The Builders Lien Holdback is a point of confusion amongst parties involved in all types of construction projects. The holdback is in place to limit the liability of parties in the payment chain of a project while setting aside some funds for unpaid parties lower on the chain. Many believe that a holdback is not required on their project and make full payments to their contractors or sub-contractors without a second thought. Unfortunately for those parties they are putting themselves at risk of double payment of the holdback funds by not adhering to the terms of the Builders Lien Act, SBC 1997 c.45.
Is a Holdback Required?
On any construction project (with a number of specific exceptions – for example, projects involving First Nation’s lands or highways) the parties in the payment chain – owners, contractors, sub-contractors etc. – must maintain a 10% holdback from the parties below them in the chain including contractors, sub-contractors, and sub-sub-contractors. For example, the owner holds back from the contractor and the contractor holds back from the sub-contractor. Parties cannot hold back funds from workers, material suppliers, architects or engineers, as parties below them in the payment chain cannot file a valid lien against the project.
Many contractors and their sub-contractors will either explicitly exclude the Builders Lien Holdbacks in their contracts, or simply not allow the parties above them to hold funds back. However, these contract terms are not enforceable as parties cannot contract out of provisions of the Builders Lien Act. The challenge arises when the contractor or sub-contractor demands payment in full, as the party is not legally obligated to make the full payment. In some cases, the contractor or sub-contractor will (wrongly) deny continuing with the work if the holdback is maintained, which can cause uncertainty on the project. If this occurs, it is likely best to seek legal advice to determine what the most prudent way forward is to keep the project on track.
This 10% holdback should be deducted from each invoice before payment is made, and if the project value exceeds $100,000 those funds should be held in a separate account in an accredited savings institution. Although some believe that it must be held in a joint account, the Builders Lien Act does not specify a joint account and only requires that the owner administer the account with the contractor.
Once being held, the holdback funds must not be released to the parties until the following conditions have been met:
- 55 days have passed since substantial completion, abandonment or termination of the improvement (these dates are often difficult to determine);
- No liens have been placed on title to the lands; and
- No litigation has commenced in the Supreme Court of British Columbia in relation to payments on the improvement.
The party holding back the funds should be sure to perform the appropriate searches of the title to the property and the Court Registry to determine if liens or civil claims have been filed before releasing any funds. Although the period for filing a lien expires 45 days after substantial completion, abandonment or termination of the improvement, this should not be confused with the 55-day period noted above. This 10-day difference is often misunderstood and can cause issues with the holdback if not adhered to correctly.
In the event that the party maintaining the holdback releases the holdback funds prior to these conditions being met, lien claimants or those with litigation underway can potentially recover the entire holdback amount from that party. Although this could possibly constitute a double payment, that is the risk associated with not adhering to the holdback provisions under the Builders Lien Act.The information provided above is for educational purposes only. This information is not intended to replace the advice of a lawyer or address specific situations. Your personal situation should be discussed with a lawyer. If you have any questions or concerns, contact a legal professional.