Under the Construction Act, R.S.O. 1990, c. C.30 (“Act”), holdback obligations are created pursuant to Section 22 that provides that the owner is required to hold back 10% of the contract price from the contractor as well as the amount of any registered liens for which the owner has received notice of. This requirement to hold back also applies to contractors since the Act requires contractors to retain holdback on behalf of subcontractors. If the owner fails to retain holdback, the owner can be personally liable for the holdback obligations pursuant to Section 23 of the Act with respect to any lien action.
The obligations for the owners and contractors to retain holdback will terminate when subcontractors or suppliers that have done work or supplied materials for the improvement of a property can no longer make a lien claim as against the subject property as well as when any existing registered lien has been either resolved/paid or discharged with respect to the owner’s holdback obligation.
There are two types of holdbacks under the Act, the regular holdback as referred to in Section 22(1) as well as the finishing holdback as referred to in Section 22(2). The regular holdback relates to subcontractors that carried out work prior to substantial performance of the prime contract and a finishing holdback relates to subcontractors who performed work after substantial performance of the prime contract.
Section 26 of the Act provides that each payer upon the contract or subcontract, without jeopardy, can make payment of the holdback that the payer is required to retain by subsection 22(1) (basic holdback), so as to discharge all claims in respect of that holdback, where all liens that may be claimed against that holdback have expired as set out in Part 5 of the Act or have been satisfied, discharged or as provided for under Section 44 of the Act. The application of Section 26 of the Act in relation to regular holdback obligations therefore provides that the regular holdback obligations come to an end when the period to register new liens has expired. Pursuant to Section 31 of the Act, the new provisions requires that 60 days have passed since the publication of the certificate of substantial performance and that existing liens have been satisfied, resolved or finally settled, and discharge with respect to the owner. This includes the payment of security into court to cover any liens that may have been registered on title and were vacated by the owner by posting security with the court pursuant to Section 44 of the Act.
Sections 26.1 and 26.2 of the Act permits for payment of holdback on an annual basis or in phases where the contact price is greater than $10,000,000 and the contract provides for annual/phased release of holdback. Section 33 of the Act needs to be taken into consideration since that section permits the reduction of the holdback such that it can be paid out on a subcontract basis provided that a subcontract is certified as being completed at the request of the contractor. If certification of the contract takes place, the owner will no longer be obligated to retain holdback with respect to the subcontract amount if all liens with respect to that subcontract have expired, satisfied or discharged or security has been paid/posted into court pursuant to Section 44 of the Act.
Section 27 of the Act provides that finishing holdback obligations come to an end under the same conditions as Section 26 of the Act save and except that the expiration of the lien period in relation to a finishing holdback is 60 days after the total completion of the project.
Once the holdback funds are owing to the contractor, these funds become trust funds pursuant to Section 7 of the Act and they constitute a trust fund for the benefit of the contractor. The Act obligations require the trustee (the person that owes the holdback) and the beneficiary (the person to whom the holdback is owed) to have contracted with one another. Therefore the trust obligation of the owner is only to the contractor and not to others such as subcontractors.
An owner and/or a general contractor can set off as against the holdback with respect to any outstanding debts, claims or damages that the owner or general contractor may have against the party to whom the holdback is owed.