No Lien Against the Holdback if Nothing Heldback

Generally speaking, an owner, and anyone who is primarily liable on a contract or subcontract, must retain a holdback of 10% under the Builders Lien Act. In 2002, the BC Supreme Court surprised many legal observers when it held that a someone who was owed money on a project could not only claim a lien against the property, but also against the builders lien holdback (the "Shimco case"). However, it is not uncommon for parties to ignore this requirement to maintain a holdback. The BC Court of Appeal recently considered what effect this had on a subtrade's alleged lien against the holdback.

FACTS
A subtrade contracted with the general contractor to provide plumbing and heating work as part of the renovations of a single family home for approximately $80,000. The subtrade completed the work but was only paid $35,000. The subtrade liened the property. Shortly thereafter, the general contractor abandoned the project.

The subtrade sued the contractor and the owner. However, initially the subtrade did not refer to any lien in the pleadings or register a certificate of pending litigation against the property, which is required to perfect a lien. As such, the lien was extinguished and removed from title. The subtrade later amended his pleadings to claim a lien against the holdback that should have been retained.

ISSUES
Did the subtrade have a lien against the non-existent holdback that the owner was obligated to retain?

DECISION
Generally speaking, there are two purposes of the lien holdback:

  1. It protects an owner by limiting their potential liability to the maximum amount of the holdback; and

  2. It provides a pot of money to pay legitimate lien claimants.

The Shimco case established that a lien against a holdback is independent of the lien against the land and that a holdback lien is not automatically extinguished when a lien against the land is extinguished. The holdback period expires 55 days after completion, abandonment or termination of the project. Once that period has expired, the holdback may be paid out. However, if a claim of lien is filed against the land before the holdback is paid out, or legal proceedings are commenced to enforce a lien against the holdback, the holdback may not be paid out until these claims are resolved.

After the Shimco case, there was uncertainty as to what would happen to the owner if no holdback was maintained, but a lien against the holdback was alleged. It was thought that potentially the lien would effectively require the owner to pay twice.

In the present case, however, the Court of Appeal held that this was not necessarily the case. Critical to the court's decision was that since (a) the Owner did not retain a holdback from each of the progress payments (or alternatively paid the holdback prematurely by wrongfully failing to holdback 10% from each of the payments), and (b) the subtrade did not commence legal proceedings against the holdback before the land lien was extinguished, there was no holdback in existence to which the lien holdback could apply. Even if the subtrade had commenced legal proceedings to claim a holdback lien before the land lien expired, the court found that there was nothing against which the holdback lien could be claimed. While the owner breached the Builders Lien Act by failing to retain a holdback which was the primary cause of the loss of the appellant's holdback lien, the court held that this was the result of the wording of the Builders Lien Act and up to the provincial Legislature to remedy.

While the owner avoided paying twice in this case, it does not mean, however, that owners should not retain the holdback. Had the subtrade properly perfected its land lien in the proper time and manner, it would have likely recovered payment from the owner. This is because the land lien would rank in priority to any interest the owner had in the property and the subtrade could force the sale of the property in foreclosure to recover payment if there was any equity in the property. This is the critical reason why owners should retain the holdback as the Builders Lien Act provides that this is the maximum amount that the owner will have to pay to discharge a lien if it has been properly retained. This will protect the owner from paying twice for work.

LESSONS LEARNED

  1. For owners - Properly retain the holdback and do not release it prematurely in order to minimize your potential liability.

  2. For contractors - Make sure you file your land lien on time or commence legal proceedings against the holdback before the holdback is released in order to protect your lien rights against the holdback. Even if there is no holdback, make sure you perfect your lien in order to better ensure that you will be paid.

 

This article was written by Ian Moes, a lawyer who practices construction law with the law firm of Kuhn LLP. It is only intended as a guide and it is important to get legal advice for specific situations. If you have questions or comments about this case or other construction law matters, please contact him at 604-682-8868.