Construction Liens and Improvements at Leased Premises – Whose Lien Is It Anyway?

An unpaid contractor or subcontractor can register a lien on title to premises where it supplied services or materials to an improvement, even if the premises are leased and the work was done pursuant to a contract with the tenant, rather than the registered owner.  That said, the rules surrounding the liening of leased premises are highly technical and the consequences of an improper lien are significant.

This blog post sets out some important general rules about liening leased premises and does not purport to be a comprehensive summary of the applicable law. The application of these general rules will depend on the particular facts of a given case and contractors and subcontractors planning or undertaking work on premises that are known to be leased or that may be leased should seek legal advice prior to entering into a contract or commencing work in order to protect their interests in the event that a project runs into trouble.

Similarly, landlords that are aware of, or involved in, an improvement being undertaken by a tenant should seek legal advice about their changing exposure under the new Construction Act and how to manage the risk of being subject to a lien claim in the event a tenant’s project encounters trouble.

Can I Lien When I Do Work For a Tenant?

The Construction Act states that a person who supplies services or materials to an improvement for an owner, contractor or subcontractor has a lien upon the interest of the owner in the premises improved.  “Owner” under the Construction Act (and the Construction Lien Act before it), means more than just the registered owner of the lands and is defined as:

[…] any person, including the Crown, having an interest in a premises at whose request and,

(a) upon whose credit, or

(b) on whose behalf, or

(c) with whose privity or consent, or

(d) for whose direct benefit,

an improvement is made to the premises […]

This definition has two important implications for leased premises:

  1. A party who is not the registered owner may nonetheless be an “owner” whose interest can be subject to a lien under the Construction Act. A tenant’s leasehold interest constitutes an interest in the premises and, therefore, a tenant can be an “owner” under the Construction Act and its interest can be subject to a lien. In order to effectively lien the interest of a tenant, that tenant should be identified as an owner in the claim for lien, and the failure to do so can be fatal to the lien as against the tenant’s interest.
  2. The registered owner of the premises will not be an “owner” under the Construction Act unless it can be shown that it requested the improvement and that the improvement was made upon its credit, on its behalf, with its privity or consent, or for its direct benefit. Where a registered owner is not an “owner,” a further set of rules apply that, depending on the date the lease was entered into, may nonetheless make some or all of the landlord’s interest subject to a lien.

Rules For Leases Entered Into Before July 1, 2018

If the lease was entered into before July 1, 2018, the provisions of the old Construction Lien Act still apply, which require that a contractor give the landlord written notice of the improvement to be made prior to commencing work in order for the landlord’s interest to be subject to a lien.  Any contractor wishing to give written notice to a landlord should seek legal advice as soon as possible to ensure that the form of notice is sufficient and that it is properly served on the landlord.

Even where proper written notice is given to the landlord, it then has 15 days following the receipt of such notice to inform the contractor that it assumes no responsibility for the improvement. Where a landlord that is not otherwise an “owner” does so, its interest will not be subject to a construction lien.

Even if the landlord’s interest is not subject to a lien, where the tenant’s interest is properly liened, that interest itself (that is, the lease) can ultimately be subject to sale in order to satisfy the lien claim. Although a leasehold interest will likely not be as valuable on a sale as outright ownership, a lien against a leasehold interest can still have value and also provides important leverage to a lien claimant.

Because these rules continue to apply to improvements made to leased premises where the lease was entered into before July 1, 2018 (the date the changes to the Construction Lien Act became effective), the rules under the old Construction Lien Act will still apply for long, long time.  As a practical matter, contractors and subcontractors would be well-advised to assume that the lease for the premises they will be working at was entered into prior to July 1, 2018, and that the old rules will apply.  As set out above, these rules are highly technical and each case depends on its own particular facts.  Legal advice on these issues should be sought at the earliest possible stage (ideally before contracts are signed and work commences).

Rules for Leases Entered Into After July 1, 2018

If a lease was entered into after July 1, 2018, the process of a contractor giving written notice to the owner and the owner having the option to disclaim liability no longer exists.  Going forward, where payment for an improvement is accounted for under the terms of the lease, a renewal or any agreement with the landlord connected to the lease, the landlord’s interest will be subject to a lien, to the extent of 10% of that payment, with no requirement for the contractor to give notice.

Although this change will be beneficial to contractors and subcontractors in many cases (and it will remain possible to lien the interest of a landlord who can be shown to meet the definition of “owner”), the practical problem of determining when the lease was entered into, and what rules apply, remains.  Seeking early legal advice in order to determine who the “owner” is and what can be done to minimize risk is a must.

At Duncan, Linton LLP, our construction team keeps on top of the latest developments in the law, and translates this into practical advice for our industry clients. Our highly knowledgeable lawyers can help new and existing clients navigate all recent changes set out in the new Construction Act and assist in implementing strategies that will protect client interests. Contact us online or call 519-886-3340 to make an appointment.