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Construction - Holdbacks
MORE CASES
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. KingSett Mortgage Corporation v. Mapleview Developments Ltd.
In KingSett Mortgage Corporation v. Mapleview Developments Ltd. (Ont CA, 2026) the Ontario Court of Appeal dismissed an appeal, here involving "the issue of how the quantum of any deficiency in holdbacks is to be calculated under s. 78(2) of the Construction Act, R.S.O. 1990, c. C.30 (the “Act”) for the purpose of determining a priority dispute between a lienholder and a building mortgagee in circumstances where there are no subcontractor lien claims at the time of the dispute":[1] The statutory framework governing construction liens in Ontario has long required holdbacks to protect lienholders. This appeal engages the issue of how the quantum of any deficiency in holdbacks is to be calculated under s. 78(2) of the Construction Act, R.S.O. 1990, c. C.30 (the “Act”) for the purpose of determining a priority dispute between a lienholder and a building mortgagee in circumstances where there are no subcontractor lien claims at the time of the dispute. The quantum of holdbacks is important because liens arising from improvements enjoy a statutory priority over building mortgages taken out “to secure the financing of [that] improvement” to the extent of any deficiency in the required holdbacks.
[2] The specific question on this appeal is whether any deficiency in the holdbacks under s. 78(2) of the Act is to be calculated as a proportion of unpaid invoices or total invoices rendered under a contract for an improvement.
[3] For the reasons that follow, I conclude that, for the purposes of a priority dispute under s. 78(2), where there are no subcontractor lien claims at the time of the dispute and a payer has fully paid invoices from a contractor for services or materials provided, there is no deficiency in the holdbacks related to those services or materials fully paid for. It follows that any deficiency must be properly calculated as a proportion of unpaid invoices from the contractor.
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[19] In Dufferin Concrete, the court held that once contractor invoices are paid in full, that contractor is not entitled to any priority for any holdback referable to those invoices in respect of which the owner failed to retain a holdback under the predecessor to s. 78(2) of the Act, as this would amount to double recovery. In other words, a contractor is entitled to a holdback only for unpaid invoices, not all invoices relating to services or materials supplied under the contract.
[20] In the decision below, the motion judge described “the longstanding principle set out in Dufferin Concrete”, and observed that, in that case, the plaintiff had supplied concrete materials and had been paid in respect of most but not all of the total contract price. The plaintiff argued that the quantum of the holdback should be equal to ten percent of the total contract value, not the lesser balance remaining unpaid.
[21] The court in Dufferin Concrete disagreed, concluding that to do so would make “the holdback on contracts … closer to 20 per cent”. The court further stated that “[t]he legislation could have only intended this doubling effect when injured third parties are involved … Consequently, the plaintiff’s holdback collectible from the mortgagee is 10 per cent of the unpaid contracts”.
[22] As noted by the motion judge, that approach was followed in subsequent cases, including in a decision by Brown J. (as he then was) in Pegah Construction Ltd. v. Panterra Mansions Joint Venture Corp., 2014 ONSC 3966, 37 C.L.R. (4th) 58, in which he stated, at para. 11:That result [that the holdback obligation is significantly lower] arises from a series of cases dealing with the method for calculating the statutory holdback in circumstances where the supplier has contracted directly with the owner. The principle emerging from those cases – often referred to as the principle in Dufferin Concrete Products v. Waterbrooke Developments Ltd. – is that the proper holdback of the lien claimant who has a direct contract with the owner is 10% of the unpaid contract. [23] Having concluded that she was bound by the decision in Dufferin Concrete, the motion judge then calculated the quantum of each appellant’s Priority Payables claim accordingly (i.e., in an amount equal to ten percent of the value of the unpaid invoices only).
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3. The Statutory Framework
[34] The Act, like its legislative predecessor the Construction Lien Act,[3] sets out a comprehensive regime governing construction contracts, liens and payment rights. Its legislative purpose is clear and straightforward: to protect contractors, subcontractors and suppliers who provide services or materials to improve a property in Ontario (referred to as lien claimants): Scott, Pichelli & Easter Limited v. Dupont Developments Ltd., 2022 ONCA 757, 475 D.L.R. (4th) 364, at para. 9.
[35] A construction lien (sometimes referred to as a builder’s lien) is a claim for unpaid services or materials that may be registered against title to the property improved. That serves as public notice to all, including mortgagees, other lenders and/or potential purchasers, that there is an outstanding claim related to improvements to the property.
[36] The Act sets out the technical provisions and relevant timelines for preserving liens (by registering the claim for lien against title –required to be done within 60 days) and perfecting liens (by commencing an action to enforce the lien and registering a certificate of action against title so the lien will not expire –required to be done within 90 days): ss. 31(1) and (2); 34(1); and 36(1) and (2).
[37] Where the services or materials are supplied by the contractor who has entered into an agreement with the owner, there is privity of contract and a claim for unpaid invoices is straightforward. However, the Act goes further and recognizes the reality that construction and property improvement projects often involve work by different construction trades who lack any direct contractual relationship with the owner. Instead, they are subcontractors engaged by a contractor.
[38] The Act provides that not only can these subcontractors qualify as lien claimants notwithstanding the lack of privity of contract with the owner, but they are also further protected by the statutory requirement for holdbacks. That protection is balanced, however, against the rights of a building mortgagee by providing that the lien holder has priority over the building mortgagee only to the extent of any deficiency in the required holdbacks.
4. The Relevant Statutory Provisions
[39] I begin with the text of the relevant statutory provisions.
[40] Part XI of the Act addresses “Priorities”, including priorities between liens and mortgages (which is the dispute here). Dunsire, as purchaser, stands in the shoes of the building mortgagee whose debt it satisfied through the purchase of the townhouse project, for the purposes of the priority dispute. Section 78(2), which applies to building mortgages (mortgages [taken] with the intention to secure the financing of an improvement), provides:Where a mortgagee takes a mortgage with the intention to secure the financing of an improvement, the liens arising from the improvement have priority over that mortgage, and any mortgage taken out to repay that mortgage, to the extent of any deficiency in the holdbacks required to be retained by the owner under Part IV, irrespective of when that mortgage, or the mortgage taken out to repay it, is registered. [Emphasis added.] [41] In the present case, there is no dispute that, as a result of the application of s. 78(2) (and the November 2024 decision of Cavanagh J. made in this proceeding), KingSett’s mortgage has priority over the appellants’ liens “except to the extent of any deficiency in the holdbacks required to be retained by Mapleview”.
[42] Accordingly, to succeed, the appellants must establish that there is such a “deficiency in the holdbacks … under Part IV” (i.e., s. 22) for the purpose of determining a dispute about the extent of the priority granted under s. 78(2).
[43] Section 1(1) of the Act defines “holdback” as “the 10 per cent of the value of the services or materials supplied under a contract or subcontract required to be withheld from payment by Part IV”.
[44] Part IV of the Act addresses holdbacks and includes s. 22(1) which is the key provision obligating a payer to retain a holdback:Each payer upon a contract or subcontract under which a lien may arise shall retain a holdback equal to 10 per cent of the price of the services or materials as they are actually supplied under the contract or subcontract until all liens that may be claimed against the holdback in respect of the supplied services or materials have expired or been satisfied, discharged or otherwise provided for under this Act. [Emphasis added.] [45] Section 22(3) operates to confirm that this obligation applies irrespective of whether the contract or subcontract provides for partial payments (as occurred here) or payment in full on completion.
[46] Under s. 14(1) of the Construction Act, a lien arises at the time services or materials are supplied:A person who supplies services or materials to an improvement … has a lien … for the price of those services or materials. [47] Accordingly, s. 22(1) imposes on a payer (which may be an owner, contractor or subcontractor) the obligation to retain the ten percent holdback as the services or materials are actually supplied “until all liens that may be claimed against the holdback in respect of the supplied services or materials have … been satisfied …”.
[48] Moreover, the term “deficiency in the holdbacks” is not defined in Part IV (or anywhere else in the Act). The term appears in the statute only twice, both times in s. 78 in relation to priority disputes between lien claimants and mortgagees: ss. 78(2) and (5).
[49] Accordingly, an analysis of whether there is “any deficiency in the holdbacks” in the context of a priority dispute under s. 78(2) plainly requires consideration of two factors: whether there are any liens that may be claimed against the holdback at the time of the priority dispute; and if so, whether those liens have been satisfied.
[50] In my view, when those factors are properly applied to the circumstances here, the position advanced by the appellants cannot succeed. I reach this conclusion since, where an invoice has been paid to the contractor in full, no lien can arise, or if it did, any lien has been fully satisfied. This is the inescapable result, since the amount of the invoice has been paid in full to the contractor and there is no other lien claimant at the time of the priority dispute under s. 78(2) (i.e., a subcontractor) who could have any claim for all or part of that amount.
[51] It then follows from the plain language of s. 22(1) that for the purposes of a priority dispute under s. 78(2), where there are no subcontractor lien claimants at the time of the priority dispute, there is no deficiency in the holdbacks in relation to the services or materials supplied by the contractor pursuant to those fully paid invoices. No amounts remain owing to the contractor and there are, at that time, no other lien claimants.
[52] Here, both appellants supplied services or materials and rendered periodic invoices as the work progressed. With respect to some but not all invoices, the owner did not deduct ten percent in respect of the required holdback, but instead, initially paid the invoices to both appellants in full. In other words, rather than the owner paying ninety percent of the invoiced amount and retaining ten percent as a holdback, that ten percent was also paid to the contractor.
[53] In these circumstances, where there are no subcontractor lien claims, I agree therefore with the position of the respondent that any “deficiency in the required holdbacks” for the purposes of a priority dispute under s. 78(2) must be interpreted to account for the full payments made to the appellants. Put otherwise, when an invoice has been paid in full, in the absence of subcontractor lien claims at the time of a s. 78(2) priority dispute, there is no deficiency in the required holdbacks in favour of the contractor relating to the invoiced amount. At paras 54-63 the court further considers this issue from a statutory interpretation perspective, here - ultimately - 'absurdity'.
The court continues:[61] It has been a longstanding principle of construction lien law in Ontario that the premature payment of a holdback cannot give a lien claimant a greater right, or put the owner in any worse position, than if the owner had retained the holdback as required: Brooks v. Mundy (1914), 1914 CanLII 519 (ON SCAD), 16 D.L.R. 119 (Ont. C.A.), at para. 6; Otis Elevator Co. Ltd. et al. v. Commonwealth Holiday Inns of Canada Ltd. et al. (1972), 1972 CanLII 620 (ON HCJ), 2 O.R. 536 (Ont. Co. Ct.), at para. 10; and Doig v. Stehn (1924), 1924 CanLII 122 (SK CA), 2 D.L.R. 627 (Sask. C.A.).
[62] Put simply, the effect of the appellants’ submission is that a contractor should have a priority over building mortgagees to the extent of ten percent of invoices already fully paid – where that same ten percent has already been paid to that same contractor. The contractor would effectively be paid the same holdback amount twice – once when the owner failed to retain the ten percent holdback and paid the contractor’s invoice in full, and a second time when the contractor is granted priority over the building mortgagee arising from a “deficiency in the holdbacks” in respect of invoices that have already been paid in full.
[63] I can see no language in the Act, and particularly in either ss. 22(1) or 78(2), that imposes such a requirement and, in my view, this would yield an absurd result and an interpretation that cannot be said to reflect the intent of the legislature.
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b. Legislative Objective of Maintaining a Balance
[64] It is also important to recall that the legislation is not intended to favour lien claimants, but rather to strike a balance. As observed by Penny J. of the Ontario Superior Court of Justice, Commercial List, in BCIMC Construction Fund Corp. et al. v. 33 Yorkville Residences Inc et al., 2022 ONSC 2326, 4 C.B.R. (7th) 238, at para. 27, aff’d 2023 ONCA 1, 4 C.B.R. (7th) 253, at para. 14:First, contrary to the lien claimants’ submission, there is no broad principle that the Act should be interpreted to favour lien claimants. Rather, it is well accepted that the Act is remedial legislation that provides a means for contractors and subcontractors to obtain payment for labour and material supplied to a property, while balancing the competing interests of owners, contractors, subcontractors, and mortgagees in the construction process. Indeed, the parties seem to agree that the true object and purpose of the Act is to balance the interests of the various parties in the construction process and to fairly allocate risk and benefit between those who fund construction and those who provide services and materials. Section 78(2) is an important element in that balancing done by the legislature. [65] The text of s. 78(2) has not been substantially changed since it was introduced (although the Act has since been renumbered). Legislative history materials support the conclusion that the purpose of s. 78(2) was to “[provide] a reasonable balance between the interest of the mortgagees who finance the construction of improvements and the lien claimants who do the actual work on the improvement …. it is only fair that the mortgagee’s interest be partly subordinated to the liens of the suppliers to the improvement, to ensure that there will be money available to pay them for the work that they have done” (emphasis added): Report of the Attorney General’s Advisory Committee on the Draft Construction Lien Act (Toronto: Ministry of the Attorney General, April 1982) at pp. 179-180.[4]
[66] As the respondent submits, this balance is achieved by, among other things, limiting the priority of lien claimants over mortgagees to any deficiency in the holdback amount: Bianco v. Deem Management Services Limited, 2021 ONCA 859, 159 O.R. (3d) 542, at para. 29.
[67] The result in Dufferin Concrete (and in Pegah) maintains this balance. That may be why, notwithstanding the significant passage of time since that case was decided, there have been very few decisions engaging the issue, and no decisions supporting the interpretation urged on this court by the appellants.
[68] In Dufferin Concrete, as here, the owner became insolvent, there were no subcontractor lien claims and the dispute was effectively between the contractor and the mortgagee. The court accepted that, while the premature payment of holdback “will not result [in the] discharge of the liens of persons other than the person who is paid” (i.e., the contractor who receives the payment):[T]o give the plaintiff what it wants … and not credit … the first 23 invoices paid in full, in effect, makes the holdback on contracts … closer to 20 per cent. The legislation could have only intended this doubling effect when injured third parties are involved, in my opinion. In these circumstances I agree that failure to retain the 10 per cent holdback is to deprive those claiming under [the contractor], not [the contractor] itself. [69] It is a critically important fact on this appeal that there were no subcontractor lien claims at the time of the priority dispute under s. 78(2). The record is silent on whether there were any subcontractor lien claimants at an earlier point in time. The result might be very different if there were subcontractor lien claimants, and nothing in this decision should be taken as endorsing the result in Dufferin Concrete where such parties are present at the time of a priority dispute under s. 78(2).
[70] But where there are no subcontractor lien claimants at the time of the priority dispute, s. 78(2) simply confirms that liens have priority over a building mortgage to the extent of any deficiency in the holdbacks required to be retained by the owner, even if that mortgage is first ranking security registered on title.
[71] Accordingly, in my view, any "deficiency in the holdbacks" pursuant to s. 78(2), in circumstances where there are no subcontractor lien claimants at the time of the dispute, must account for fully paid invoices and therefore be calculated in an amount equal to ten percent of the amount of unpaid invoices, and not the full contract amount, all as calculated by the motion judge. . Sayers Foods Ltd. v. Gay Company Ltd.
In Sayers Foods Ltd. v. Gay Company Ltd. (Ont Div Ct, 2026) the Ontario Divisional Court dismissed a statutory JR, this brought against an adjudicator's order for "the Applicant to pay $685,574.91, plus interest .... pursuant to the prompt payment regime in the Construction Act" [under Part II.1 - Construction Dispute Interim Adjudication].
Here the court considered Construction Act 'holdbacks':(a) Notice Holdback
[49] Gay Co’s applications for payment did take account of Sayers’ obligation to maintain a “basic” holdback of 10% of the value of services and materials provided to the improvement. Sayers argues that, in addition to the “basic” 10% holdback, it was required to maintain a “notice” holdback in respect to the amount of any claims for lien registered against the project.
[50] Sayers is correct that “[a] requirement to pay an amount in accordance with this section [the prompt payment adjudication regime] is subject to any requirement to retain a holdback in accordance with Part IV [of the Act]” (Construction Act, s. 13.19). “Any” requirement to maintain a holdback includes the requirement to retain the “basic” holdback and “notice” holdback (Construction Act, ss. 22 and 24)).
[51] As noted above, the Adjudicator found that “notice” holdback obligations do not arise for an owner unless “written notice” of the lien is given to the owner by the claimant.
[52] Gay Co. argues that this finding is wrong in principle and unreasonable because it “[disregards] the legal constraints in the Act with respect to how additional holdback works when a party has “actual notice” of a registered construction lien” (Factum, para. 67). Gay Co. cites authority from the Superior Court and from this court in support of this position: Urbacon Building Groups Corp. v. Guelph (City), 2009 CanLII 72065 (SCJ); Basic Drywall Inc. v. 1539304 Ontario Inc., 2012 ONSC 6391 (Div. Ct.).
[53] This analysis is problematic for two reasons. First, it overstates the authorities upon which it is based. Urbacon was a decision focused on finding the “undisputed basic holdback” and then ordering payments to subcontractors from this amount – against which a set-off claim could not be asserted by the owner. “Notice” holdbacks were not included in the calculation, and no findings were made respecting what kind of “notice” to an owner was required to give rise to a notice holdback obligation. In Basic Drywall, the court did find that “any notice [of a construction lien] before actual payment” would be sufficient to give rise to notice holdback obligations (at para. 24). However:(a) The court, in Basic Drywall, was not concerned with the form of notice given, but rather with the timing of that notice; and
(b) The Construction Act and its regulations were amended when the prompt payment provisions were added, including amendments related to the form of notice to be given to an owner of registration of a construction lien [SO 2017, c. 24, s. 2].[7] [54] The applicable definition of “written notice of lien” in s. 1(1) of the Act means “a written notice of a lien in the prescribed form, given by a person having a lien.”[8] This definition precludes mere “actual notice” obtained by an owner doing a title search and discovering that a lien has been registered. In this way, the Legislature has permitted a lien claimant to register a claim for lien without triggering notice holdback obligations, so that the claimant may protect its right to pursue a lien and may also cooperate with the efforts of its contractor to pursue the same funds, faster, through a prompt payment adjudication. The notice must be given “to” the owner “by” the person having a lien, in the “prescribed form”.[9] If these conditions have not been met, then notice has not been given and notice holdback obligations do not arise. See Ziebarth Electrical Contactors Ltd. v. 2461476 Ontario Inc., 2021 ONSC 3360, paras. 45-51, per Master Kauffman (as he then was). Ziebarth states the law correctly on this point. Further, prior to Ziebarth, mere registration of the claim for lien was held not to be sufficient to constitute the requisite notice to give rise to notice holdback: Belmar Sheet Metal Co. v. 849539 Ontario Inc. (1995) 24 CLR (2d) 28 (Ont. SCJ Master); Hal Mann Tiles Inc. v. Palmer (1995), 1995 CanLII 7093 (ON SC), 24 OR (3d) 93 (Master).
[55] The applicable definition provides that a subcontractor may register a construction lien so as to preserve its rights within the time periods stipulated by the Act but may also choose not to give “written notice” of the claim for lien so as to trigger notice holdback obligations and thereby frustrate an application for prompt payment. In this way, a subcontractor lien claimant may maintain its lien rights while also delaying asserting those rights against the notice holdback, in the hopes that an order for prompt payment will result in faster payment than would litigation of lien claims before the courts. These provisions are in accordance with the recommendations in Striking the Balance, the Report that led to the prompt payment amendments to the Act: “there is a need not only to preserve rights under the current Act, but also to attempt to ensure that the preservation of those rights does not defuse the potential usefulness of the adjudication regime.”[10]
[56] In its factum, Sayers argues as follows:The Adjudicator… simply interpreted section 24(2) as only being triggered if an actual “written notice” is provided, notwithstanding an Owner already has actual notice of registered construction liens. He misunderstood notice holdback in this scenario, and then stepped beyond his statutory authority limited by s. 13.19, as well as ss. 21 and 24(2) of the Act, and ordered payment in breach of holdback obligations. The logic is arbitrary, as it suggests that a subcontractor would attain greater rights by simply serving a letter indicating it was going to register a lien, but obtain lesser rights by actually registering that lien and the owner receives notice of it. (Factum, para. 74) [57] With respect, the Adjudicator did not “step beyond his statutory authority”. The Adjudicator has jurisdiction to determine “basic” and “notice” holdback obligations and to apply those findings in the course of the adjudication. And that is what the Adjudicator did in this case. There is no evidence in the record establishing that Sayers received written notices from subcontractors giving rise to notice holdback obligations: Sayers’ argument that its discovery of liens registered on title constituted such notice is wrong in law, and the Adjudicator made no error in rejecting that argument on the merits.
[58] As noted above, the Adjudicator found that Sayers had conceded this point during argument. Before us, Sayers denies that this point was conceded. There is no transcript or recording of the hearing before the Adjudicator filed in this application, and so we have no way to assess whether the point was actually conceded. However, we would not rest our decision on the Adjudicator’s finding that the point was conceded. The record discloses no basis for finding that written notice was given by subcontractors to Sayers, and thus the Adjudicator was correct, in law, in finding that notice holdback obligations did not arise. Inquiry into the “concession issue” would not change the bottom-line conclusion on this issue.
[59] The court appreciates that payment of a prompt payment determination – and resulting payments by a contractor to subcontractors and suppliers – may have an impact on the quantum of subsisting liens and security required for those liens. Those are matters to be addressed in the lien proceedings, after the determination has been paid – adjudication and prompt payment are not to be delayed while those issues are sorted out. See: Okkin Construction v. Apostopoulos, 2022 ONSC 6367 (SCJ), per S.E. Fraser J.; Pasqualino v. MGW Homes Design Ltd., 2022 ONSC 5632 (Div. Ct.), per Ricchetti RSJ. . Sayers Foods Ltd. v. Gay Company Limited
In Sayers Foods Ltd. v. Gay Company Limited (Div Court, 2024) the Divisional Court grants a consent stay action against Construction Act (CA) adjudicator's decision, here in the course of a CA 'prompt payment' JR.
Here the court considers CA 'holdback' treatment:[6] As was confirmed during oral argument, the improvement has been completed and the contract price for the improvement was about $7.2 million. Basic holdback is thus about $720,000. Subcontractor claims, enforceable against basic holdback, are largely uncontested to a value of about $500,000, with additional subcontractor claims of about $150,000 not being contested by the Responding Party, but which the Moving Party submits are out of time.
[7] The amount of the Adjudicator’s determination is less than the amount of Basic Holdback.
[8] The Construction Act provides that any funds paid to the Responding Party pursuant to an Adjudicator’s determination are to be used to pay down amounts owed to subcontractors.
[9] The Moving Party is not entitled to assert set-off claims it has against the Responding Party against basic holdback available to satisfy subcontractor lien claims.
[10] On one theory of the facts, the Moving Party will be required to pay about $500,000 in basic holdback to subcontractors. On another, the Moving Party will be required to pay the entirety of the Adjudicator’s determination, and more, in basic holdback to subcontractors.
[11] I understand the Moving Party’s concern that, if it pays the determination to the Responding Party now, if those funds are not applied to subcontractor claims to reduce the claims against basic holdback, the Moving Party could be called upon to pay more later. I also understand the Moving Party’s concern that payment of the Adjudicator’s determination will leave the currently registered claims for lien on title. These are issues that may be raised before the application panel.
[12] In my view it is beyond dispute that the Moving Party will be required to pay most, perhaps all, of the Adjudicator’s determination to the Responding Party’s subcontractors. I see no reason why this payment should have to await the extended litigation that may be required to decide the lien claims between the Moving Party and the Responding Party. Any issue about the proper application of the funds, reduction in lien security upon payment of those funds, and related issues, may be addressed by the application panel or as that panel may direct.
[13] Finally, I note that this court has endorsed early payment of established subcontractor claims from minimum holdback, and consequent reduction in lien security: Homes by DeSantis (Lake) Inc. v. Sutton Forming Inc., 2023 ONSC 2628 (Div. Ct.), applying Urbacon Building Groups Corps. V. Guelph (City), 2009 CanLII 72065 (ON SC). This court has not addressed how the process of retiring subcontractor claims in lien proceedings may be affected by a prompt payment determination. However, the parties need not await a decision from this court on these issues to order their affairs appropriately: if the parties consent to payment out of some or all of the funds paid into court to retire subcontractor claims against basic holdback, they may request an appropriate consent order from the court.
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