Written By Denise D. Bright, Geoffrey P. Stenger and Kay She

The recent Master's decision in Chandos Construction Ltd v Twin Peaks Construction Ltd, 2016 ABQB 296 determined an issue under the Builders' Lien Act (Alberta) (BLA) which, surprisingly, had never been specifically addressed by an Alberta court. The issue was whether a lien claim for the value of work performed prior to the issuance of a certificate of substantial performance can attach to land after the owner has properly released the major lien fund. The Master determined that a lien does not attach in such circumstance.

Case Summary

Chandos Construction Ltd. was a general contractor constructing a hotel in Calgary and Twin Peaks Construction Ltd. was a structural steel supplier, hired directly by Chandos. Nearing completion of construction, a certificate of substantial performance was issued by Chandos and the owner paid the major lien fund to Chandos when permitted in accordance with the BLA. There was no dispute as to whether the certificate of substantial performance was properly issued or whether the major lien fund had been properly paid by the owner to Chandos. In addition, the owner withheld 10 percent of the value of the work performed after issuance of the certificate of substantial performance, the minor lien fund, which amounted to approximately $45,000.

Following payment of the major lien fund by the owner, Twin Peaks registered a lien in the amount of $118,756.29, most of which was for work performed prior to issuance of the certificate of substantial performance. As a result, Chandos brought an application seeking a court order that a lien for work performed prior to issuance of a certificate of substantial performance does not attach to land in the amount of the minor lien fund once the major lien fund has been properly paid by the owner. The Master reviewed the BLA and, in particular, cited section 24 of the BLA, which provides as follows:

When a certificate of substantial performance is issued,

1. any lien arising out of work done or materials furnished before the date of issue of a certificate of substantial performance is a charge on the major lien fund, and
2. any lien arising out of work done or materials furnished on and after the date of issue of a certificate of substantial performance of the contract is a charge on the minor lien fund. [emphasis added]

The Master concluded that only work performed on or after the issuance of a certificate of substantial performance can be the subject of a lien claim after proper payment of the major lien fund by an owner and prior to payment of the minor lien fund, if any.

Does this Create any Challenges under the BLA?

For owners, this decision confirms some advantages associated with requesting a contractor to issue a certificate of substantial performance, as once an owner properly pays the major lien fund it is no longer liable for that amount (or lien claims for work performed prior to issuance of the certificate of substantial performance). For general contractors, this decision is also a win as it reduces the likelihood of lien claims being advanced against the minor lien fund. With that said, this decision further incentivizes subcontractors to register liens after issuance of a certificate of substantial performance to preserve their lien rights which could result in a disruption to the flow of funds on a construction project.

While the facts in Chandos Construction were fairly straight forward, the decision raises some challenges under the BLA with respect to the application of the BLA, including:

• How will this decision affect lien claims where there is a certificate of substantial performance issued for a subcontract? In particular, can a sub-subcontractor still register a lien for all unpaid amounts where a portion of the major lien fund has properly been paid by an owner to its contractor following issuance of such certificate of substantial performance? Are the lien rights of all subcontractor affected where there is a certificate of substantial performance issued under an unrelated subcontract?
• Section 23(3) of the BLA prescribes the maximum amount a subcontractor's lien can attach to the minor lien fund and is subject to Section 13(1), which provides for the scope and extent a labourer's lien has priority. Accordingly, do the provisions of Section 24 interpreted in Chandos Construction conflict with Section 23(3), in particular considering that Section 24 does not contemplate the priority of a labourer's lien provided for within Section 13(1)?
• Is it an equitable result where an owner maintains a minor lien fund but unpaid subcontractors cannot have recourse to the full minor lien fund as provided for in Section 23(3) and are the trust provisions sufficient protection under the BLA if a contractor/subcontractor absconds with any portion of the major lien fund?
• In what cases will there be a practical value maintaining a minor lien fund given the application of this decision? How many subcontractors are performing work after substantial performance and when will it be worth registering a lien (and potentially incurring legal fees) for potentially very small amounts?
• Does this decision result in further complexity administering lien claims as parties seek to determine the value of work performed by a subcontractor before and after a certificate of substantial performance is issued?
• If unpaid contractors could lien for all amounts owing to them for work performed on a project, but only attach to the major or minor lien fund, as applicable, would that not be easier to administer?

Those are questions for another day and potentially the legislature. If anything, this decision may have confirmed one issue under the BLA but may have resulted in others requiring further consideration. We understand this case has not been appealed as of writing.