Construction Liens: Substantial Performance and Holdbacks

Author: Julia Tremblay
Reviewed by: Andrew Wood

A review of our previously published “Construction Liens 101” article will provide readers with a solid understanding of the basics of construction liens. For the purposes of this article, one should simply keep in mind that construction liens are a way of ensuring payment for services and materials provided in property improvement projects. These payments are ensured because construction liens become secured interests equal to the value of the services or materials provided if they properly registered and perfected.

The Construction Act has strict timelines within which contractors (and subcontractors) must preserve and perfect their construction liens. Missing the timelines, subject to limited exceptions, are fatal in most instances. "Substantial Performance" is one of the key elements that affect such timelines and is the focus of this article.

Knowing when the ‘timeline’ for preserving and perfecting liens begins to run, which in many circumstances may be upon the substantial performance of a contract, is important for contractors and subcontractors who wish to preserve their lien rights. It is equally important knowledge for homeowners who must make holdback payments (discussed below) to their contractors and subcontractors.

Definition and Benefit of "Substantial Performance"

Under section 2 of the Construction Act, a contract is considered substantially performed when the improvement is ready for use or is being used for its intended purpose, and any remaining work can be completed or corrected for a minimal cost. Specifically, the outstanding work must be completable for less than:

• 3% of the first $1,000,000 of the contract price,

• 2% of the next $1,000,000 of the contract price (if applicable), and

• 1% of the balance of the contract price (if applicable).

A Certificate of Substantial Performance (in its prescribed form) is usually completed by the architect, property owner, or designated payment certifier on the project, which may be published in a construction trade newsletter (such as the Daily Commercial News) The result of this process is notice to all contractors involved in the project that the timeline for lien registration has started. If the certificate is not promptly signed, the contractor can seek a court declaration, which serves the same purpose.

Contents of a Certificate of Substantial Performance

Section 32 of the Construction Act outlines the required information for a Certificate of Substantial Performance:

• The date of substantial performance,

• Names and service addresses of the owner, contractor, and payment certifier (if applicable),

• A description of the work completed,

• The date on which the contract was substantially performed; 

• A legal description of the property, including property identifier numbers (PINs) and addresses, or an alternative property description if the lien is not attached to the title.

Failure to include necessary details can invalidate the certificate, as evidenced in the case of Vestacon Limited v. ARC Productions Ltd., 2018 ONSC 5366, where the court declared certificates invalid due to missing property PINs.

Holdbacks

Every payer on a construction project must hold back 10 percent of every payment made, or payment owing, as a form of security for any liens that may be preserved against the project. This holdback is a mandatory requirement under the Construction Act and applies to all construction projects. This means that holdback requirements will still apply to contracts which are silent on holdback practices or attempt to waive or opt out of them.

The most common method of retaining holdback is by simply withholding 10 percent of the amounts payable.

Conclusion

Understanding the nuances of construction liens and substantial performance is essential for homeowners, contractors, and suppliers in Ontario. Properly navigating these legal requirements ensures that those involved in property improvements can secure their payments and protect their financial interests.

Disclaimer: the information provided in this article is general, is intended to inform, and is subject to change. Its content does not provide legal (or any other) advice and should not be construed as providing such by readers. If you require legal assistance, it is strongly recommended that you speak with a competent lawyer who can provide you with advice tailored to your specific situation.