A lot of small and medium (and, surprisingly, sometimes even large) sized residential renovations neglect to follow the requirements imposed by the Builders Lien Act – most notably the need to maintain a 10% holdback on funds paid by the owner to the general contractor (or contractors if there is no general contractor). This holdback fund should be held until 55 days after the renovation is substantially complete.
This is unfortunate, because small lien disputes without holdbacks are guaranteed to be uneconomical for all of the parties to the dispute. In almost every small lien dispute without a holdback, I know that the clients (whether owner, contractor or subcontractor) will be unsatisfied with the economics of the litigation.
A proper holdback fund protects all of the parties (albeit imperfectly at times) and can simplify a dispute. Why, then, is the holdback rarely maintained in smaller residential construction? One of the main reasons is that few people, even contractors, fully understand the benefits of the holdback created by the Builders Lien Act.
The holdback protects owners, contractors and subcontractors differently.
For the owner, the holdback will allow them to discharge liens filed by subcontractors, employees or material suppliers, even if the total value of the liens exceed the amount of the holdback. If a general contractor or contractor goes bankrupt or walks off the job without paying subcontractors, the owner doesn’t have to worry about coming up with additional funds to discharge the liens.
The holdback does not directly apply (or assist) when the dispute is between the owner and a general contractor. However, even then, having the holdback allows the owner to quickly deal with unpaid subcontractors, thereby simplifying the litigation (and simple is almost always cheaper).
For a general or head contractor, the holdback will discharge subcontractor liens from title. If, as a contractor, you are in a dispute with your subcontractor about the amount you owe them, your client, the owner, can be assured that they won’t be impacted by this dispute because they can use the holdback to discharge any liens. In other words, it is good client relations to ensure the holdback is maintained. A contractor should also be aware that trust obligations follow funds paid by the owner to the contractor. Taking holdback funds when they should have been maintained may increase a contractor’s liability in a dispute with subcontractors.
Finally, for a subcontractor, employee or material supplier, the holdback provides at least partial protection for the value of the work they provided. If an owner has not maintained the holdback account and paid the funds to the contractor (who has not paid you), any resulting litigation will be more complicated and will directly involve the owner. Confirming that a holdback will be maintained can reduce the costs of any subsequent dispute.
There are many elements to the Builders Lien Act, some of which are quite technical, but all of which are designed to help maintain a balance between owners, contractors and subcontractors. Even for smaller renovations, it is usually a good idea to consult a professional about the contract and your obligations prior to finalizing the contract.
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.