Monday, 7 July 2014

No Setoffs Allowed Against the Statutory Lien Holdback? Think Again

Author: Corbin Devlin 

Confusion Over Lien Rights
Lien claimants – and their legal counsel – sometimes make the mistake of believing they can compel the project owner to pay the lien fund into court (and out again to the lien claimants). The legislation is actually permissive – the owner (or a mortgagee authorized by the owner) may pay the lien fund into court in order to discharge liens from title. There is no mechanism in the Builders’ Lien Act for lien claimants to compel the owner to pay the lien fund into court. Of course, if the lien claimants have valid liens, their ultimate recourse is to foreclose on the land, which may compel the owner (as a practical matter) to pay the lien fund into court, at risk of foreclosure. But this practical compulsion should not be confused with legal compulsion.

Understanding the Lien Fund

The lien fund consists of two parts: 1) 10% of the value of work performed and materials supplied, plus 2) any additional amounts owing. The case law makes it clear that the “first part” of the lien fund (i.e. the holdback) is not subject to setoffs. This only means that subcontractors and suppliers (not in a direct contract with the owner) have at least 10% of the value of the work as security for amounts owing to them, despite any setoffs the owner may have against the contractor (the party having a direct contract with the owner). 

This certainly does not mean, as I have heard argued from time to time, that the owner is liable to pay the 10% holdback to a contractor regardless of any issues in dispute between them. A contractor having a direct contract with the project owner, trying (by court application) to compel the owner to pay him the “first part” of the lien fund, despite the existence of a legitimate dispute as to the amount owing, is most certainly barking up the wrong tree. Whether the application to “compel” the owner to pay the lien fund is made by the contractor or a subcontractor or supplier of any tier, the legislation simply does not permit it. Further, where the issues in dispute are solely between owner and contractor (parties having a direct contractual relationship), the lien fund is largely irrelevant; the question is the proper amount(s) owing between them, and lien rights do not likely come into play unless the owner is unable to pay any amounts owing after judgment.

Subcontractors’ Advantage
However, a subcontractor (or a supplier; i.e. any lien claimant who does not have a direct contract with the project owner) may have more success. The subcontractor still cannot compel the owner (by court application) to pay the lien fund into court. But the subcontractor can take other steps that will compel the owner to act. That is, despite the existence of any dispute between the prime contractor and project owner, the subcontractor can apply to court to prove its’ lien valid, followed by other legal steps leading to foreclosure on the lands, which will almost surely compel the owner (not legally, but as a matter of practical necessity) to pay the lien fund into court, or at least expedite the resolution of any dispute between the owner and the contractor.  In this sense, the subcontractor may be able to compel the owner to pay the lien fund into court, where the prime contractor cannot.

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