Home->Spring 2009

When in Doubt, Lien

By: Don Procter

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The recession is here, but some industry observers say many regions in Canada won’t experience a significant slowdown in construction activity if promises are kept by the federal and provincial governments to allocate big bucks to building and infrastructure improvement programs. Still, that doesn’t mean contractors should treat business as usual.

“While the jobs may still be out there, that doesn’t mean that liquidity is out there as well,” says Ken Belley, senior credit manager, PolR Enterprises Inc.

Never has the practice of “due diligence” been so important, he says, pointing out that every subcontractor should find out as much about the project and its players as possible before signing the contract. PolR supplies insulation products to the industry throughout Central Canada and the eastern provinces and it also helps clients file liens and deal with credit issues.

During these rocky times, Belley advises his clients to stick to contractors they know are reliable and pay their subs on time. When working for a new contractor, get a credit report on the company, available through a credit agency. It provides a company’s track record of payment and any liens filed against it.

He says over the past six months more clients have come to him seeking assistance with interpretation of credit reports and other credit-related concerns. Late payment is a common concern, likely stemming from the tight-cash times.

Filing a lien in Ontario must be done within 45 days of substantial completion of the project or 45 days after the applicant’s last work was performed. If the subcontractor misses the cut-off date, one option is to file a breach of trust, provided that the sub can prove that the main contractor has been paid for the project. To do this, the sub must send the contractor a letter referring to section 39 of the lien act, which states the contractor must divulge all the monies it has been paid for the project. “It’s often overlooked, but a lot of people would argue that it is even more powerful than a construction lien,” says Belley. The breach of trust provision is an also an option for subs in all other provinces but Quebec.

An oft-overlooked but effective means of securing monies owed is small claims court. It’s particularly effective in provinces like Ontario where claims are up to a maximum $10,000, he notes, adding a self-explanatory step-by-step guide small claims guide is available online. In B.C. the maximum is $25,000, but in other provinces such as Quebec and parts of the Maritimes maximum claims are below $8,000, making it a less attractive option.

Ted Betts, who practices construction law and is a partner at Blakes in Toronto, says knowing the date of substantial completion is critical. That date is established in one of two ways: a notice typically given on major projects or through a mechanism in the lien act determining the date.

The holdback clause requires the owner to hold back 10 percent from every payment they make. For instance, if the general contractor invoices the owner for $100,000, the owner must hold back $10,000, he says. If the contractor goes bankrupt, the subcontractor can go to the owner to get that $10,000. “If the owner didn’t hold that money back, then the sub can sue the owner.”

Most provincial lien acts are similar, with lien application periods ranging from 30 days in Quebec to 40 or 45 days in most other provinces. However, Quebec’s lien act has one major caveat: it contains a clause that permits a main or general contractor to waive the right for its subcontractors to register liens. It is typically done on large commercial projects, says Annick Demers, an associate at Blakes’ Montreal office. “I won’t say it is impossible for a sub to negotiate [a waiver] with the main contractor, but I’d say it would be difficult.”

Another distinction in Quebec is that while the subcontractor must register and serve a notice of lien rights within 30 days of completion of the work, the sub has a full six months after work completion, to either publish an action or register a notice of exercise of hypothecary rights, she says. Typically, in other provinces the sub only has 45 days.

There are two reasons to file a lien: for security in cases where a contractor or supplier is concerned he might not get paid; and, when it will expedite payment, points out Bob Kuhn, managing partner of Kuhn & Co, in B.C. His advice to clients: “When in doubt, lien. Don’t wait until the last minute. You can always take it off, but you can’t always put it on.”

Often subtrades are “too kind” and wait too long, missing their chance to file during the 45-day lien period, says Kuhn, pointing out that the lien period doesn’t always commence at the substantial completion of the head contractor. In some cases it begins when a certificate of completion is issued by a subcontractor above them in the contractual chain. To be aware of this, the supplier or contractor can put the payment certifier (typically, but not always, the architect on major projects) on notice that they require notification of any certificate of completion.

Kuhn, whose firm has offices in Abbotsford and Vancouver, says two avenues he advises his clients to consider when the lien period has expired is the breach of trust or the 10 percent holdback clause.

In Alberta, more HVAC and plumbing contractors are taking on insulation work probably to make up for tougher times, says Terry Schlamp, credit manager, Crossroads C&I Distributors, a one-stop shop of commercial and industrial thermal and mechanical insulation products in Western Canada.

Schlamp advises contractors to be aware of building sectors that are slow to pay. In Alberta, these days a number of junior oil and gas companies are “notorious for not paying for 120 to 150 days.”

Due diligence is essential from day one because if a subcontractor has to file a lien, it can be costly – particularly for companies working on slim profit margins – if a lawyer is retained. But Schlamp says there are companies like Lienpro. com that will complete lien forms in a day at about a third of the $1,000 or so fee typically charged by many lawyers.

He says credit departments like his generally assess credit applicants on their character, capacity, capital, and conditions (the four Cs). Character is the most important so applicants should provide solid work references. Surprisingly, some applicants he’s sat face-to-face with have offered non-work references such as car rental agencies, and in one case a work clothes supplier.

Schlamp advises clients to secure a line of credit from a bank prior to applying for a loan from companies like Crossroads. Crossroads offers a two percent discount so that the contractor can use his bank line of credit and know the bank charges will be covered by the discount.

It’s a credit department’s job to make a sale work even if it means “stretching company policy a bit,” he points out, adding that if customers don’t succeed then neither does the company. “But, and this is a big but, we as credit managers have to make the decision to use all means necessary to collect the account if it goes south on us.” SMJ