the Alberta builders’ lien holdback be used for the correction of deficiencies? The short answer is, the holdback can be used for correction of deficiencies, only after the statutory purpose of the holdback is expired.  The Builders’ Lien Act does not contemplate using the statutory holdback for anything other than security for payment to lien claimants. But the Builders’ Lien Act does not dictate what happens to the statutory holdback after the lien holdback period expires. Read on for further explanation…

Legitimate Setoff


The first thing to consider is whether there is a legitimate right to set off a claim or hold back funds otherwise payable – ignoring for the moment any issues arising under the Builders’ Lien Act. A construction deficiency does not automatically give rise to a right to deduct an estimated repair cost from amounts otherwise payable. One must consider the payment provisions and other related provisions of the contract. Some contracts expressly allow for rights of setoff, or the right to hold back an amount on account of construction deficiencies.  On the other hand, common law rights of setoff may allow for an owner to retain funds on account of deficiencies, even where the contract is silent.

A fulsome discussion of the principles of setoff is beyond the scope of this article. For our present purposes, we assume that there is a legitimate right to retain a deficiency holdback (i.e. claim a setoff), per contract or common law. The question is, how does this relate to builders’ lien holdback requirements?

As Between Owner and Contractor


There’s two statutory restrictions on payment of the builders’ lien holdback: 1) the owner is required to maintain the holdback until the lien period is expired (ss. 18 and 23 of the Act); and 2) the Act expressly states that the lien fund “shall not, as against a lienholder, be applied to the completion of the contract or for any purpose other than the satisfaction of liens.” One might read these requirements and conclude that the lien holdback is simply not available for the completion of deficiencies. However, this is only partly correct, and there is some flexibility inherent in the legislation.

The legislation specifies when the holdback must be retained, but it does not specify when the holdback must be released. If the statutory requirements to retain the holdback are expired, then the owner may pay out the holdback. Whether (and when) the owner must pay out the holdback is a question of contract interpretation. Standard form contracts typically specify when the holdback is to be paid to the contractor. But express or implied contract terms may also permit the owner to hold back funds or set off the costs of unfinished work or deficiencies against payment amounts otherwise due to the contractor.

In other words, once the lien period is expired, if no liens are registered, the owner is permitted, but not required, by statute to release the holdback.  At that point, the owner may use the holdback for the completion of the work or correction of deficiencies, if permitted by contract, because the owner is no longer required by statute to continue retaining those funds.

As Between Contractor and Subcontractors


The lien legislation in Alberta does not impose any obligation to retain a lien holdback on anyone other than the owner. However, as a matter of contract requirements and industry practice, a general contractor will often retain a holdback from a subcontractor (and so on down the line) to mirror the owner’s retention of funds from the contractor.

Therefore, whether a contractor can use holdback funds to correct deficiencies by a subcontractor is entirely a matter of contract interpretation.

Examples


If a contractor or subcontractor has performed deficient work, and the lien period has expired without the registration of any liens, the owner’s lien holdback may be applied (set off) against the cost of the deficiencies - if expressly or impliedly permitted by the contract.

If a contractor (or subcontractor) has performed deficient work, and liens are registered or may become registered (i.e. because the lien period is not yet expired), the owner (or contractor) should not use the lien holdback for the completion of the work or correction of deficiencies – even if the contract would permit it. The lien holdback may soon be required to be paid into court to discharge liens against the project (for example, if the subcontractor becomes insolvent, resulting in sub-subcontractor lien claims). The owner (or contractor) who has used the statutory lien holdback to account for the cost of repairing deficiencies, while liens are registered or may be registered, may end up short of funds for completion of the work or for the discharge of liens (i.e. risk of shortfall). If a deficiency holdback is permitted by the contract, it should therefore be a separate/additional holdback from the statutory lien holdback, so long as liens are registered or may become registered. Then, when the liens are discharged (or the lien period expires without lien registration), the statutory lien holdback can be released separately from the deficiency holdback.

Summary


In essence, if liens are claimed or may be claimed (i.e. before the lien period is expired), the lien holdback should be considered as reserved for a single purpose; security for payment to lien claimants. However, once that purpose runs out due the expiry of lien rights (assuming no liens are registered), the lien holdback is just another sum payable under the contract, and express or implied rights of setoff may be exercised and taken into account to determine the actual amount payable. In other words, the owner or contractor may employ the lien holdback to offset legitimate deficiency costs, only after the statute allows the lien holdback to be released.

Some contracts expressly contemplate a deficiency holdback that is separate and additional to the lien holdback. If the contract expressly addresses the issue, those agreed terms will prevail, unless they somehow conflict with the lien legislation. Much more frequently, there is no express right to a deficiency holdback set out in the contract. Such a right may nevertheless exist, based on the common law right of setoff.

The statutory trust provisions, if applicable, may also impact on these issues. The limited trust provisions under the Alberta Builders’ Lien Act are discussed in another recent article [insert link to August blog Article] on this blog.

Friday, 24 August 2018

Statutory Trust for the Benefit of Subcontractors

By Corbin Devlin


A lesser known provision of the Alberta Builders’ Lien Act creates a trust fund in favour of subcontractors. 

Narrow Provisions
These statutory trust provisions are narrow in their operation. They only apply when “a certificate of substantial performance is issued” and they only apply to payments made by the owner after the date the certificate is issued. But in certain circumstances they can provide a financial safety net for subcontractors.
The certificate of substantial performance is mainly used to obtain progressive release of the holdback funds (a topic we have discussed extensively in prior blog posts). Up to the date of substantial performance, the holdback funds are held by the owner to ensure that the subcontractors will be paid, and to satisfy the owner’s statutory obligations should a lien be filed. Section 22 of the Builders’ Lien Act provides that a payment made by the owner after a certificate of substantial performance is issued is a trust fund “to the extent that the person owes money to persons who provided work or furnished materials” within the scope of the certificate. This is intended to ensure that when the holdback funds are paid out, they will end up in the hands of any unpaid subcontractors. Section 22 effectively uses the mechanism of a trust to avoid the diversion of the holdback funds, after the issue of the certificate of substantial completion, but before the funds actually reach the unpaid subcontractors. (Reference: Iona Contractors Ltd. v Guarantee Company of North America, 2015 ABCA 240 at para. 22. Click here for link

The Operation of the Trust
The benefit of the trust provisions (to subcontractors) is mainly realized in the context of an insolvency. If the general contractor becomes insolvent and uses monies received from the owner to pay other creditors, the unpaid subcontractors may have additional legal recourse for breach of trust. In the event of a priority dispute, subcontractors benefiting from the trust provisions may recover amounts due to them ahead of the general contractor’s secured creditors. And, the trust provisions may provide a supplemental remedy if the subcontractor’s lien rights prove inadequate (e.g. if money paid into court as alternate security for a claim of lien proves inadequate). (Reference: Crossing Company Inc. v. PricewaterhouseCoopers Inc., 2004 ABQB 448, Click here for link)

Finally, the trust provisions may provide subcontractors a measure of security even if the lands are exempt from liens (e.g. a public highway, federal lands) or the subcontractors do not have lien rights for some other reason (e.g. failure to register on time). 
A Few More Notes
The statutory trust provisions apply equally for the benefit of material suppliers.

These trust provisions vary significantly from one jurisdiction to another. In most Canadian provinces, the statutory trust provisions are actually much broader than they are in Alberta.

The complete text of s. 22 is as follows:

22(1)  Where
                (a)          a certificate of substantial performance is issued, and
                (b)          a payment is made by the owner after a certificate of substantial performance is issued
the person who receives the payment, to the extent that the person owes money to persons who provided work or furnished materials for the work or materials in respect of which the certificate was issued, holds that money in trust for the benefit of those persons.
(2)  When a person other than a person who received the payment referred to in subsection (1)
                (a)          is entitled to the money held in trust under this section, and
                (b)          receives payment pursuant to that trust,
the person, to the extent that the person owes money to other persons who provided work or furnished materials for the work or materials in respect of which the payment referred to in clause (b) was made, holds that money in trust for the benefit of those other persons.
(3)  A person who is subject to the obligations of a trust established under this section is released from any obligations of the trust when that person pays the money to
                (a)          the person for whom that person holds the money in trust, or
                (b)          another person for the purposes of having it paid to the person for whom the money is held in trust.

Builders’ Lien Act, RSA 2000, c. B-7