Chapter 15: Holdbacks by Purchasers
IMPORTANT NOTE: On Friday, October 31, 1997 the Minister of Employment and Investment announced that when the new Builders Lien Act is brought into force, section 4(7) which provides for the purchaser’s holdback will remain unproclaimed at this time.
The Minister has instructed his staff to work with Legislative Counsel to develop alternative approaches to protecting customers from liens which are filed after a property purchase is complete.
15.1 | Is the purchaser of an improvement bound by liens filed after the purchase is completed?
Liens binding on purchaser’s interest
Commentary: yes. In many cases, lien claimants will have 45 days to file their liens following the completion of the improvement or the head contract. It is quite possible that the improvement may be sold to a purchaser during that period. Even when the purchaser has been diligent in checking title to the land, a lien may still be filed after the “closing” and transfer of the property but still within that 45 day period. Where such a lien is filed, it is binding on the purchaser who may be put in the position of having to pay twice.
15.2 | Is this a problem confined to new construction?
Commentary: no. Liens can also be filed by persons working in the home renovation and home repair areas. For example, the person who puts a new roof on an existing structure is entitled to a lien. Even if the lien is filed after there has been a sale of the building, the purchaser is bound by it.
15.3 | How does the Act deal with this problem?
Commentary: the approach of the Builders Lien Act is to bring the purchaser into the overall scheme of the Act by permitting that purchaser to retain a holdback from the seller. The operative provision of the Act is section 4(7).
4(7) A person who, in good faith, purchases an improvement, including a strata lot, may, despite an agreement to the contrary, retain from the vendor a holdback equal to 10% of the purchase price.
15.4 | What if the seller refuses to agree to the retention of a holdback or the “interim agreement” stipulates that no purchaser’s holdback will be made?
Agreement as to holdback
Commentary: it is not necessary for the seller to agree to the holdback from the purchaser price. Moreover, any purported agreement under which the purchaser agrees not to retain a holdback, or waive the right to retain a holdback, is ineffective. Section 4(7) clearly provides that the holdback may be made “despite an agreement to the contrary.”
15.5 | Will the purchaser’s holdback be retained every time the property is sold?
Holdback is permissive
Commentary: there is no reason it should be. Section 4(7) is worded in a permissive way – the purchaser “may” retain a holdback. It is not compulsory that a holdback be retained in every case.
15.6 | When will a purchaser not wish to retain a holdback?
When purchaser’s holdback unnecessary
Commentary: the purpose of the purchaser’s holdback is to protect the purchaser from the possibility of “hidden liens” that may emerge after the sale is complete. Where the purchaser is satisfied that the possibility of such liens arising is remote, it is inappropriate for the purchaser to retain a holdback. For example, on a sale of an older home, the purchaser may have thoroughly inspected the premises and conclude that there has been no recent work that might give rise to a lien.
On the sale of a newly constructed building, the purchaser may be satisfied that other machinery exists to discharge any liens that might arise after the sale. For example, the purchaser may be satisfied that there is sufficient funds in the holdback account established under section 5 to deal with any liens that may arise. A further safeguard might be making the purchaser an administrator of the holdback account if all parties agree.
[See paragraph 6.11]
15.7 | How does the purchaser’s holdback work on the sale of a condominium?
Sales of condominium
Commentary: if the sale of the condominium is by the owner/developer, then special rules apply. Section 75(2)* of the Condominium Act provides that the purchaser must retain a holdback in a stipulated amount from the purchase price. This holdback is compulsory.
Where this holdback is retained under the Condominium Act, a purchaser is not entitled to retain a holdback under the Builders Lien Act.
[See section 4(8)]
Where the sale of the condominium is not by the owner/developer, which will include most “private” sales of condominiums, the purchaser’s holdback may be retained under the Builders Lien Act as with any other sale of an improvement.
15.8 | How long should the purchaser’s holdback be retained?
Commentary: the Act provides that the purchaser’s holdback period expires on the later of two possible times. Section 8(3) provides:
8(3) If a holdback is retained by a purchaser under section 4(7), the holdback period expires on the later of (a) 55 days after the acceptance for registration at a land title office of the purchaser’s interest, and (b) the day the period would have expired if the holdback had been made with respect to a contract to which subsection (2) applies.
The time referred to in paragraph (b) is a holdback period which expires at the end of 55 days after completion of the head contract or completion of the improvement where there is no head contractor.
[See section 8(2)]
Where work was not completed at the time of the closing of the purchase, it is likely that the longer holdback period applies and purchasers should monitor the state of work carefully.
15.9 | What if the value of liens filed are greater than the amount of the purchaser’s holdback?
Limitation of purchaser’s liability
Commentary: the Act limits the liability of a purchaser to satisfy liens in much the same way as the liability of an owner is limited. Section 35 provides:
35) The amount that may be claimed under this Act against the interest of a purchaser in good faith of an improvement in respect of claims of lien filed after the latest of
(a)acceptance for registration of the purchaser’s interest at a land title office…,
(b)completion, abandonment or termination of the head contract for construction of the improvement, and
(c)completion or abandonment of the improvement if the owner did not engage a head contractor
must not exceed 10% of the purchase price of the improvement.
Thus, the purchaser who retains the 10% holdback is fully protected against hidden liens.
Section 35 is supplemented by section 23(1) which permits liens to be cleared from the purchaser’s title on the payment into court of no more than the amount of the purchaser’s holdback.