Problems with Posting Security to Discharge Liens

Author: Corbin Devlin 

Posting Alternate Security is Standard Practice

It is common practice for an owner or general contractor to put up cash or a lien bond in order to discharge a lien from the land title.  This is often required to be done quickly, as the registration of a lien can disrupt construction financing or hold up a transfer of the land.  Many contracts also specifically require the contractor to discharge subcontractor liens within a matter of days.

Posting alternate security is rarely a step that invites any controversy.  Generally, one would expect that security in the form of cash or a lien bond is as good or better than a lien against the land.  As a consequence, lien claimants usually consent to replacing the land with alternate security in the form of cash or a bond.  If lien claimants object, it is usually because they are getting leverage out of having a lien on title, and discharging that lien reduces their bargaining power.

Troubling Developments

Recent case law alerts us that, in the right circumstances, claims by both Canada Revenue Agency and Factors may have priority over lien claims – even in respect of money specifically paid into court as alternate security for the claims of lien.

For example, if security paid into court is subject to claims by Canada Revenue Agency (e.g. an Enhanced Requirement to pay issued by CRA to collect unremitted source deductions or GST) or subject to a prior factoring of accounts, then both the CRA and the Factor may claim priority over the lien claimants, effectively snatching that security away from the lien claimants.  The case law regarding the priority of CRA has been around for a while; the case law regarding the priority of Factors is relatively recent: Van T Holdings Inc. v. KCS Equipment Ltd., 2012 ABQB 335. (Discussing these priorities in greater detail is a subject for another day.)

A new practical problem for construction owners and contractors has arisen because of this priority issue.  The courts have recently shown a reluctance to remove liens from title (i.e. on applications to post alternate security).   It seems the courts have been persuaded that the reasoning of these recent cases (giving priority to CRA and Factors) is only applicable if the lien is discharged from title.  Lien claimants have argued they should not be required to give up their lien against the lands, because alternate security might be less secure (i.e. subject to these other claims).

Until the courts come to grips with this situation, owners and general contractors may face a significant practical problem.  A lien must often be discharged quickly for legitimate practical reasons, particularly to ensure continuing project financing.  There is an opportunity for mischief by a lien claimant who wants to delay the discharge of lien; i.e. objecting to the discharge of lien on the basis that alternate security is not so secure.  The courts have shown a willingness to delay the discharge of liens to address this issue.  Should the owner or general contractor be required to present evidence in court that its’ tax remittances are up to date, and that it has not factored its’ accounts, before it can get a lien discharged from title?

Practical Resolutions

For the moment, there is a risk that routine discharges of lien could be delayed.  But the courts must eventually accept that fairness and practicality requires a mechanism for quick discharge of liens.  If there is to be any objection to discharging a lien based on allegations of priority issues, surely the lien claimant has to show some facts to support the allegations; i.e. a factoring of accounts, or a debt to CRA, or at least a hint of insolvency.

More significantly, I doubt the premise that a lien against the land is more secure than cash security or a lien bond.  After all, the ultimate remedy for a lien claimant is to have the court foreclose and sell the land to realize on the lien.  If there is a debt owed to CRA or a Factor, these priority creditors would exert their claims against the proceeds of sale of the land, if necessary to realize their claims.  In my view these priority cases provide no basis for the court to balk at discharging liens from title.

(Factoring is a sale of accounts receivable to a party known as a Factor.   The seller obtains a cash advance on the accounts receivable from the Factor, and the Factor pays the seller a discounted price relative to the face value of the receivables.  The Factor then owns the accounts receivable and collects from the account debtors.)

The Importance of Keeping a Diary

Author: Corbin Devlin 

Construction disputes often get resolved in favour of the party with the best records.  Right and wrong may have little to do with it when only one party has the advantage of a daily record to support its’ version of events.  A good diary, in addition to serving a practical purpose, is sometimes key evidence in a contract dispute.

Why keep a diary?

• What appears to be a routine discussion, instruction or decision may become a key issue down the road, in a dispute.
• Individuals can legitimately have very different perceptions of the same events and discussions, particularly as memories fade.  And sometimes witnesses bend the truth. What seems to have been a point of agreement on site may be hotly disputed months or years later in the context of litigation.
• Diaries are admissible in court and can be used to assist witnesses to refresh their memory of events.
• The courts place more weight on a contemporaneous record – such as a diary - than on the testimony of a witness (if that testimony is unsupported by any record).
• A good diary can be essential to proving facts in court or arbitration.

Do’s and Don’ts

• Do – require your project managers, superintendents and perhaps others to keep a diary.
• Do - use the diary to record the progress of the work, meeting minutes, instructions and decisions, events and disagreements, equipment and personnel on site… what is important may vary depending on the nature of the work, the nature of the contract, and the other daily project records (it is not necessary to repeat information that is already recorded).
• Don’t - record disparaging remarks or profanity.  It is too common that diaries include embarrassing comments; remember that the diary is a business record and may be viewed by others. Personal remarks on the other hand (e.g. “KFC for lunch again today…) are fine and may even lend credibility to the record.
• Do - implement a policy of retaining work diaries along with other project records.
• Don’t - rely on the fact that the other party is recording meeting minutes – unless you receive, review and correct the minutes.
• Do - ensure that your or your lawyer get your hands on the diaries kept by the other party when you are in a dispute.
• Don’t – rely on a diary as a substitute for documentation required by the contract (e.g. notice of claims, documentation of changes).

In court or arbitration, a good record of events - such as a superintendent’s diary – is invaluable.  It can level the playing field if both parties have kept such records.  It can determine the outcome if not.

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.