If you’re a property owner, contractor, or subcontractor in the construction industry, it has been one year since the rules for your operations in Ontario have changed. The implications of the Construction Lien Amendment Act, which came into effect in July 2018, were significant. These changes were made with an eye towards modernizing construction laws in Ontario. For a review of the new Act and its implications, check out our previous publication in this series – The Rules Have Changed: The New Construction Act (Part 1). In this second installment of our series on the new rules for construction in Ontario, we will be recapping some of the notable changes that have occurred, as we prepare for additional changes to come this October 2019. Specifically, we will discuss how the new Act has changed liens, holdback rules, trust accounting, and surety bonds.
First and foremost, the new Act extends the timeline to register and lien to 60 days, and the time to file and start a court action to 90 days. Previously, both processes had to be completed within 45 days.
What this has done is provide parties involved with additional time to negotiate before commencing costly and time intensive adjudication and court action. Furthermore, lien claims under $25,000 will now be referred directly to small claims court.
Lastly, condominium unit owners will now be allowed to remove liens related to improvements made on common areas (for example; corridors, lobbies, the garage, the roof) from their units.
The Act has been amended to expand the form in which holdbacks can be retained. Now, holdbacks are no longer limited to monetary funds but can also be retained in the form of a letter of credit, demand repayment bond, or other forms of prescribed security. The Act now allows for mandatory payment of holdbacks on the 61st day after substantial performance for a basic holdback, and payment over a scheduled, periodic basis for projects with different phases or stages. Moreover, under the Act, mandatory payment will be required once the timeline to file liens has passed. This change is to enable more streamlined cash flows such that businesses will get paid more promptly or be made aware in a timelier fashion when and why funds are not being released.
Further, non-payment will be permitted provided that the owner provides notice to the contractor in the prescribed form (note; a link to the prescribed forms is provided below) specifying the amount that they are refusing to pay. This process must be completed within 40 days of receiving a notice of substantial performance of the contract. Once completed, the matter will then be referred to the adjudication process. For more on the adjudication process, look out for our third installment in this series
Altogether, these changes will have a significant impact on contractors who hire subcontractors, as, should they be unhappy with work provided by their subcontractor, they will need to ensure that they abide by the stringent timelines mandated for filing a notice of non-payment and commencing the adjudication process. Failure to meet deadlines will result in mandatory payment of any and all holdbacks.
Under the new Act, contractors and subcontractors now need to follow a set of specific bookkeeping rules to protect subcontractors in the event of bankruptcy. The Act deems contractors and subcontractors to be trustees of monies received on a contract and requires particular accounting of trust fund activity – specifically relating to amounts received and paid out of the trust fund.
As of July 1, 2018, trust funds must be held in a trust account. A separate trust account is not required for each project; however, movement of funds must be traceable and attributable to specific projects. These rules are designed to ensure that revenues received from a specific project are used to pay expenses from that project.
As a result of these changes, the compliance and administration costs for many contractors and subcontractors will likely increase, as additional record keeping is now required to adhere to these new requirements.
Public sector owners such as the Crown, municipalities, and broader public-sector organizations are now required to have a surety bond on any public contract priced above a prescribed amount. Specifically, the Act requires a minimum 50% of the performance and 50% of the labour and material payment bond for all public-sector contracts priced at over $500,000. Any alternative financing and procurement arrangements will also be subject to a minimum coverage limit. For contracts with a contract price of more than $100M, the minimum coverage limit is $50M. For contacts with a price of $100M or less, the minimum coverage limit is 50% of the contract price. This change is consistent with the Ontario Government’s mandated goals throughout this amendment process; one of which includes the protection of subcontractors and workers in the event that the general contractor files for bankruptcy.
To support these changes, the Ontario Government has introduced a number of new regulations and a variety of prescribed forms. A list of prescribed forms has been provided by the Ontario Government and can be found available for download here.
In the coming weeks, we will bring you the third installment to this series which will take a dive into the upcoming changes which will take effect October 1, 2019.
If you have immediate questions about how these changes are affecting your business, email us at firstname.lastname@example.org and we will be happy to chat about what the new Construction Act means for you.
The information in this article is of a general nature and is in summary form. Contact one of our professionals to discuss these matters in the context of your situation before acting upon such information.