The end of the Mechanics’ Lien Act
Kenneth McCullogh, QC and Conor O’Neil, P.Eng.
On December 18, 2020, the Legislative Assembly of New Brunswick passed the Construction Remedies Act. The new legislation will not take effect until a date to be named at which time it will replace the existing Mechanics’ Lien Act (“Act”). The new legislation is lengthy and technical in nature compared to its predecessor. As anticipated the new Act does not include provisions for prompt payment or adjudication which have been passed in other provinces, although the door has been left open for such provisions at a later date.
Modernization of the Act
Many of the changes will be familiar to those who work in jurisdictions outside New Brunswick. As in almost all other provinces, the statutory holdback amount which is required to be retained by an owner will be reduced from 15% of the contract price to 10%.
Similarly, the time within which a lien holder has to register its claim for lien will be harmonized to a single 60 day period. In most instances that 60 day period will run from the earliest of the date of certification of substantial performance, completion, termination or abandonment of the contract. Importantly for subcontractors, the time period will also be triggered by the date upon which the subcontractor last supplied services or materials to the improvement. This provides clarification for certain subcontractors, for example earthworks, who supply their services early in a project and do not stay on for the entire life cycle.
A subtle, but significant, new change will be that parties can no longer contract out of their lien rights. The new legislation specifically provides that every contract or subcontract is deemed to be amended to conform to the new Act.
Substantial performance and completion of projects
The new Act offers some clearer direction for determination of when a contract is substantially performed and completed. As to substantial performance, the test that the improvement be ready for use or the purpose intended is codified; however, a second criteria will be in place which requires that the improvement be capable of completion or that the remaining defects be less than a certain amount, for which the new Act provides a formula. Similarly, completion requires that the cost of completing the improvement be less than 1% of the contract price.
The Construction Remedies Act will more strictly limit who can perform the role of payment certifier to an architect, engineer or a third party designated in the contract. A contractor will have the ability to directly request that the payment certifier determine if the contract is substantially performed. The new Act also prescribes times within which the payment certifier will deliver its certificate. Finally, the contractor will be required to post the certificate of substantial performance at the site of the improvement. The new Act leaves open the possibility that other forms of notice may be prescribed by regulation. The government has previously signaled that it would be preferable if an industry association take on the role of publishing certificates of substantial performance online, as is done in trade publications in some other jurisdictions. This would have the effect of providing more timely and consistent notice to subcontractors and suppliers that the clock is ticking for the release of holdback and expiration of lien rights on projects.
Where a contract is substantially performed and some services or materials remain to be supplied, the owner will be required to maintain a finishing holdback. The finishing holdback applies to the amount which remains to be completed after substantial performance, representing 10% of that amount. The finishing holdback may be released 60 days after the completion, abandonment or termination of the contract.
Release of holdback after the lien period expires will become mandatory, rather than permissive. Owners and payment certifiers that have in the past converted the statutory holdback to a deficiency holdback after the period for registration of a claim for lien has expired will no longer be able to do so. Owners will want to carefully keep track of such amounts to avoid the issue of not retaining enough funds to complete a project. For longer projects the Construction Remedies Act also provides that holdback may be released on an annual or phased basis.
Trust accounts and breach of trust
The trust provisions of the new lien legislation will be significantly altered. The obligations of owners, in particular, will greatly expand. As was always the case, the contractor and subcontractor trusts remain.
Funds in the hands of an owner will become trust funds when the funds become payable to the contractor. Owners will also be required to establish a holdback trust account for such funds with their financial institution in an account separate and apart from other funds for the project. This account is to be administered, in most cases, by the owner and the contractor. Any payments made out of the holdback trust account require the signature of each of the trustees and trustees are required to maintain records to ensure that the funds are traceable.
Finally, a breach of the trust provisions remains an offence under the Provincial Offences Procedures Act; however, directors, officers and any person who has effective control of the corporation that assents to, or acquiesces in conduct that the person knows, or reasonably ought to know, would result in a breach of trust may be liable for such a breach. This means trustees may be personally sued in the Court of Queen’s Bench for breach of trust by beneficiaries of the trust.
Government is now drafting regulations under the Construction Remedies Act and it is not anticipated that the Act will come into effect until the regulations are complete.
For the time being the Mechanics’ Lien Act continues to apply to all construction projects in New Brunswick. When the transition happens, the new legislation provides that contracts entered into after the Construction Remedies Act comes into force will be governed by the new legislation. There will be a period of grandfathered contracts as the Mechanics’ Lien Act will continue to apply to any contracts which are entered into before the date upon which the Construction Remedies Act comes into force.
This update is intended for general information only. If you have questions about how the information above may affect you, please contact any member of our construction group.
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