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Don't Forget to Holdback Money From the Contractor

By
Commercial Real Estate Agent with RE/MAX West Realty Inc., Brokerage (Toronto)

Don't Forget to Holdback Money from the Contractor



By Brian Madigan LL.B. 

You are entitled to holdback 10% of the value of the work after it has been completed for a period of 45 days. That's the law! Although, many small contractors will say they never heard of it. So, where have they been for the last 50 years?

If you are planning on any renovations or you are building a new home, then you need to know about the Construction Lien Act.

First, there is a lien which can be registered by anyone who provides work or services or supplies materials which are used for your property. The lien has to be registered within 45 days of the last work being performed or the last supply of goods. Then, the lien has to be "perfected" within 90 days of that same date by instituting an action and registering that on title as well. Many liens are registered but never perfected.

Second, there is a statutory holdback under the Act. Every person responsible for payment is required to holdback 10% of the amount for 45 days to ensure that there are no liens. If you pay this amount, and a lien is registered, then you may have to pay this again. So, be careful!

Third, there are other provisions for liens under the Act, in excess of the 10%. If a sub-contractor gives written notice of a claim for a lien, then that full amount (not just 10%) must be heldback. This is the most risky situation for homeowners.

Many contractors will tell you that you have no right to hold back any money because it's not in the contract. But, don't worry, the Act has you covered. Every contract is deemed to be amended so as to be in conformity with the Construction Lien Act. So, even if it's not in there, it's still part of the contract, and not only do you have the right, but you also have the obligation to holdback sufficient funds.

Let's assume that you are having a hot tub installed. Your price was $10,000.00, so you are obligated to holdback $ 1,000.00 for 45 days, but you receive written notice of a lien from the manufacturer for $ 6,000.00 and one from the installer for $ 1,500.00. So, how much do you holdback? The answer is $ 8,500.00. The full amount of the written notices together with the statutory holdback. But, if you're actually in this situation: don't pay anything! You may still hear from the electrician and the gas installer, both of whom may still have claims. Better safe than sorry, make sure everyone has been paid and get proper releases and authorizations signed. This is a good time to involve your lawyer.

The purpose of the Construction Lien Act is to protect all the suppliers and workmen down the line, so that they all will be paid. It is an Act intended to benefit sub-contractors from the general contractor. It is also designed to protect the general contractor from you if you don't pay. As a lien, it has priority over both unregistered and unsecured interests and it follows mortgages (provided the funds have been advanced) and taxes which have a higher priority.

So, where does title insurance fit in? If you have a valid title insurance policy, then you will be covered for any claims of the manufacturer or installers. You did not have a direct contract with them. However, you may not be covered for the general contractor's claim. You have a contract here, and you may not have lived up to your side of the bargain. If you were supposed to pay in installments, and you failed to do so, then this whole lien mess, may be your fault. If you're in breach of your obligations under the contract with the supplier, then title insurance won't save you. However, maybe they brought the wrong unit and you were quite within your rights to refuse payment. Here, title insurance will be helpful.

There are a couple of matters that are important considerations under the Act. What is the last day work was performed and material was supplied to the property? Who certified completion? What wage rates are paid to the workmen? Have all payments been paid to date? What about WCB payments? Is there a performance bond? If these issues arise, then you will have to see a lawyer. The Act can be tricky and somewhat complicated in parts.

It is also important to note that you can't use any of the holdback moneys for defects or repairs. Those funds are constituted as "trust funds" and may only be used for the purposes of the trust. If you borrowed money from a bank to finance the hot tub, then those funds may be subject to the trust provisions under the Act. It would be better just to arrange a general loan from the bank. It's far less risky! It's bad enough not to get what you paid for, but it's even worse to have to pay twice.

Ultimately, if a homeowner refuses to pay for proper work, services or materials supplied, the Court has authority to order the sale of the property. Before this occurs, the mortgagee will likely have intervened. And, there's an interesting provision contained in the mortgage, they have the right to pay the claim and add it to your mortgage with interest.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com

 

Comments (9)

Sylvie Conde
Sutton Group-Associates Realty Inc., Brokerage - Toronto, ON
Broker, Toronto Real Estate

This is a great law, Brian.  Unfortunately, contractors will lien your house even when they have been paid, and when they have NOT completed the work.    There are great laws in place to protect contractors, but none to protect homeowners.  At least, none that will force a contractor to pay.  How about we lien their personal home, or the court forces them to take out a line of credit to pay someone else to finish the job at our house, which they didn't complete, but we paid for?
(Or maybe they say they completed it, but it's all wrong and now you have to pay someone else to do it again....)  

(Sigh)

 

 

Sep 30, 2009 01:30 AM
Jeremy K. Frost
Keller Williams Realty - Dripping Springs, TX
Associate Broker, ABR,CNE,CRS,ePro,PSA,RENE,SRS

I love to read a great post like this one. keep them coming!

Sep 30, 2009 01:51 AM
Brian Madigan
RE/MAX West Realty Inc., Brokerage (Toronto) - Toronto, ON
LL.B., Broker

Sylvie,

Obviously, you HAVE some experience in this.

However, with a diificult contractor:

1) pay off the lien on your own house by negotiating 70 cents on the dollar with the sub-trades, and

2) take an assignment of their lien entitlements on the contractors other jobs.

Now, you have control of the legal proceedings on another one of the contractor's jobs. You get your money before he gets his.

And, it's fun to see them squirm a bit.

Jeremy,

Thanks for stopping by.

The laws realted to construction liens are statutory, but are reasonably similar in approach from one jurisdiction to the next.

Brian

Sep 30, 2009 12:01 PM
Terry Chenier
Homelife Glenayre Realty - Mission, BC

Brian,

Most people don't realize this law is in effect for a long time; they get intimidated.

Sep 30, 2009 05:15 PM
Bob & Leilani Souza
Souza Realty 916.408.5500 - Roseville, CA
Greater Sacramento Area Homes, Land & Investments

Brian - Sylvie took the words right out from my keyboard as I was about to type them! The only choice homeowners seem to be left with if they don't succumb to a contractor's extortion (paying the lien off even if work has not been done) is having an awesome attorney who will take the necessary steps to protect them and prosecute the offender(s), depending upon the extent and nature of the damages.

Leilani

Sep 30, 2009 08:08 PM
FN LN
Toronto, ON

Brian - Let's say you are ready to pay the 10% holdback on day 46.  How would the average person know that a lien was registered on day 45 if he or she has not yet received any notice of a lien filiing?

Does a non-perfected lien simply "disappear" automatically off the list of registered documents after the 90 days has expired?

Sep 30, 2009 10:40 PM
Brian Madigan
RE/MAX West Realty Inc., Brokerage (Toronto) - Toronto, ON
LL.B., Broker

Marc,

That's a good question, and as you know, I often turn your "good questions" into articles. 

But, for the meantime, you have to search the title to the property. 

There is a procedure to have it removed from title.

It gets somewhat complex because a lien "shelters" other liens.

So, if A registers and perfects, B is sheltered and doesn't have to register individually. So, it becomes risky to resolve A's claim without dealing with B.

When I get a chance I think this would make a good article too.

Brian

Oct 01, 2009 12:02 AM
Anonymous
Greg Beitz

I just had a pool installed. Where they poured my concrete there is a low spot that about 1 inch of water pools on the deck and is about 3 feet in diameter. Coping around the sides have been scraped down to metal to remove concrete. The list goes on. Am I able told hold back last payment until this work is completed and how long after the work is done am I able to hold last payment?

 

Thanks.

Greg.

Sep 12, 2011 07:03 AM
#8
Brian Madigan
RE/MAX West Realty Inc., Brokerage (Toronto) - Toronto, ON
LL.B., Broker

Greg,

You are entitled to holdback 10% of all of the amounts paid to date, including this present payment.

So, if the cost is 30K and there is 2K left, even though you have not heldback anything, you can withold $2,800 being 10% of $28,000 at this point.

Naturally, I am assuming that you live in Ontario.

Brian

Sep 12, 2011 12:49 PM