Understand the Construction Lien Act

If you are considering doing a major renovation project or constructing your dream home, you need to pay close attention to the Construction Lien Act, which includes essential legal provisions that could apply to you.

Ontario’s Construction Lien Act sets out all regulations for the renovation industry, which can better protect the rights of both homeowners and renovation companies/individuals.

The building industry is fundamentally unique in its vulnerability to financial risks faced by those participating in the construction process. These risks are distinctive to the construction industry because most building works are carried out by contractors/traders that do not have a direct contract with the landowner.

To simplify, the flow of funds for construction projects can be described as a pyramid.

You, the homeowner, are at the top of the pyramid. Following the owner, it is the party (or parties) with whom the owner has a direct contract with. Then these contractors can further employ other subcontractors to complete specific tasks, and so on.

In this system, money flows down the pyramid; generally speaking, when work is finished, payment is made to the contractor by the owner and eventually to the different subtrades.

Due to the insecurity of money distributions between different levels of the pyramid, Ontario has come up with the Construction Lien to cover trades from the top of the pyramid to the bottom.

The basic principle is “when a person/company provides an owner, contractor or subcontractor with services or materials to develop a property, they have a connection to the owner’s interest in the premises that are improved for the price of such services or materials” (section 14(1), Construction Lien Act).

Basically, the Ontario Construction Lien Act gives builders, contractors, construction subcontractors, suppliers and labourers a method to collect money owed to them for labour and materials used to improve land in Ontario.

Ontario’s Construction Lien Acts cover a good portion of complex legal issues in the renovation industry.

In order to protect the rights of homeowners, owners are entitled to retain 10% of all fees 45 days after completion of the project. However, if the owner does not pay the amount indicated in the contract on time, the renovation business is required to report this issue and register a Claim for Lien within 45 days after the completion of the project. After the registration has been completed, the business must file a formal action to the Ontario Court of Justice within 90 days after the completion of the renovation project, as well as have the file registered against the homeowner’s property after obtaining a Certificate of Action from the Court. If this process is done after the 90-day period, the order will automatically be expired. It is also important to note that Ontario’s Small Claim Courts do not hear Construction Lien Act related lawsuits, regardless of the amount of the dispute.

Renovating a house is a costly and time-consuming process. Quality renovations would not only be pleasing to the eyes but also help to improve the overall quality of homeowners and make sure that the house would have a good resale value. However, in the event of an unnecessary renovation dispute, not only will cost homeowners a fortune but both parties will also be involved in a long and costly legal process. As a result, it is crucial for homeowners to be very careful when choosing and hiring a renovation company.