5 things commercial landlords should know about the new Construction Act

25 September 2018

On July 1, 2018, the first round of major amendments to the Construction Lien Act (now called the Construction Act) came into effect. With the second round of amendments scheduled for October 1, 2019, there promises to be a significant shift in the way that the Construction Act affects commercial landlords in Ontario.

Here are five important takeaways for commercial landlords.

1. Automatic 10% Lien Right against Landlords Paying Allowances, etc.

While the reference to "liens" has been removed from the title of the Construction Act, changes to the Act will actually extend landlords' lien exposure.

First, changes to the Construction Act remove the ability of landlords to avoid liens where payment for an improvement to a leasehold property is accounted for under the lease (or under any connected agreement to which the landlord is a party). Unlike the Construction Lien Act (the "Old Act"), the amended Construction Act (the "New Act") does not permit landlords to provide notice to contractors to deny liability for tenant improvements to their leased premises.

These changes mean that if the landlord funds an improvement through a tenant improvement allowance, any kind of credit or rent abatement or other tenant inducement, contractors performing the work will automatically have a lien right against the interests of both the tenant and the landlord. The landlord's interest in the land will be subject to a lien, to the extent of 10% of the amount of any payment accounted for under the lease (or under any connected agreement to which the landlord is a party). If the tenant does not pay the contractor, the contractor will be able to seek payment from the landlord to the extent of this lien. In practical terms, the landlord will be responsible to retain a 10% holdback from any amount that it pays for improvements to the leased premises. If it does not, the landlord will be liable for any deficiency in the holdback.

The New Act also clarifies that a landlord is fully liable for the lien amount (ie. the price of services or materials supplied) if it meets the criteria set out in the definition of "owner". More specifically, the landlord is deemed to be an "owner" under the New Act if (i) the landlord has an interest in the improved premises, (ii) the landlord requested the improvement and (iii) the improvement was made on the landlord's credit or behalf, or with the landlord's privity or consent, or for the landlord's direct benefit. If each criterion is met and the tenant does not pay the contractor, the contractor may seek full payment from the landlord (as "owner") using a construction lien, regardless of whether there is a direct contract between the contractor and landlord.

2. Extended Lien Rights

The New Act extends the period for contractors to register a lien on title from 45 to 60 days. If a contract is terminated, this period will begin to run as of the date specified in the required notice of termination.

The alternative triggers of substantial performance, completion or abandonment are carried over from the Old Act, but the threshold tiers for determining substantial performance have doubled to $1 million and the threshold for determining total completion has increased to the lesser of 1% of the contract price and $5,000.

The New Act also doubles the subsequent timeline to perfect a lien (to prevent expiry of the preserved lien) to 90 days. To perfect a lien the lien claimant must commence an action and register a certificate of action on title to the premises within 90 days next following the last day on which the lien could have been preserved.

Lien rights will be available in respect of capital repairs that extend the normal economic life of a structure (as opposed to "repairs to the land") under the New Act. By contrast, maintenance work performed to prevent normal deterioration or to maintain a normal, functional state of the land, building, structure or works on the land, is excluded from the definition of capital repairs and will not attract lien rights.

Finally, it may now cost significantly more for a landlord to have a lien removed from title. The amount that must be paid (or posted as security) before the court is required to vacate the registration of a claim for lien from title has increased to the lesser of 25% of the amount of the claim for lien or $250,000 (up from $50,000). As a result, if the claim for lien amount is greater than $200,000, it will cost the landlord more to have a lien removed from title.

3. Some New Protections against Lien Liability and Holdbacks

Under the New Act, the Court has an explicit power to discharge a lien on the basis that the claim for the lien is frivolous, vexatious or an abuse of process (in addition to any other "proper ground" that is carried over from the Old Act). A lien claimant may also be held liable if the amount of the lien was wilfully exaggerated (not just grossly exaggerated, as was the case under the Old Act).

The New Act permits holdbacks to be retained in the form of a demand-worded repayment bond or letter of credit in lieu of cash. It also permits payments of up to 90% of the contract price (the retained 10% being a required holdback) unless the payer has received written notice of a lien in the prescribed form[1] (not just any written notice that identifies the payer, premises and unpaid amount as was permitted under the Old Act). Further, although the New Act will require the release of the holdback at the end of the period for lien registration, the owner (which in some cases may include a landlord) may refuse to pay a contractor some or all of the amount the owner is required to pay if it publishes a notice in the prescribed form no more than 40 days after the applicable certificate or declaration of substantial performance was published.

4. Landlords Must Now Respond to Information Requests from Lien Claimants

Under the New Act, landlords may have to answer requests for information from lien claimants. Any person having a lien may require the landlord to provide certain information within 21 days of the lien claimant's written request, including the names of the parties to the lease, the amount of payment for all or part of the improvement accounted for under the lease, and prescribed information about state of accounts between the landlord and tenant.

5. Grandfathering of Existing Improvements and Leases

The New Act grandfathers existing projects and leases. The Old Act will continue to apply with respect to an improvement if, before July 1, 2018:

  • a contract for the improvement was entered into (regardless of when any subcontract under the contract was entered into);
  • a procurement process, if any, for the improvement was commenced (for example, by a request for qualifications, a request for proposals or a call for tenders) by the owner of the premises; or
  • the premises is subject to a leasehold interest and the lease was first entered into before that date.

A second round of substantive changes to the Construction Act is scheduled to come into force on October 1, 2019. New prompt payment and adjudication provisions will be mandatory in respect of all contracts (and subcontracts made under those contracts) signed on or after October 1, 2019, regardless of when the procurement process was started or when the lease was signed. The prompt payment provisions will require owners (which may include landlords) to pay contractor invoices promptly. If they do not, the adjudication provisions will entitle contractors to invoke a process to quickly resolve payment disputes.

These two rounds of amendments to the Construction Act create new potential liability, costs and procedural requirements for landlords when improvements are made to leased premises. We urge landlords to prepare now to make this period of transition as smooth as possible.

[1] If the payer has received written notice of a lien in the prescribed form and retained an additional amount sufficient to satisfy it, the New Act also permits payments of up to 90% of the contract price, less the amount retained.

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