To lien, or not to lien? That is the question for contractors seeking payment

Contractors who’ve been in this situation know the score. You’ve not been paid for work you’ve completed on a home building or renovation project, your subs are mad as hell, and your credit limit is getting stretched. Perhaps your contract allows the client to hold back 10 per cent of the final payment, or for portions of the work as completed, but now they’re not returning calls and you need to move onto other aspects of the project. Pressure builds from all sides. Maybe the client has even gone bankrupt! A lien can light a fire under a slow-paying client, but at what cost?

Proposed amendments to Ontario’s Construction Lien Act have re-focussed attention on the costs of liens that end up in the court system. The proposals suggest a more structured approach to payments and mediation to avoid that route entirely. But first a quick review.

What is a lien, and what can it do for you?
A lien is a registered claim, usually against the title of the land itself, for payment for services or materials supplied in relation to an improvement to land, like a building or improvements to a building.

A lien might help you get paid, but it depends. What is the financial status of the property itself? Are there mortgages or other security claims against it? Have other liens been filed? Is there actually any money at the end of the day to pay you?

Maybe you don’t want to go this route
Liens, although easy to file, quickly get complicated, potentially expensive, and can take a long time to resolve through the courts once the process is underway. All filing steps must be completed in strict accordance to the rules, or your lien will not be qualified. Most filing rules deal with time frames, and vary across the country. On top of all that, if you are one of several other same-class contractors, and payment funds are limited, you may only get a portion of what’s due. And generally speaking, you won’t get paid ahead of anyone else anyway.

Do your due diligence before you sign the contract…or at least before you file a lien
There is, of course, the obvious point of researching your client’s financial status, past history, and the status of the property before you sign a contract. But if you’ve now reached the point where a lien seems appropriate, ask yourself some questions. Will your lien actually impede any financing approvals underway that would allow the client to pay you? Will a lien action simply annoy and alienate a client who is maybe just slow but who does intend to pay you? Will it jeopardize other aspects of a multi- layered project yet to be undertaken?

Arming yourself with a “proper invoice”
Ontario is the process of reviewing and amending its liens legislation, however contractors across Canada can gain from the advice being given to contractors and sub-contractors in that province in anticipation of these proposed changes.

For example, the proposals being considered in Ontario include a prompt payment regime wherein clients must pay contractors (and they in turn their subs) within 35 days of receiving a “proper invoice.” What is a proper invoice. First of all, your invoice must be in writing. That seems obvious, but what that really means is that it should be clearly itemized and laid out in a professional format. (Have you ever submitted a partial work invoice on a scrap of paper outlining in pencil your hours and materials over the past two weeks?)

A professional or “proper invoice” format also means an invoice from a corporate entity. This is important from a liability issue, such as cases of negligence for example. It also means naming your client correctly. Likely it’s a personal name, not a corporation. Nevertheless, make sure you get the client’s full name so that if it comes to a legal dispute, there is no doubt who is the “proper debtor.”

Specific to Ontario, other changes to the Liens Act being considered include a mandatory arbitration process, and an increased awareness and sensitivity to what is called “quantum”, or the “willful exaggeration” of work done or materials used. It’s all in an effort to find resolutions without going through the courts, to everyone’s benefit. Some of these options may already be in place in your province. Check and find out.

Learning how the liens process works is important, just as finding ways to avoid having to use liens could save you time, aggravation and definitely money.

follow John on Twitter @john_bleasby