What is a Construction Lien?

What is a Lien? Essentially, a Lien is a type of Instrument – no, not a power-tool used on site, but rather a legal document that secures the Claimant’s legal interest with respect to the property to which said Claimant provided improvements.

The concept of a “construction lien” is a relatively new legal invention, and as such did not appear in the common law. Historically, when a mason would build a cabin or a carriage-maker repaired a carriage, he could refuse to release it until he had been paid. Whether the goods were in his possession or he had more militant ways of securing his payment, the lien was part of his “implied contract with the owned and secured by the transfer of possession from craftsman to owner.”[1]

Accordingly, a lien is a type of a security interest. According to Black’s Law Dictionary, a lien is a “qualified right of property which a creditor has in or over specific property of his debtor, as security for the debt or charge or performance of some act.”[2] The creditor retains and holds this right against something which belongs to the debtor, until certain demands of the latter have been satisfied and discharged.[3]  As such, in the case of construction law, a lien on the owner’s property or other funds creates a guarantee that – if successfully proven – the Claimant is guaranteed to receive the money for the services or materials that he or she supplies.

These “liens” are a major part of the construction industry because they provide a safeguard for contractors, sub-contractors, and materials suppliers at the lower tier of the Construction Pyramid. As mentioned in earlier weeks, the owner in the top-tier of the Pyramid is not often contractually related to the bottom-tier parties. Further, many players in the construction industry supply their goods and services on a credit-basis. This problem is often seen with large projects containing many tiers in the Pyramid.

Consider the following scenario: Party A, the owner, has a contract with Party B, the general contractor for $100,000,000.00. Aside from the owner’s mandatory ten per-cent (10%) holdback obligations, trust, and/or labour and material payment bonds, Parties C and further (the sub-contractors and materials suppliers) will have to hope and depend on the reliability of the general contractor to get paid and, subsequently, release funding down the Pyramid. As such, prior to release of payment from the owner, Parties C and further must provide lines of credit to their corresponding higher-tier party on the Pyramid during their provision of labour and services. In reality, this means that often many lower-tier parties will not get paid until the owner begins releasing funds. It is important to note that the new amendments in the Construction Act will provide for a “prompt-payment” regime commencing in October 2019, and as such, the aforementioned and subsequently discussed process may change.[4]

Nonetheless, the lien protects the cautious sub-contractor in the event that upper-tier parties do not release funds. However, placing a lien on an owner’s property has significant industry-political implications. In an industry as closely-nit as the Construction Industry, there are certain implications in placing liens too often/too quickly. At a certain point, it becomes a business decision of whether a general contractor wants to forgo their lien rights so as not to damage their reputation or lose out on future customers. On the other hand, developing a reputation that a party is willing to walk away could have bargaining implications for future projects and so, at times, a sub-contractor should stand its ground even where it might not make financial sense at the present moment.

Regardless of whether the sub-contractor ultimately decides to exercise its lien rights, the said party must first ensure that its work gives rise to lien rights, and subsequently ensure that they comply with the strict timelines for exercising such rights, which we will discuss next week.

Until then!

[1] Ed J Brogden, The Contractor’s Guide to Construction Law (Canada: McGraw-Hill Ryerson Limited, 1984) at 87.

[2] Black’s Law Dictionary, online (September 2018), sub verbo “lien”.

[3] Dempsey v Carson (1861), 11 UCCP 462, 1861 CarswellOnt 182 (Ct Com Pl) at para 1.

[4] Construction Act, R.S.O. 1990, c. C.30, s. 6.1 – s.6.9.

The foregoing is for informational purposes only, and should in no way be relied upon as legal advice. For legal advice tailored to your circumstances and business, please contact any of Sutherland Law's lawyers by email or telephone.