I am Mark Giavedoni, a commercial real estate and lending lawyer at Gowling WLG.
This video is part of our Real Estate Topics for Lenders Series.
In this video we will be discussing Lending for the purpose of a Construction Project.
Lending to a landowner who is undertaking a construction project can be a challenge by virtue of all the moving parts and various players involved.
Generally the lender will advance funds to the owner/borrower against evidence that the construction contract is proceeding and the borrower will pay its general contractor and consultants, who will then pay their subcontractors and sub consultants all the way down the chain.
In 2019, Ontario required the payment to a general contractor to be made within 28 days, and payments from the general to its subcontractors within 7 days of that payment being made. If there is a valid reason to not pay all or a portion of the invoice, notice must be given within 14 days of receiving the invoice.
A proper invoice is defined in the Construction Act to include specific details, like the name and contact information of the contractor, the nature of the work being invoiced, the purchase order and other items. The construction contract can include other items, such as evidence of insurance or a declaration that sub trades have been paid to date. It cannot require a certificate that the work being invoiced conforms to the project documents. This is different than before when most owners required this evidence before payment could be made. It also disrupts most lenders' typical conditions precedent to funding, resulting in a delay or even a dispute giving rise to liens or adjudication.
10% of all payments need to be held back by the payer and only released at substantial performance of the construction contract. There are limited exceptions to this.
The holdback is a trust for all workers and suppliers in the project who may not be getting paid property, so it cannot be distributed without proper clearance or security.
A contractor or supplier has a right to claim a lien for the value of work/materials supplied to a project (less the holdback). They have 60 days from the last day they worked at the site (or delivered materials to the site) to register a lien on title (or file a lien if the project is on municipal or government property). The lien can be perfected by starting a court action within 90 days of the end of the 60 day preservation period.
Parties to a contract may adjudicate their dispute, if it qualifies, for an expedited resolution and order from a formal adjudicator, usually within 40 -45 days of the dispute arising.
Is it ideal to address disputes early and avoid liens, as a construction lien will have priority over any registered mortgage of the construction lender.
Lenders should be familiar with how they fit in this matrix of construction projects so that funds can be moved predictably and keep the project viable. Good advice can come at the outset to ensure the commitment letter, loan agreement and security documents include requirements to ensure the lender will still be a part of the process but have access to rights and remedies that maintain a good and safe investment.
This presentation was a high level overview; however, if you find that you have more specific questions about any of the points discussed or their application to a specific fact situation, please reach out to any member of our lending team and I am also available through my email mark.giavedoni@gowlingwlg.com.