What are liens in contracts?
A party that provides construction services to an owner, contractor or subcontractor can impose a “lien” on the owner’s interest, which is a debt based on the price of the services used to improve the property in question. Liens are important to construction contracts because they provide the service worker with a guarantee of compensation for their efforts. When a lien is registered, the property owner can be ordered to pay for services that added value to the property and have not yet been paid for.
The property owner, who will want to avoid being overcharged for the work, can move to have a lien discharged. This can succeed if: a) the lien is higher than reasonable considering the level of improvement to the property, b) it was not registered within the time allowed, or c) it was otherwise frivolous. When the rules of liens are followed, both parties are held accountable and receive what they are owed for the project at hand.
However, sometimes the same provider will be hired for multiple projects, which raises a difficult question: can a lien from one project be carried over to another, or does it always expire once its associated contract has been fulfilled? And if it can be carried over, what are the larger ramifications?
A recent decision in the Ontario Superior Court of Justice (the “Court”), Trillium Masonry Group Inc v Marydel Homes (Beaverton) Inc. et al. (“Trillium v Marydel”), highlights this issue by suggesting a constructor can, when registering a lien, include in it the unpaid amounts from an earlier contract they entered with the same owner.
The Trillium v Marydel Decision
The judge in this case dismissed a motion by Marydel Homes (the property owner) to discharge or reduce a lien placed on their developed lot. Two contracts were created to assign this work: Contract 1, which involved work completed on the first 43 lots on the property, restricted liens to a lot-by-lot basis; and Contract 2, which specifically dealt with Lot 121, and included a “price” which allowed for outstanding balances from prior work to be included in the lien.
Altogether, Trillium (the contractor) was not paid $193,191 for their work under Contract 1, which they then included in the lien they placed on Lot 121, under Contract 2. Marydel did not dispute the unpaid amount. Instead, they argued that the outstanding debt had expired when Contract 1 ended, and that any lien on Contract 2 could not include value from unrelated work.
However, the Court determined that Trillium’s lien was acceptable. Marydel signed Contract 2 despite it placing them at a disadvantage, which the judge noted is an “especially improvident” course of action.
Marydel also raised concerns about the implications of the Court’s decision for the construction lien regime. If courts legitimize a way to “revive” expired liens by transferring them, could future contractors not use this precedent to claim artificially inflated debt on their work? It might disrupt the balance of the owner-contractor relationship by effectively removing the time limit for contractors to make a claim.
The Court dismissed this concern. The judge said that the risks of future “forwarding” incidents are too unlikely, noting that, in this case, both parties agreed to the terms. Future updates on this case, and the wider issue, will likely revolve around the credibility of those who set up the contract.
How will this affect construction deals going forward?
Property owners, and anyone who enters into contracts for construction, should always be careful to read their contracts in detail, so that they can avoid ending up in difficult situations like this one.
What the decision suggests, though, is that while a lien’s lifetime ordinarily ends with the contract, it can persist throughout a longer working relationship, according to contract law. For now, if you are entering any construction-related contract, it may be worth taking a closer look at what the provisions allow regarding debt.
If you are in a construction dispute, or other real estate litigation, and you require assistance with these issues, please reach out for a consultation with one of our experienced litigation lawyers.
Tags: Contract Disputes, Construction Disputes, Residential Real Estate Disputes