Wednesday, 25 January 2017

Construction Holdback Requirements – Not for Dummies

Authors: Corbin Devlin and Kathleen Garbutt

Statutory construction holdback requirements can be remarkably tricky to interpret, presenting challenges for both novice and experienced players in the construction industry.

It is important to note that holdback requirements under the Alberta Builders’ Lien Act apply to projects of any size, from major industrial facilities to home renovations. In some sectors, particularly residential construction, holdback requirements are frequently misunderstood (to the considerable peril of the homeowner, who is often inexperienced regarding holdbacks and liens). In other sectors, particularly some professional design services and material suppliers, holdbacks are intentionally avoided, even if the Builders’ Lien Act is applicable.

On the other hand, there are all kinds of projects and lands exempt from builders’ liens – and therefore exempt from the corresponding holdback requirements. Most of the exemptions relate to projects of a “public” nature. Public highways and lands owned by irrigation districts are exempt. Interests in land owned by the federal or provincial governments are exempt. But not all infrastructure projects or projects with government involvement are exempt. For example, municipalities are not generally exempt - although particular municipal projects or lands may fall within another exemption.

Statutory holdback requirements are the responsibility of the owner, not the contractor or subcontractors or suppliers. However, statutory requirements are often supplemented by contractual holdback requirements. That is, contractors and subcontractors may also be responsible for holdbacks under their contracts and subcontracts, and sometimes construction managers are contractually responsible for taking care of statutory holdback requirements on behalf of construction owners. In Alberta, it is against the law to make a contract to the effect that the Builders’ Lien Act does not apply, but there is no problem with a contract that supplements the statutory requirements.

As a general rule, the statutory holdback requirement is 10% of the value of the work actually done. In practice, this typically means that the owner deducts 10% from invoiced amounts. In some provinces, the holdback has to be placed into a separate account, but in Alberta the owner simply keeps the holdback in pocket. After the work is complete, the owner must then wait 45 days before releasing the holdback, or 90 days if the work relates to an oil or gas well. The prudent construction owner (or lender) will always check the title to make sure no liens have been registered prior to releasing payment of the holdback. And if any liens have been registered, the prudent owner will make arrangements for discharge of those liens before making any further payments.

There are provisions for releasing the holdback early, or in stages (“progressively”) which can be very important on larger construction projects. In the simplest terms, a Certificate of Substantial Performance may be used to authorize the release of part of the holdback – that is, the holdback in relation to the value of work performed before the Certificate is posted – even though the work is not yet entirely complete. (The tricks and traps associated with the progressive release of holdbacks is a subject for a future article.)

Most importantly, why does the statute impose a holdback requirement? The underlying purpose is to provide a fund to protect subcontractors and suppliers in the event of insolvency or payment default by others involved in the project. In practical terms, the construction owner must abide by the holdback requirements, or face the risk of making double payment (i.e. coming up with the money to pay subcontractors and suppliers out of the owner’s own pocket if there is no holdback).

Holdbacks are a big consideration for construction owners and builders alike in terms of construction financing, cash flow, payment security, and just plain old contract administration. Contact us if you require more information regarding your holdback rights and obligations.

Tuesday, 3 January 2017

Lien Pitfall – Transfers of Land

Author: Corbin Devlin

When a transfer of title takes place, it is possible that builders’ lien claimants automatically lose their builders’ lien rights. This is another Builders’ Lien Act trap for the unwary.

If a lien is registered before the transfer of land, it will survive the transfer. (Or more likely, the transfer will be delayed until the lien is discharged.) However, if the transfer of land occurs after lien rights arise, but before the contractor or supplier registers a lien, then lien rights are at risk. That is because only a statutory “owner” is subject to lien claims. If the purchaser did not request the work to be performed or materials to be supplied and was not otherwise an active participant in the construction project, then the purchaser is not an “owner” within the statutory definition.

Example 1 – Residential Construction

By way of an example, a residential home purchaser had an agreement with the developer that he would construct and deliver the home to them. The developer owned the land in question and contracted to have the home built. When the home was completed, title was immediately transferred to the purchaser. The builder did not get paid by the developer and registered a builders’ lien. Notwithstanding the fact that the lien was registered in time, the court declared the lien to be invalid. The purchaser was not an “owner” (as that term is defined in the Act). The builder still had a right to sue the developer for payment, but the builder had no lien rights.

The Test – Statutory Definition of “Owner”
In the Builders’ Lien Act, the following definition applies:

…“owner” means a person having an estate or interest in land at whose request, express or implied, and
  1. on whose credit,
  2. on whose behalf,
  3. with whose privity and consent, or
  4. for whose direct benefit,
work is done on or material is furnished for an improvement to the land and includes all person claiming under him whose rights are acquired after the commencement of the work or the furnishing of the material…
This definition, like much of the Builders’ Lien Act, is badly in need of translation into simple English.

Whether or not someone with an interest in land meets this antiquated statutory definition of “owner” will almost always fall to be determined on the question whether they expressly or impliedly requested the work. That is, were they active participants in the construction project? In the example above, the purchaser simply contracted to buy a completed house, and there was no evidence that (for example) they directed any changes during construction, so the court concluded that they were not sufficiently involved in the construction project to meet the statutory definition; simply speaking, they did not request the work.

Example 2 – Commercial Construction

This issue seems to come up most often in new home construction, but it can occur on any construction project. In our second example, a commercial contractor registered its lien on time, but not before the land had been transferred to a purchaser. The purchaser approved the specifications for the building, made requests (through the vendor) for changes during construction, and had a representative on the construction site from time to time. But the court held this was still insufficient to meet the statutory definition of “owner.” Where the party with an interest in the land (i.e. the purchaser) is not a party to the construction contract(s), it must be shown that they otherwise “actively participated” in the construction process so as to meet the statutory definition of “owner.”

Practical Tip

The practical consequence is that contractors, subcontractors and suppliers must be aware of any situation where the interest in land they are working on is likely to be sold or otherwise transferred. If a developer transfers title during construction or immediately after completion – to a purchaser who isn’t actively involved in the construction process - unregistered builders’ lien rights are lost. In appropriate circumstances, this might mean that it is desirable to register a lien before the transfer takes place, in which case the lien survives the transfer. Since this will usually have the effect of holding up the transfer completely, this should be done only after giving due consideration to the consequences. In other circumstances, this might mean it is prudent to seek other forms of security for payment at the outset