CLA & Holdback Obligationsw
A holdback is a requirement that all owners, contractors and subcontractors withhold 10% of the cost of the services or materials supplied on a project until the lien expiry period has lapsed. This helps to ensure that there is enough money to satisfy any lien claims that may arise.
A few changes with respect to holdback obligations and payment have taken effect since July 1, 2018. Again, it is important to remember that the old rules and timelines with respect to holdback will continue to apply to a project if any one of the following markers occurred BEFORE July 1, 2018:
- the contract for the improvement (i.e. the project) was entered into between the owner and contractor before July 1, 2018; and
- the procurement process, if any, for the improvement was commenced by the owner of the premises before July 1, 2018
Mandatory Release of Holdback
Under the rules of the old Construction Lien Act, payment of the 10% holdback is permissive once liens that may be claimed against the holdback have expired or have been satisfied, discharged or otherwise provided for under the old Act.
The new Construction Act has been amended to require the payment of the holdback once all liens that may be claimed against the holdback have expired or been satisfied, discharged or otherwise provided for under the Act. It is important to note that even after the lien period expires and it is confirmed that no liens have been preserved, the use of holdback funds to address deficiencies will be prohibited, subject to notice requirements.
Annual and Phased Release of Holdback
The old Construction Lien Act does not provide for the holdback to be released on an annual or phased basis. The new Construction Act, provides that a payer can make payment of the basic holdback on an annual or phased basis if certain conditions are met, including the following:
- the contract provides for a completion schedule that is longer than 1 year (if paid on annual basis);
- the contract provides for payment of accrued holdback on an annual or on a phased basis (and identifies each phase);
- the contract price at the time the contract is entered into is $10 million or higher; and
- If, as of the applicable payment date, there are no preserved or perfected liens in respect of the contract, or all liens have been satisfied, discharged or otherwise provided for under the Act.
Non-Payment of Holdback
The old Construction Lien Act does not provide for a notice of non-payment of holdback. Under the new Construction Act, an owner may refuse to pay some or all of the holdback required to pay to a contractor if the owner does the following:
- Publishes a Notice of Non-Payment of Holdback (Form 6) specifying the amount of holdback owner refuses to pay, and the notice is published no later than 40 days after the publication of a certificate of substantial performance (or, if there is no CSP, the date on which the contract is completed, abandoned or terminated); and
- Notifies the contractor of the publication of the notice in writing (electronic or paper format) within 3 days of publication.
Come October 1, 2019, a contractor may also withhold payment of holdback to subcontractors, but only if:
- the owner has refused to pay the holdback,
- the contractor refers the matter to adjudication, and
- the contractor notifies every sub of the amount not being paid and of the adjudication referral.
Similar rules will also apply to subcontractors who may withhold payment of holdback to sub-subcontractors and suppliers.
The above information is provided by way of guidance as to the application of the amended legislation. It is not exhaustive in its scope and is not legal advice. It is strongly recommended that you consult with a specialized construction lawyer to determine how the amendments will affect your business and what you need to do to prepare.
If you have any questions relating to this article or wish to discuss your particular concerns, you may reach the author email@example.com or (905) 276-0420
This article is provided for general information purposes and should not be considered a legal opinion. Clients are advised to obtain legal advice on their specific situations.