Understanding Notice Holdback

Ontario's Construction Act (the "Act") underwent significant amendments in 2018 and 2019, most of which were aimed at modernizing the construction payment regime and enhancing protections for contractors, subcontractors, and suppliers. Among the notable changes (but perhaps less talked about than others over the last half decade) are those related to "Notice Holdback".

What is Notice Holdback?

Sending a "written notice of lien" is a first step that a party may want to consider prior to registering or giving a claim for lien. Upon receipt of a written notice of lien, a payer (i.e., the party or parties above the lien claimant in the construction pyramid) must retain an amount sufficient to satisfy the lien. This is often referred to as "Notice Holdback".

The practical effect of a party giving a written notice of lien is such that the normal contractual flow of funds is disrupted (at least to the extent of the Notice Holdback) until the written notice of lien is discharged, vacated, or withdrawn.

In a situation where an owner fails to retain Notice Holdback and continues to pay its general contractor in the face of a written notice of lien, the owner may be liable for the full amount of the written notice of lien if the general contractor does not pay the subcontractor and goes bankrupt. As such, the owner's maximum liability is increased from the basic holdback set out in section 22 of the Act to the applicable Notice Holdback.

Importantly, from a lien claimant's perspective, a written notice of lien does not "stop the clock from running" in respect of the time to preserve a claim for lien. It is a temporary measure and if the claimant remains unpaid after the written notice of lien is given, the claimant must still preserve its claim for lien, or it will lose its lien rights.

Rules under theConstruction Act

1. Form of notice: The "written notice of lien" must be in Form 1 and given by a person having a lien. Under the old Act, "written notice of a lien" was defined as follows: "written notice of a lien" includes a claim for lien and any written notice given by a person having a lien that,

1. identifies the payer and identifies the premises, and
2. states the amount that the person has not been paid and is owed by the payer.

With the changes to the Act, the circumstances where Notice Holdback obligations are triggered are narrower and require the use of a particular form.

2. Service of the notice: A written notice of lien must now be served by personal service as provided for in Rule 16.02, or by an alternative to personal service as provided for in Rule 16.03 (section 87 of the Act).

3. Content: Form 1 requires information related to the parties, the time period of supply, description of the supply (i.e., the services or materials), description of the premises, contract price and amount of claim. It also requires the signature of the lien claimant.

4. Resolving a written notice of lien: A written notice of lien can be:

1. withdrawn (in accordance with section 41(2) of the Act);
2. vacated (in accordance with section 44 of the Act); or
3. declared expired (in accordance with section 47(1) of the Act).

Practice Implications

Notice Holdback has several practical implications for stakeholders within the construction industry:

1. Compliance requirements:
   parties must familiarize themselves with the specific Notice Holdback provisions outlined in the Act to ensure compliance. Failure to adhere to these requirements could result in increased liability, for example, if an owner makes payments after a written notice of lien has been received.
2. Increased leverage for subcontractors and suppliers: subcontractors and suppliers can use a written notice of lien to protect against solvency issues with contractors and subcontractors above them in the construction pyramid and facilitate payment without formally registering a lien on title.
3. Contractual considerations: owners, contractors, subcontractors and suppliers should review their contracts and update them to reflect the provisions in the Act, and make sure they account for written notices of liens.

In summary, Notice Holdback represents opportunity and risk for construction players, and it is important to understand the obligations bestowed upon each party in a situation where there has been a written notice of lien given on a construction project.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.