By: Jayson Schwarz LLM and Konstantine Chatzidimos
If you construct or renovate a property you should know about construction liens and how they can affect real estate. A lien is, simply, a claim against property. A construction lien is a special kind of claim created by a statute called the Construction Lien Act (the “Act”). These liens are used by people who do construction work or supply materials and/or services for the construction, repair or alteration of land or buildings.
Lien rights do not replace, but add to any other rights suppliers or servicers may have for recovering their money at law. Among those who would ordinarily use construction liens are general contractors, trades people, surveyors, architects, designers and material suppliers. Construction liens encumber title to the property; effectively preventing the owner from mortgaging or selling it.
The right to a lien arises as soon as someone provides services, work or materials to a construction site. The Act provides that this lien expires if it is not “preserved”, or registered, within forty-five (45) days after the last substantial supply of services or materials. Oftentimes, the registration of the lien itself is sufficient to get the claim paid, unless, of course there is a fundamental dispute about the sum owed. Even where the amount is in dispute, the party against whom the claim is made may pay the amount into court by cash or bond along with estimated court costs and the lien will be discharged with the parties battling it out later in Court.
If you the miss the period for registering your lien you can still sue in ordinary Court.
Registering a lien gives the lien claimant priority on title against any future mortgagee or owners of the property. This effectively prevents the property owner from mortgaging or selling the property without dealing with the lien claimant. Lenders will not provide construction money or financing on a property that has outstanding construction liens unless arrangements have been made for the settlement or discharge of the lien. Further, a purchasers will not be obligated to close a deal unless lien claims have been dealt with and removed from title.
In the instance where the claim is filed and the lien remains unpaid, the claimant has an additional forty-five (45) days (meaning a total of 90 days after substantial completion) to register a “Certificate of Action” against the lands and premises. This means a law suit has been commenced. If this additional step is not taken, the claim will normally expire. Often, the expense of multiple court actions by workers on the same project can be avoided by a process called “sheltering” in which claimants proceed under the umbrella of one claimant and sometimes share the costs.
Under the Act, anyone paying another party to work on a construction project, or to provide materials or services, must hold back ten (10) percent of the amount owing until the time for filing all liens relating to the holdback has expired. Normally, all funds are released once the forty-five (45) day period for all parties has passed. Obviously, the termination of the forty-five (45) day periods will be different for all the parties, since their different stages of work and supply will have taken place at different times. Any individual who does not hold back the amount that they were supposed to, will still be liable for that amount, and possibly more, if others further down the construction chain do not pay the amounts that they were supposed to.
In the case of construction mortgages, the bank or lending institution will hold back ten (10) per cent of all money paid out until respective lien periods have expired.
It is a good idea if you are considering registering a lien, to consult with your lawyer as soon as possible. Your lawyer will tell you what information you will need to register in a timely fashion. It takes time to prepare properly and register, don’t be late!!!!. In any registration process there can be glitches and things that need to be changed at the last minute. It is generally a good idea to plan to register by day 40 of the eligibility period in order to allow for any last minute problems.
The lien can be removed from title after either; its expiry for failure to perfect, a settlement in some fashion, payment into Court by way of cash or bond, or a final judgment. There are costs and penalties for those who file false or inappropriate liens.
The Lien legislation is very complicated. The above is simply an outline and not intended in any way to be a comprehensive analysis of construction lien law or actions that should be taken in any particular circumstance. If you wish to discuss construction liens or your particular construction lien problem we advise you consult a solicitor experienced in real estate law.