The Importance of Timely Registration of a Subcontractor’s Lien
Here is a fact scenario that both subcontractors (who want to get paid) and building project owners (who want to limit their liability) should consider. An owner holds back 10% of construction costs payable to the contractor for work done before the Certificate of Substantial Performance is issued (“major lien fund”) and for work done afterwards (“minor lien fund”), as is required under the Builders’ Lien Act. The major lien fund may be released to the contractor 45 days after the Certificate’s issuance. The owner, in holding sums back, provides a form of protection for subcontractors. One such subcontractor performs work and supplies materials before the Certificate is issued. However, the subcontractor registers a lien against the land more than after 45 days after the Certificate is issued and after the major lien fund is released to the contractor. There is nothing left in the major lien fund. It is gone.
There are 2 questions. First, does the subcontractor have a claim to a portion of the minor lien fund? That is to say, even though the work was performed before the Certificate’s issuance, could the subcontractor get paid from the minor lien fund which was set for any work performed after the Certificate’s issuance? Second, if the answer to question 1 is no, does the subcontractor have any other recourse to get paid?
The Court of Queen's Bench faced a scenario with these facts in the recent case of Chandos Construction Ltd. v. Twin Peaks Construction Ltd. (“Chandos”). The Court held that the answer to the first question is no. The major lien fund and the minor lien fund are segregated. Work performed and supplies provided before the Certificate’s issuance attach only to the major lien fund.
In order to ensure that it has a claim to the major lien fund, the subcontractor must register its lien within the 45 days after the issuance (and of course within 45 days of when the work was performed). If 45 days have passed since that issuance, but the major lien fund has not been released to the contractor yet, the subcontractor will still have a claim to the major lien fund. However, Chandos should encourage owners to 1) push contractors to issue Certificates and 2) release the major lien fund to the contractors as soon as possible since, under the Act, an owner is liable only to the amount of the major and minor lien funds. By releasing the funds, the owner protects itself from further liability. Even if there is more than enough money in the minor lien fund to satisfy the subcontractor’s lien, the subcontractor cannot access those funds.
A subcontractor who is unable to access the major lien fund in such a circumstance still has alternative recourse. First, the contractor to whom the major lien fund was released is required under the Act to hold that money in trust for the subcontractor. Second, the subcontractor may have a claim against the contractor for breach of contract. There are other common law remedies that may be available to the subcontractor against the contractor. The important thing, however, is that the subcontractor will need to demand payment from or, failing resolution, file a lawsuit against only the contractor. The path of least resistance is for the subcontractor to at least get paid what it can from the applicable lien fund.
Invitation for Discussion:
Our litigation lawyers are skilled in the area of construction law. If you would like to discuss this blog in greater detail, or any other business litigation matter, please do not hesitate to contact one of the lawyers in the Business Litigation group at Nerland Lindsey LLP.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.