Chapter 9: Clearing Liens from the Owner’s Title
9.1 | Why is it important to have machinery to clear liens from the owner’s title?
Commentary: although it may reflect a problem or default only in one small corner of the construction pyramid, the filing of a builders lien can have serious consequences for the whole project. This is because construction lenders receive priority only for money advanced before liens are filed. If an advance is made after a lien is filed, the lien has priority.
[See paragraph 17.3]
Most lenders make it a practice to search the title to the land on which the improvement is situated to make sure that no liens have been filed. If a lien is discovered, no further advances will be made until the lien is removed. Thus, the filing of lien will cut off financing for the whole project.
This drastic consequence requires that there be some method by which liens can be removed from title to the land while preserving the position of the lien claimant.
9.2 | What provisions of the Act address this problem?
Sections 23 and 24
Commentary: the problem is addressed in two different provisions of the Act.
Under section 23, liens can be cleared by paying into court a defined amount of money. When that is done, the lien becomes a lien against the money in court and is removed from the owner’s title.
Section 24 provides for the cancellation of the lien on providing security for payment of the claim. Conceptually, this is slightly different from the provisions of section 23. On the provision of security, the lien ceases to exist rather than being shifted to a different item of property. Functionally, however, the security serves the same purpose.
It is likely that the two provisions will be used in different circumstances depending on who is seeking to clear the lien.
[See paragraph 9.4 and paragraph 9.5]
9.3 | Who, in practice, is responsible for clearing liens from the owner’s title?
Who clears the liens?
Commentary: a term is either expressly or impliedly included in virtually every contract and subcontract within the construction pyramid that the person who is engaged under the contract promises the other party that the project will be kept “clear” of liens that may be asserted by persons lower in the pyramid in the same branch of the chain of contracts.
Typically, the existence of a lien will become known when the construction lender does a title search before making an advance. The lender will advise the owner of the existence of the lien and the owner will order the head contractor to see that the lien is cleared. The head contractor will turn to the subcontractor under whom the lien is claimed and order that it be cleared. Similar orders will be passed from party to party down the chain until it reaches the subcontractor who actually engaged the person filing the lien.
If that person is able to clear the lien, it will do so. If that subcontractor cannot clear the lien (perhaps because it is insolvent) then the person next higher in the chain must clear the lien. The practical result is that the responsibility to clear a lien falls on the first solvent person above the lien claimant in the contract chain.
[See Figure 8]
9.4 | When will section 24 be the preferable mechanism for clearing liens and why?
Use of section 24
Commentary: although section 24(1) says that an owner, contractor, subcontractor or other person may apply to have the lien claim cancelled on giving security, in practice, the person most likely to use this is the one who has directly engaged the lien claimant. The reason is that the alternative, section 23, requires the payment into court of the total amount of either the lien claim or the amount owing by the payor to the person to whom the liens are claimed. Since the claim would be on a contract directly between the payor and the lien claimant, this would be the full amount of the lien claim.
Under section 24, security other than money can be posted and that security may be less than the amount of the lien claim.
Practice under the equivalent provision of the former Builders Lien Act permitted security to take the form of a letter of credit or a lien bond. Either of these is less expensive to the person providing the security than putting up cash.
Where a lien must be cleared by the person who actually engaged the lien claimant, the preferable route will usually be to post security under section 24.
[See Coulson paragraph 4(2), and 4(5)]
9.5 | When is section 23 most likely to be used?
Use of section 23
Commentary: payment into court under section 23 is most likely to be used by persons who are closer to the top of the pyramid than the person who engaged the lien claimant. The reason is that frequently, the amount that is to be paid into court to clear to lien will be substantially less than the amount of the lien claim. Also, section 23 contains machinery which provides for the cancellation of additional liens if they should be filed after the initial payment into court.
9.6 | Who makes the payment into court?
Commentary: the person who makes the payment (referred to in section 23 as the “payor”) will normally be the first solvent contractor or subcontractor in the contract chain above the lien claimant.
Between the payor and the lien claimant will be one (most often) or two (less often) subcontractors in the chain.
9.7 | How much must be paid into court?
Amount of payment into court
Commentary: section 23(1) stipulates the amount to be paid into court:
23 (1) If a claim of lien is filed by one or more members of a class of lien claimants, other than a class of lien claimants engaged by an owner, the owner, contractor, subcontractor or mortgagee authorized by the owner to disburse money secured by a mortgage may, on application, pay into court the lesser of
(a) the total amount of the claim or claims filed, and
(b) the amount owing by the payor to the person engaged by the payor through whom the liens are claimed provided the amount is at least equal to the required holdback in relation to the contract or subcontract between the payor and that person …
The key variables are the amount of the lien and the amount owing by the payor. Calculation of the amount to be paid into court is most easily understood through the use of the “decision procedure” set out in Figure 9.
Figure 10 sets out a simplified chain within the construction pyramid and provides the figures for a hypothetical example. Table 1 illustrates the amount required to be paid into court by a person one step removed from the lien claimant and Table 2 shows the amount to be paid by a person two steps removed from the lien claimant. The figures in the table were arrived at using the decision procedure and are meant to illustrate two points:
- The amount to be paid into court varies with the amount owed by the payor and the size of the lien
- It may cost different parties in the chain different amounts to clear the same lien owing to different states of accounts between the payor and the person in the chain immediately beneath the payor
9.8 | When is the amount owing by the payor to be calculated? Won’t that amount increase over the life of the contract or subcontract?
When “amount owing” is to be calculated
Commentary: refer to Figure 10. If the lien filed by “M” is to be cleared by a payment into court by “HC,” the amount owing by “HC” to “SC” will be relevant to the amount that must be paid in. That amount must be calculated with reference to the state of accounts as they exist between “HC” and “SC” at the time the payment into court is made.
It is theoretically possible that “SC” might provide further material and services under the contract with “HC” but, in practice, this will be most unlikely. The fact that “SC” was not able to clear “M’s” lien and that it fell to “HC” to do that strongly suggests that “SC” is insolvent and will have no further role to play in the project.
9.9 | What else might affect the calculation of the “amount owing?”
“Amount owing” and section 34
Commentary: the marginal note to section 23 refers to the “removal of claims of lien by payment of total amount recoverable.” This strongly suggests an intention by the legislature that the provisions of section 34(2) are meant to be read into section 23. Section 34(2) provides that certain amounts or payments are not to be taken into account in calculating the “amount owing.” It was discussed earlier.
[See paragraph 7.3 to 7.6]
“Amount owing” may also not include amounts retained in excess of the required holdback which the payor is entitled to apply to remedy a default or deficiency.
[See section 23(5)]
9.10 | What if there is a dispute concerning the “amount owing?”
Powers of court
Commentary: the payment into court must be made in the context of an application made to the court for that purpose. In the course of that application, the court may hear and receive evidence, or direct the trial of an issue, to determine the amount to be paid into court.
[See section 23(4)]
Once payment is made into court, the owner is discharged of liability in respect of the lien filed and the claims are to be removed from the title to the land on which the improvement is situated. The money in court stands in place of the improvement and the land.
[See section 23(2)]
9.11 | After a payment into court has been made and a lien is cleared, a second lien may be filed. How does the Act deal with this situation?
Clearing further liens
Commentary: the Act addresses this possibility in section 23(3). It permits the payor to make a further application to court and on paying an additional sum, (if necessary) have the second lien cleared. Basically, one looks to the amount that would have had to have been paid into court on the first application if the payor had sought to clear both liens. If that amount is larger than the amount paid into court to clear the first lien, the difference is the additional amount that must be paid into court to clear the second lien.
[See Figure 11]
Commentary: additional powers to remove liens are found in section 25. An application may be made to the court or register of titles that the lien be cancelled on certain grounds. These grounds include:
- the extinguishment of the lien under the Act,
- dismissal or discontinuance of an action to enforce the lien,
- or that the lien has been paid.
The court also has the power to cancel a lien where it is satisfied that the lien does not relate to the land against which it is filed or the lien is an abuse of process.
[See section 25]