To lien or not to lien?

So you’ve completed work on or supplied materials to a construction project and you haven’t been paid – how do you collect your outstanding invoice? Do you lien the project or do you skip the lien and commence a lawsuit? Construction professionals grapple with this question almost every time a property owner or general contractor fails to pay an invoice. There are benefits and drawbacks for both options and the right choice for your matter is typically fact-dependent.

What is a construction lien and why use it?

Let’s start with the basics. A construction
lien is an encumbrance registered against real property when some form of work
or improvement has been undertaken at that property and the individual or
company that performed the work or supplied the materials has not been paid. The
Construction Act governs the use of
construction liens as a method of debt collection, among other things.  Under the Act,
a general contractor, subcontractor or supplier that has not been paid for work
performed or materials supplied for a construction project has 60 days from the
last day work was performed or materials were supplied at the jobsite to
register a construction lien against the property. If the party that has not
been paid is a supplier or subcontractor, the general contractor or other
instructing party is also named in the lien. From that date of the registration
of the construction lien, the unpaid party has 90 days to resolve the issue of
nonpayment or to “perfect” the construction lien by commencing litigation.

Like any other encumbrance registered against
real property, such as a mortgage or municipal property tax lien, the property
generally cannot be sold without paying out the construction lien. Other ways
construction liens can affect a project depend on the nature of the project
itself. For example, the registration of a construction lien can create
financial difficulties for a project in terms of the owner being unable to
obtain a construction mortgage or other additional financing. In the case of a condominium,
if a lien is registered against the common elements of a condominium
development, individual condominium owners are not able to sell their units
without dealing with the lien.

In a nutshell, a construction lien can have a significant adverse impact on a construction project. In some cases, the registration of a construction lien can halt a project completely. Construction liens are primarily used as a relatively quick and inexpensive pressure tactic to compel timely payment of an outstanding invoice and can be a very effective method of accomplishing this, especially when there is a power imbalance such as between a small subcontractor and a large, national general contractor. As effective as liens may be, however, they are not always the most appropriate choice for construction dispute resolution.

How can I determine whether a lien is right for my situation?

Construction liens are a great tool for
resolving construction payment disputes; however, they are not always the most effective
way to do so. You should consider your options carefully before you select your
dispute resolution mechanism. One of the most important considerations,
especially for small- to medium-sized businesses, is the cost associated with
collecting payment. The cost of the dispute resolution mechanism you select
should be proportionate to the debt you hope to collect. Construction liens are
a creature of the Superior Court of Justice, which means that despite having
some unique procedural rules, they generally follow the Rules of Civil Procedure and can include steps in the litigation
such as participation in the discovery process and motions. The initial
registration process of a construction lien is inexpensive; however, lien
litigation can be very costly and legal fees can accumulate quickly with the
risk of surpassing the amount owed. In civil litigation in Ontario, successful
parties are usually able to recover a portion of their legal fees, but the
successful party will still be out of pocket for at least some of its fees.
There is no minimum value prescribed under the Act in order to be able to register a construction lien; however,
if the outstanding amount is relatively small, the costs associated with construction
lien litigation may far outweigh the benefit. You could end up paying more in
legal fees than the value of the outstanding invoice.

The Act does
permit lien litigation to be transferred to Small Claims Court when the lien
value is within the prescribed limit of Small Claims Court ($35,000.00 or less);
however, such a transfer requires a motion after pleadings have been exchanged.
Transferring a matter to Small Claims Court may provide some cost savings in
the long run, but depending on the quantum of the outstanding payment, it still
may not be enough to justify registering the lien in the first place. If the
amount you are owed is within the Small Claims Court limit, you may be better
off foregoing a lien and commencing an action.

Other important things to consider is the
ability of the property owner/general contractor to pay the outstanding invoice
if you succeed with your litigation and the evidence available to support your
claim. If you have a concern that a property owner for whom you have completed
work or supplied materials lacks the funds to pay your invoice, may liquidate
assets or seek bankruptcy protection, a lien may be appropriate, even if the
quantum is small, to provide a greater chance of recovery of the money you are
owed. In terms of evidence, it is important to remember that there is no
discovery process in Small Claims Court. This means that there is no advance
ability to cross-examine potential witnesses prior to a trial on the documents the
parties exchange in support of their respective positions. If you believe that
this is a necessary step to allow you to access all of the information you
require to prove your claim, this may be another situation where a lien may be
the best recourse even if the amount owed is small.

A construction lawyer is your best resource to
discuss these options with you and to help you determine your best course of
action to collect your outstanding fees. If you require assistance with a
construction matter, our commercial litigation practice group would be pleased
to help you with your legal needs.