LIEN 911 What To Do When Lien Rights Are

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					        ONTARIO BAR ASSOCIATION 


           Construction Law Primer 





            LIEN 911 

What To Do When Lien Rights Are Lost 





             Neil S. Abbott, Partner 

          Gowling Lafleur Henderson LLP 

                    Suite 1600 

              1 First Canadian Place 

              100 King Street West 

                 Toronto, Ontario 

                     M5X 1G5 


              Direct: (416) 862-4376 

            Direct Fax: (416) 863-3476 

            neil.abbott@gowlings.com

                                    LIEN 911 

                        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.
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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

alternatives.


        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.
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       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

defending it.


       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
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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

made.


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.
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       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
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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
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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
                                                 -8-                                                   



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
RIGHTS

       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.
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        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.


CONCLUSION

        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.


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