Deconstructing the Construction Act
Narrator: You’re listening to season two of WeirTalking Leasing, a podcast series from WeirFoulds LLP’s commercial leasing lawyers in Ontario, Canada. In these first few episodes of the season, our speakers cover topics including co-tenancies, distribution leases and changes to construction legislation that impact leases and construction projects. Now on to the episode.
Caitlin Steven: Hi, I’m Caitlin Steven and I’m here with Krista Chaytor and Faren Bogach. There’ve been some substantial changes to the Construction Act recently. Changes that affect leases and construction projects. It’s important for landlords and tenants to understand what the changes are and how the changes will impact them. We’re going to cover: changes that impact tenant improvements and leasehold improvement allowances, common lien issues, the introduction of prompt payment and a new process called adjudication. So, Krista, due to these new changes to the Construction Act, do you expect to see corresponding changes to clauses dealing with tenant improvements and leasehold improvement allowances?
Krista Chaytor: Yeah, I do. There’s been a pretty big change to what a contractor can lien in the context of leases. To understand that change the first thing that you really need to understand is the difference between a leasehold interest in land and a freehold interest in land. So the leasehold interest is really the set of rights that comes with the lease. It’s the right to temporarily occupy and have exclusive possession of property during the term of the lease, it’s basically the interest that the tenant has. The freehold interest, on the other hand, is the ownership of land, that’s the interest that the landlord has. So, it’s always been the case and it remains the case that a contractor who is doing work for a tenant can lien the tenant’s leasehold interest. That’s basically liening the lease and sometimes that’s not a very valuable right. What’s changed is the extent to which the contractor can now lien the landlord’s interest, that’s that freehold interest.
Krista Chaytor: So before the changes, it was the case that in order to have a right to lien the landlord’s interest, the contractor would first send a notice to the landlord before the start of construction telling the landlord that it intended to look to the freehold interest. Then, the landlord could, if it got that notice, send a notice right back right away to the contractor saying, “no, we don’t agree and you can’t lien our interest.” So the net effect of those notices back and forth was that any contractor wouldn’t have any right to lien the freehold interest or the landlord’s interest unless it met a particularly disorganized landlord who didn’t send the notice back after it received a notice. What the Construction Act now says, and what was changed is, if the landlord is giving the tenant an allowance for making leasehold improvements, then the landlord’s interest in the property, the freehold interest can be liened without any notice for 10 percent of the amount of such payment.
Krista Chaytor: So the landlord needs to retain 10 percent of any improvement allowance to protect itself from liability for potential liens. So, what if the leasehold improvement allowance is being paid in instalments? Most people I’ve discussed this issue with read the Construction Act as saying that the landlord’s obligation is cumulative. In other words, the freehold can be liened for 10 percent of what the landlord has actually already paid out to the tenant. So in a situation where the allowance has only partially been paid out, the landlord would not be responsible for the 10 percent of the full amount of the allowance. I might be a minority of one in this, but I don’t think the Act is 100 percent clear in that respect, and it’s possible that a landlord may be responsible for 10 percent of the leasehold improvement allowance right away before it’s advanced any money to the tenant.
Krista Chaytor: So Caitlin, you asked about changes to lease clauses dealing with tenant improvement allowances. If you’re a landlord, you should be interested in changing these clauses to reflect the changes to the Construction Act. If a payment of an allowance is being made in one lump sum, then the lease should make it clear that the landlord is retaining 10 percent of that payment until all lien periods have expired. If the payment of an allowance is being made in instalments over time, then it should be clear that for each request for payment, the landlord will be entitled to retain sufficient funds to cover its liability for liens. It’s important to remember that it’s not enough for the lease to just say that the landlord is entitled to retain hold back, because the 10 percent of the leasehold improvement allowance that the landlord is potentially responsible for is not hold back, it’s something different.
Krista Chaytor: Another thing to consider if you’re the landlord is how you will know when liens have expired. Perhaps you can insist that any contract entered into by the tenant requires publication of substantial performance or perhaps you can require a stat deck from the tenant. But of course declarations are not a defence to the contractor. If you’re a tenant, don’t assume that the improvement allowance clauses are the same as they have always been. Be sure that the landlord isn’t retaining more of the allowance than it needs to, to protect itself from liens. And make sure that you know what’s being retained so that you can finance the improvement with the money that you’re going to have available. So Faren, I mentioned that the landlord may want to include in the lease information about when the lien has expired so that the landlord can be sure the lien period has expired. There’s also been some changes to lien periods so why don’t you tell us about those?
Faren Bogach: Sure. So the lien period that you often would see in the lease was the 45 days that a lien claimant would have to register a lien on title, that now has been changed to 60 days to preserve or register that lien on title. There’s also been an extension in the time to actually perfect the lien, which means to start a statement of claim. And that has been changed from an additional 45 days to an additional 90 days. So lien claimants now have more time to register liens and so landlord should be aware of that before they release the 10 percent. So the question might be, how do I know if the 45 days or 60 days applies to my job? So if the lease has been entered into after July 1st, 2018 you’re under the 60-day regime. And if the lease was entered into before July 1st, 2018 and the construction contract or the procurement to start that process was commenced after December 6, 2018 then you’re in the 60-day period for a lien claimant to preserve its lien rights and register a lien.
Faren Bogach: But there are instances where a landlord might be found to be a deemed owner and responsible for more than 10 percent, can you tell everyone what that’s all about?
Krista Chaytor: Sure. Thanks Faren. There are some cases that deal with this issue and essentially what contractors have said is that the landlord has involved itself so much in the leasehold improvement that in fact it’s the owner of the project and not the tenant. So this goes back to the definition of “owner” in the construction act. So basically, what the contractors’ argument is, is that the lease hold improvement was actually done at the landlord’s request and with the landlord’s consent and on the landlord’s behalf, on the landlord’s credit and for the landlord’s direct benefit. Those allegations against landlords that they’re actually the owner of the project will still come up and haven’t changed because of the changes to the Act.
Caitlin Steven: Faren, does the contractor have the right to get information from the landlord about the lease?
Faren Bogach: That’s a great question, Caitlin, and that’s one of the big changes to the Construction Act. The contractor now can ask the landlord for information and they have a right to get that information. So the landlord has to respond to these requests, they have to give the contractor the name of the parties still leased, the amount of the improvement allowance and the statement of accounts. The landlord needs to respond within 21 days. If the landlord does not respond and the contractor suffers harm because they registered a lien against the wrong parties, then they can seek costs against the landlord. I had a case recently where a landlord had not paid a tenant improvement allowance to the tenant and when the Section 39 request came in, the landlord advised the contractor of this. Now, the contractor in the face of this information registered a lien against the freehold interest and the landlord used its response to the Section 39 request to have the lien removed without costs.
Faren Bogach: But as a landlord, you may want to ask your tenant in your lease to pay for any costs you incur as a result of having to deal with or respond to a Section 39 request for information.
Narrator: You’re listening to WeirTalking Leasing by WeirFoulds’ commercial leasing lawyers. We’re taking a quick break to tell you about part two of season two. Coming Fall 2020, the episodes will cover the latest updates in the commercial leasing world in Canada. Visit weirfoulds.com/podcasts for more information and to subscribe for updates. Now back to the episode.
Krista Chaytor: Faren, before we wrap up, let’s just talk about the two biggest mistakes that people make when they’re liening a leasehold interest. You go first.
Faren Bogach: So the first thing people do is they name the wrong parties and we see this in construction all the time, but especially with leases. So naming the landlord as the owner or getting the wrong name of the parties. And that’s why that Section 39 request that we talked about is so important so that the lien claimant has the ability to get the information and can register the lien against the right parties.
Krista Chaytor: So the owner of the project when it’s a leasehold improvement is the tenant.
Faren Bogach: That’s right.
Krista Chaytor: And the other big mistake people make is they register the lien on the wrong interest. And this goes back to the leasehold interest I talked about before and the freehold interest that I talked about before. So what’s important is if your lien is against the tenant, register your lien against the leasehold interest. If your lien relates to the 10 percent leasehold improvement allowance that the landlord is required to retain, you can register that against the freehold interest. Okay, thanks Faren, let’s talk about prompt payment and those changes to the Construction Act. You’ve heard about it, it’s everywhere, it’s in the construction news, everywhere you look. Faren, what is it? Tell us.
Faren Bogach: So prompt payment is new rules that will require the prompt payment of invoices submitted by a contractor and this is important in the leasing context, not only if the tenant is doing work but if a landlord’s doing work on a building as well. The prompt payment regime applies to all construction from home renovation to large infrastructure projects so it would also apply in the leasing context. The subcontractors follow the head contract rules and so the prompt payment regime works that way and it’s designed to improve cash flow in the industry. It applies to construction contracts that were entered into or procured after October 1st, 2019. The triggering event for prompt payment is when the contractor gives the owner what’s called a proper invoice for payment and the proper invoice has some requirements and basic requirements set out in the legislation. In addition, parties can agree in their contracts what a proper invoice will entail.
Faren Bogach: The owner then has 14 days to let the contractor know if they aren’t going to pay the invoice. And if they don’t send what’s called a notice of nonpayment within the 14 days, the owner has to pay the contractor within 28 days of getting that proper invoice. The contractor then has seven days to pay its subcontractors and those subcontractors have seven days to pay any further sub-subcontractors to the job. So the plan with prompt payment is to get people to move money through the construction pyramid more quickly using the legislation. So this is important in a leasing context because tenants might need to get their payment of their tenant allowance sooner to abide by their prompt payment requirements. And a question that I had for you, Krista, was, is a failure to comply with prompt payment a breach of a compliance with the laws obligations in a lease?
Krista Chaytor: Faren, if you’re going to ask me questions, tell me in advance. That’s a great question. I think it possibly could be a violation of the compliance with laws clauses in the lease. I’m not sure what the remedy would be for a landlord, but one thing that’s another change that a landlord may want to make to its improvement allowance clause is to require explicitly that a tenant comply with prompt payment rules. Another thing that’s changed that goes along with prompt payment is the hammer for prompt payment, which is adjudication. Caitlin, tell us about that.
Caitlin Steven: Thanks Krista. So adjudication is a new way of resolving project disputes in real time. Now you’re probably aware of the traditional ways of resolving disputes. Those are arbitration and going to court. However, arbitration can take at least several months and court can take years. One of the downsides to those processes is that there’s no payments being made until the dispute comes to an end. So it could be months or years before you get any money at all. Adjudication runs parallel to arbitration and regular court litigation. So starting an adjudication does not stop the parties from also going to those processes later on. Instead, adjudication is designed to keep the money flowing in the meantime. So part of this is why adjudication only tackles discrete issues and that includes prompt payment. Any contracting party can refer a dispute to adjudication. That includes the owner, the subcontractor, the contractor or anyone else down the line who is involved in the process.
Caitlin Steven: And it’s also important to know that adjudication is not mandatory, but if you start an adjudication then the other parties have to participate and similarly if someone else starts an adjudication, then you have to get involved and participate as well. So it’s not mandatory for the actual dispute, but you could be forced to participate. These adjudications are governed by a specific authority called the Ontario Dispute Adjudication for Construction Contracts. Now that’s a bit of a mouthful, so we call it, ODACC for short. The decision maker in an adjudication is called an adjudicator. Now you can’t just pick anyone off the street to be your decision maker. They have to have done this training and they have to be listed in the registry and they have to be governed through the ODACC process. Now, of course, since adjudication is a process that’s set out in legislation, there are a lot of rules and procedures involved in it.
Caitlin Steven: I’m going to spare you the monotony of listing all the deadlines and I won’t go into those details right now, but it’s important to know that there are some very tight timelines that you have to be aware of if you find yourself involved in an adjudication. Now remember adjudication is a fast moving process on purpose and it was designed this way to keep the money flowing while the project or other steps take place. Now by fast moving, I mean that once the decision maker consents to
act on the adjudication, the party who actually started the adjudication only has five days to give all of the relevant documents to the decision maker. And after these five days, the decision maker has to make a written determination within 30 days. Now these are calendar days, not business days. So if you have holidays or weekends, you still have to count them when you’re figuring out this five-day or 30day period.
Caitlin Steven: And during those 30 days the decision maker has a lot to do, they have to decide the process for the adjudication and this can include ordering a site visit, having an oral hearing or seeking the assistance of an expert. The 30-day period can be extended but only by agreement between the parties. If the parties don’t agree, then you’re stuck with that 30-day period. So after all this is done, the decision maker then releases the determination to the parties. This determination is binding on an interim basis until one of three things happens. The first is that there’s a final determination on the dispute by an arbitrator. The second is that there’s a final determination on the dispute by the court or the third is that the parties come to a written agreement. After the decision maker’s determination is released, any payments must be made within 10 days, and again, this is 10 calendar days. If you have issues getting cheques issued or money transferred, even within a month’s period of time, let alone 10 days, you should think about what you can do to make sure that you can comply with these decisions.
Caitlin Steven: If the payments aren’t made within 10 days, then the person who was supposed to be paid can stop work. The parties also maintain their lien rights, so it’s still an option to consider going forward. Now, all that said, adjudication is still uncharted territory. As far as I know, there haven’t been any adjudications completed to date. There may have been one or two that have been started, but nothing’s been finished yet, so everyone’s still just trying to work through it and see how it goes.
Krista Chaytor: Faren, Caitlin, this was fun, let’s do it again sometime.
Caitlin Steven: Thanks.
Faren Bogach: Thanks everyone, recording a podcast has been a dream come true.
Narrator: Thanks for joining us for this episode of WeirTalking Leasing by WeirFoulds’ commercial leasing lawyers. Please take a moment to rate, review and subscribe, and if you’d like to hear from our lawyers on another topic, send us an email: email@example.com. Tune in again soon.