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A Simple Example of How the Basic Holdback Works

One of the foibles of Ontario's Construction Lien Act (“Act") is that it does not take project scale into account:  The same rules apply to a bathroom renovation as they do to a multi-million dollar infrastructure project.  In particular, the obligation to retain a holdback applies to all construction contracts regardless of their size or complexity.  While not exactly rocket science, most homeowners and small contractors do not administer the basic holdback properly.  Here is a simple example of how the basic holdback works. 

 

Our example involves an addition to an existing home.  The contract price is $200,000 plus HST.   The contract requires the Owner to pay 30% of the contract price upon the completion of the foundation, 30% when the addition is closed-in, and pay the balance upon completion.  The contract further provides that all invoices are due and payable within 30 days.  

 

Section 22 of the Act requires each "payor" on a construction contract to hold back 10% of the price of the services or materials as they are actually supplied under the contract until all liens that may be claimed against the holdback have expired.  The obligation to maintain the basic holdback applies despite any wording in the contract to the contrary. 

 

When the foundation is complete, the value of the services and materials supplied by the Contractor is 30% of the contract price, or $60,000.  The Contractor should deduct 10% for the basic holdback (i.e. $6,000), apply HST to the balance of $54,000 (i.e. $7,020), and invoice the Owner for a total of $61,020.  The Owner should pay the invoice within 30 days. 

 

When the addition is closed in, the value of the services and materials supplied by the Contractor since its last invoice is $60,000.  Again, the Contractor should deduct the 10% basic holdback (i.e. $6,000), apply HST to the balance of $54,000, and invoice the Owner for a further $61,020.  The Owner should pay the invoice within 30 days. 

When the addition is complete, the value of the services and materials supplied by the Contractor since its last invoice is $80,000.  The Contractor should again deduct the basic holdback of 10% (i.e. $8,000), apply HST to the balance of $72,000 ($9,360), and invoice the Owner for $81,360.  The Owner should pay the invoice within 30 days. 

 

Finally, the Contractor should issue a separate invoice to the Owner for the holdback.  The amount of the holdback is 10% of the contract price, or $20,000.  The Contractor should apply HST to the value of the holdback (i.e. $2,600), and invoice the Owner for $22,600. 

 

Unlike the other invoices, and despite the contract language that invoices are due and payable 30 days after they are rendered, the holdback invoice is payable by the Owner after any construction lien that may be claimed against the project has expired.  All construction liens will have expired 45 days after the contract is complete unless a claim for lien is preserved by registering a claim against title.  Therefore, the Owner should have their lawyer review title to the property on the 46th day after the contract is complete.  If no claims for lien have been registered against title on or before the 46th day after the contract is complete, then the Owner should pay the basic holdback to the Contractor.  If a claim for lien is made before the 46th day, then the Owner should not pay anything further to the Contractor and seek further advice from their lawyer.  

 

Ted Dreyer is a construction lawyer at Madorin, Snyder LLP. Madorin, Snyder LLP is a full service law firm serving Kitchener, Waterloo, Cambridge, Guelph and the surrounding area.  Please visit our construction law page.

 

The information contained in this article is provided for general information purposes only and does not constitute legal or other professional advice. Readers are advised to seek specific legal advice in relation to any decision or course of action contemplated.

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