ONTARIO BAR ASSOCIATION
Construction Law Primer
What To Do When Lien Rights Are Lost
Neil S. Abbott, Partner
Gowling Lafleur Henderson LLP
1 First Canadian Place
100 King Street West
Direct: (416) 862-4376
Direct Fax: (416) 863-3476
What To Do When Lien Rights Are Lost
Construction liens are not creatures of common law. They are the creation of the
Legislature. The Construction Lien Act (the “Act”), its regulations and judicial interpretation
form a complete code. The lien being confined to one statute, it should be simple to understand
and its birth, life and death should be an uneventful story. Do not be fooled. A lien can be lost in
an instant and its strength can be over-estimated.
Lien rights should not be seen as an elixir to every solution. Liens are a tool; a means to
an end, but not an end in themselves. Gaining a lien will give you a foothold in your litigation
and a step-up on other creditors but losing a lien is not as fatal as it would seem at first blush.
In this paper, I intend to take you through a number of scenarios in which liens can be
lost and provide some practical tips to collect without a lien.
But first a word from your insurers. Since liens are a weapon in the arsenal of creditors’
rights lawyers, the blunting of this instrument through your negligence, wilful blindness or
neglect could give rise to an insurable claim as against you. The remedies suggested herein
should only be exercised in consultation with your insurer.
If a lien is lost on your watch, prompt notification to LawPro may result in its
resurrection and/or decisions which could turn a loss into a gain.
DEAD ON ARRIVAL LIENS
Sometimes your clients will have lien rights and they do not even know it. They may not
appreciate that they have improved the lands, or they may miscalculate the time for delivery of
goods and materials. Keeping in mind Section 35 of the Act, which imposes a personal liability
on anyone who causes a claim for a lien to be registered, you should always consider whether a
lien right exists when meeting with any creditor client. There are alternate statutes such as the
Personal Property Security Act and the Mortgages Act, in which an interest in land may be
claimed. While I am not recommending always “when in doubt, lien” it is better to lien than not
if you are faced with a tight deadline and have some doubt that your client may in fact have a
lien right. The same will apply to lands that may not be subject to a registerable lien or lands
owned by entities not subject to the Act. It takes less than five minutes to take a lien off of title
but years of litigation if you could have liened but didn’t.
Initial questions to ask a client are the obvious ones like: What did you do; when did you
last do it and who did you do it for? Of course, sometimes the clients get confused between the
various limitations certain acts in the province provide. Some clients think they have prevenient
agreements or that a demand or acknowledgment will keep a lien right alive. Assuming the worst
however, that is the client’s lien is “dead on arrival at your desk”, do not give up hope. There are
One alternative is a good old-fashioned lawsuit for breach of contract. If your client
contracted with the owner of the lands or what could reasonably be construed to be the agent of
the owner for the lands, then a timely lawsuit for breach of contract is appropriate.
Another alternative where the owner of the lands is not in a direct contractual relationship
with your client, is to consider a suit for unjust enrichment. After all, a lien is a form of unjust
enrichment recognized by statute. The old case law, however, that protects a beneficiary from
unjust enrichment in the case of a “juristic reason” may apply to exempt your claim but the cost
and time of moving to strike the claim in the face of real and tangible benefit to the property may
force the owner to consider spending dollars on your client’s claim rather than legal fees
Another alternative is to consider bonds. If your client is in direct contractual relationship
to a party who is a principal and/or beneficiary under a bond, particularly a labour and material
payment bond, make sure you get a copy of the bond or make enquiries of the debtor as to the
existence of a bond pursuant to Section 39 of the Act. Make sure you keep in mind the deadlines
for making a claim on the bond including the commencement of an action and properly name the
parties in the subsequent action.
Another alternative is to look to letters of credit or to other negotiable instruments that
may have been posted for the benefit of the project for unpaid suppliers. Liens are a creation of
statute but not all projects limit themselves to the operation of the Act. Maintenance holdbacks
and other contingency funds may exist for the benefit of your client that you may have access to.
By far one of the best alternatives, and in theory one could argue stronger than a claim for
lien, is a breach of trust action. Unlike a lien action, you can make a breach of trust action
personal and enjoy the potentially lengthy limitation period to make a claim. Part II of the Act
almost seems to act as if breach of trust is in perpetuity so long as you remain an unpaid supplier.
Read the section carefully, however, and consider that you must originally have the right to
claim a lien in order to make a claim for breach of trust. While not summary in nature, nor
providing some guarantee of payment through the posting of security, a breach of trust action
goes right to the heart of a construction payment pyramid and they result in a quicker payment
than the more cumbersome “summary” prosecution of a lien action.
Last, do not forget good old-fashioned negotiation. If your client’s lien rights have
expired, call the owner and/or debtor and see how cooperative they are willing to be toward
payment of your client. Perhaps your client provides some useful service or material that can
only be supplied by your client, which service and material may be withheld if payment is not
LIENS LOST AND FOUND
There are three basic ways to lose a lien. The first is never to register it at all. In other
words, to miss the 45 day period from the date of last supply. I include in this liens which
contain errors in land descriptions and other breaches of the form that cannot be reasonably
corrected. These are failures in preservation of the lien.
The second most common way to lose lien rights are failures of perfection; that is, failing
to commence an action on the lien or failing to register a certification of action on title within the
timelines prescribed by the Act.
The third way to lose lien rights is by failing to set the matter down for trial within the
two-year limitation period from the date of perfection of the lien.
I will deal with each of these lost lien rights in order.
With respect to losses by failing to preserve, the first rule is to trust no one until your
client has paid by real money. What I mean by this is I have heard of lots of situations where
unscrupulous contractors talk lien claimants and their lawyers out of liening with vague promises
of payment if a lien does not get registered. Of course, day 45 comes and goes and payment is
not forthcoming. I have seen this both in the early stages of a project and upon promises of
release of holdback and upon certification of substantial completion. If the cheque-writing
machine is broken according to the contractor, have them write a certified cheque or bank draft
created by hand. I will leave it to your imagination as to what could be broken if they refuse to
do it by hand! Uncertified cheques are not payment. Payment has to be real and immediate in
order to avoid a lien being lost by failure to preserve.
If your lien contains an error as to quantum or party description, do not under any
circumstances delete its registration from title if you are within the 45 day period to lien. File a
new lien with the correct information. The Act is quite specific if you discharge a claim for lien;
its rights are forever extinguished. Do not let anyone tell you otherwise. If the amount of a claim
for lien is wrong, you can consider filing a new lien for the difference or a new lien for the
correct amount. Similarly, it you miss a parcel of property, file a lien on the correct parcel and
include a description of the parcel already liened. Search title of course to make sure you get the
right parcel of land and also consider liening in lands enjoyed therewith. Again, subject to
Section 35, it’s better to aim broadly than by laser point.
Also consider Section 19 of the Act and liens against tenanted properties. Unfortunately
the Land Titles system in Ontario does not divide between freehold and leasehold interests and
sometimes a lien registered and enforced against a landlord’s interest can result in a prompt
payment due to the pressure it exerts on a tenant. Again, better to lien broadly than not.
Once the 45 day period has expired for perfection of a lien, you cannot get the lien right
back. However, consider if your client has a prevenient agreement or if there remains contract
work to be performed. The lien may be alive but you do not know it.
Last, there is no sheltering at the lien preservation stage. More on this below.
Unperfected liens that expire have a bit of a safety net. The courts have now recognized
both horizontal and vertical sheltering. So long as there is an existing certificate of action issued
and registered at the time your lien expires as unperfected, you may claim under that perfected
lien. However, note that you are only perfected to the amount of the lien and you effectively lose
control over your litigation to that of the perfected party. Because liens cannot be prosecuted in
the small claims court whose jurisdictional limit is increasing to $25,000 effective January 1,
2010, you should discuss the pros and cons of perfection by sheltering with your client in
advance of letting a lien expire as unperfected.
If your lien expires as unperfected and there is no other lien to shelter under, consider the
alternatives I mentioned at the start of this paper in respect to other avenues of prosecution
including starting an action for breach of contract and/or unjust enrichment.
The third way in which a preserved lien could be lost is by failing to set it down for trial
within the two-year limitation period established by the Act. This is a more complicated section
to understand at first glance because each court has its own method for setting a lien down for
trial. The old standby of passing a trial record may not be sufficient where courts require a
settlement conference and the placing of the lien on a trial list. Therefore, do not assume that you
can simply leave a lien for diarization for two years and pass a trial record days before its
anniversary. Check with the trial coordinator where you commenced your lien.
On that note, the Act requires the lien actually be commenced where the land is situated.
However, there have been a few cases where courts have ruled this is a procedural rule rather
than substantive right and have transferred actions commenced in the wrong jurisdiction. While
you do not want to be in that situation, do not abandon hope if you forget that Toronto is not the
centre of the universe!
Oftentimes, well before the two-year limitation period has expired, all lien claimants to a
project may convene at a settlement conference and discuss having one party move forward with
carriage of the action. If that party moves forward with carriage and sets their action down and
conducts a pre-trial, the court may rule that the requirement that all other lien claimants set their
actions down for trial is dispensed with and the action may proceed on a class action basis under
the one lien that has been set down. Be careful to ensure that the order expressly provides for
this. Do not assume because one lien claimant has set their action down for trial that your lien is
no longer eligible for dismissal.
While the Act expressly prohibits a lien action from being joined with any other type of
action for collection of the debt, if you have a trust claim or bond claim, you may wish to attend
a construction pre-trial. If your lien has been declared as expired and unperfected, or is not set
down within the two-year limitation period, you may wish to consider, in some circumstances,
attending a construction pre-trial and having your action added to the list of actions to be tried
since essentially it’s about the same issues and it involves the same parties. You may be able to
piggyback your trust/bond action onto that of the lien claimants so long as it is within the
jurisdiction of the court to determine your action. You may have to jump through some hoops in
getting it referred to a master or in some cases, de-referred.
FALLING ON YOUR SWORD: INTENTIONALLY LOSING YOUR LIEN
Sometimes you have to give up your lien rights. In happy circumstances lien rights are
surrendered typically upon settlement. Remember though as the lien claimant, you are in control
and you should not consent to any order discharging a claim for lien or giving up security posted
for your lien unless or until you are in receipt of actual funds. “Trust but verify”, as Ronald
Reagan used to say.
Other times where you may voluntarily surrender your lien rights include clear-cut cases
where your lien is on lands that are not subject to a claim for lien such as against the Federal
Crown or where the lien was clearly out of time or placed on land not subject to improvement.
Your lien rights could also by pushed out of the way in cases of priority claims
particularly pursuant to Section 78 of the Act which simply provides that an acquisition
mortgage registered in advance of a claim for lien will have priority upon its realization. A claim
for priority is usually made at the time of a response to a Section 39, Request for Information. Do
not assume because a lender tells you it is an acquisition mortgage that in fact it is. Consider the
advances and the purpose of the mortgage before you advise your client. Sometimes construction
mortgages can be hidden in many different ways such as the provision for a line of credit or
revolving charge dressed up as an acquisition mortgage.
In the case of construction mortgages where the priority of a lien claim is limited to a
holdback deficiency, before you give up your lien in any settlement or upon realization of a
property, consider what constitutes the holdback and whether or not you are in direct contract
with the owner in which case there is no pooled holdback, or if there is a general contractor, in
which case there will be a pooled holdback. Look at the relationship between the owner and the
project coordinator carefully to determine what holdback applies in your circumstances.
Remember that the Act expressly prohibits one lien claimant from having priority over
another except in special circumstances such as for unions. Be leery of any offers that eliminate
your lien for some proposed preference.
As I have discussed above, liens can be lost in a variety of ways. Liens are an effective
weapon in the arsenal of litigation and in some cases can ensure prompt payment because, for
example, they hold up an advance or may cause a breach of contract between an owner and a
general contractor or landlord and tenant. Ultimately though, liens can be bonded off into court
and/or the extent of their claim may be restricted to holdback not the full value of the claim.
Losing a lien right is not the end of the world. While the loss of a lien right should not be dealt
with light-heartedly, conversely, you should not wallow in heavy-heartedness and surrender your
client’s claim when there are other arrows in your quiver that can be fired on your prey.