Ontario Landlords May Now Have Lien Claim Exposure from Tenant’s Work

Written By Paul D. Blundy

The Construction Act (Ontario) (formerly known as the Construction Lien Act) (the “Act”) was substantially amended last year. The first phase of those amendments came into force in Ontario July 1, 2018. Under the Act as it existed prior to July 1 (the “Old Act”), landlords did not need to concern themselves with the potential for liens arising out of work carried out by tenants.

Under the Old Act, if a tenant contracted for improvements to its premises it was only the leasehold interest of the tenant that was exposed to the risk of claims for lien being made my unpaid contractors and subcontractors. Section 19(1) of the Old Act provided a mechanism whereby the contractor engaged by a tenant could give a notice to the landlord regarding the proposed improvements. If the landlord failed to respond within 15 days, advising the contactor that the landlord would not assume any responsibility for the improvement, the landlord’s interest would be exposed to claims for lien. It was not difficult for even the sleepiest landlords to react to a notice from a contractor within the required 15-day period and thereby ensure that the landlord’s interest in the premises would not be subjected to liability to the tenant’s unpaid contractors and subcontractors.

Section 19(1) of the Old Act has now been repealed and replaced by a new provision. Under the new Section 19(1) the concept of a notice to the landlord is gone. Now the landlord need not be given any notice at all that its title will be exposed to claims for lien. If payment for all or any part of the tenant’s improvement is funded directly or indirectly by the landlord under the lease, the landlord’s interest will be subject to claims for lien arising out of the work to the extent of 10 percent of the funding under the lease. The funding need not be expressed in the lease but may be contemplated by an agreement to lease or other agreement “connected” to the lease.

Clearly, any leasehold improvement allowance or tenant inducement payment will be caught by this language, but what about free rent or other non-cash inducements that are provided by the landlord in connection with the lease? The Act uses the words “accounted for under the terms of the lease” which could potentially catch any inducement or allowance provided by a landlord. The degree to which the value of the inducement or allowance is connected to the improvement is not clear. Potentially, the value of any tenant inducement, whether in cash or otherwise, may be included in calculating the amount of the landlord’s exposure to claims for lien.

Further, there is no limit provided for the time that may elapse between the provision of the inducement and the carrying out of the improvement. Arguably, an inducement provided in one year to a tenant, the value of which is not applied by the tenant to an improvement until another year, could still result in a lien exposure.

We will no doubt see case law interpreting the breadth of the landlord’s exposure over the next few years.  In the interim, any landlord that is providing any form of tenant inducement to a tenant now needs to ensure that the tenant pays for any improvements it carries out in the premises. No notices need be provided to the landlord, therefore landlord’s must be proactive to monitor any work undertaken in the premises and ensure the tenant pays its bills.

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