Protecting Unpaid Accounts: Registering a Builders’ Lien in BC
Unpaid construction accounts can quickly become significant cashflow problems. Contractors and subcontractors may already have paid for labour, materials and equipment while payment remains tied up in a dispute or repeated promises that funds are coming.
The British Columbia Builders Lien Act provides qualifying contractors, subcontractors, suppliers and workers with an important tool to protect unpaid accounts. Registration of a builders’ lien creates security against project lands and improvement being constructed thereon and can provide significant commercial leverage in resolving an outstanding account. Because a registered builders’ lien can interfere with financing, progress draws under construction loans, refinancing or a sale of the property, registration often encourages payment or the provision of alternative security while the underlying payment dispute is resolved.
Registration of a builders’ lien does not, however, establish that the amount claimed is actually owing or guarantee recovery. Lien rights are also strictly time limited. If a lien is not registered within the applicable lien registration period, the lien is extinguished.
Identifying the 45-Day Lien Registration Period
The immediate priority when an account becomes unpaid is identifying the event that triggers the 45-day lien registration period. This is often the most misunderstood aspect of the Builders Lien Act. The lien registration period generally has little to do with the date of the claimant’s last invoice, the contractual payment due date or the claimant’s last day on site. Instead, the applicable triggering event depends on the contractual structure of the project, whether a certificate of completion has been issued and whether the head contract or improvement has otherwise been completed, abandoned or terminated:
The starting point is determining whether the owner has engaged a “head contractor.” The Builders Lien Act defines a head contractor as a contractor engaged by the owner to perform substantially all of the work respecting an improvement. On a conventional general contracting project, the general contractor will ordinarily be the head contractor (i.e., any project procured and organized by way of commonly used CCDC 2, CCDC 3, CCDC 4, or CCDC 5B agreements).
Different considerations arise where the owner contracts directly with trade contractors, as commonly occurs under certain construction management procurement models. If no contractor has been engaged to perform substantially all of the work, there may be no head contractor for the purposes of the Builders Lien Act. This distinction is important because it changes the event against which the 45-day lien registration period is calculated.
Certificate of Completion
A certificate of completion can trigger the 45-day lien registration period before the overall project or head contract is completed. Where a certificate of completion has been issued with respect to a particular contract or subcontract, the contractor or subcontractor whose contract has been certified, together with persons engaged by or under that contractor or subcontractor, have 45 days from issuance of the certificate to register their liens.
This allows subcontracts to be completed and their corresponding holdbacks released progressively without waiting for completion of the entire project. Contractors and subcontractors should therefore not assume that they have until completion of the overall project to register a lien. A certificate of completion issued earlier in the contractual chain may have already started the applicable lien registration period for any lien claimants claiming under or through the contract that has been certified complete.
The Builders Lien Act also permits a lien holder to request information from the payment certifier regarding certificates of completion issued in connection with the improvement, which is often a very useful tool to protect the interests of contractors, subcontractors and material suppliers.
Completion Without a Certificate: The 3-2-1 Test
A certificate of completion is not required for a lien registration period to be triggered. Where no applicable certificate of completion has already triggered the lien registration period and the owner has engaged a head contractor, the applicable 45-day period begins upon the earliest relevant statutory event involving the head contract, being completion, abandonment or termination of the head contract.
For this purpose, “completed” does not mean that every deficiency has been corrected, every piece of work has been performed or everyone has left the project. The Builders Lien Act provides that a contract is “completed” when it has been substantially completed or performed. The Act then establishes the commonly referred to “3-2-1 test” for determining substantial performance.
A head contract, contract or subcontract is substantially performed when the remaining work is capable of completion or correction for not more than:
3% of the first $500,000 of the contract price,
2% of the next $500,000 of the contract price, and
1% of the balance of the contract price.
For example, for a contract with a contract price of $1 million, substantial performance is achieved when the remaining work is capable of completion or correction for $25,000 or less.
This is sometimes referred to as “deemed completion.” More precisely, however, it is completion by operation of the statutory definition. Once the remaining cost to complete or correct the work falls within the applicable 3-2-1 threshold, the contract satisfies the statutory test for substantial performance and is therefore “completed” for the purposes of the Builders Lien Act. This distinction is important because no certificate, notice, declaration or acknowledgement is necessarily required to trigger the 45-day lien filing period.
For example, assume an owner has retained a general contractor under a $1 million head contract. No certificate of completion has been issued. On 1 June, the remaining work under the head contract becomes capable of completion or correction for $24,000. The head contract may therefore have become substantially performed, and accordingly completed for the purposes of the Builders Lien Act, on 1 June. The applicable 45-day lien registration period for anyone claiming under or through such general contractor may begin running from that date even though work continues, deficiencies remain outstanding and nobody formally declares the head contract complete. This creates a significant practical risk because the triggering event can occur without any document being circulated to contractors, subcontractors or suppliers. Also, no certificate of completion would be posted in a prominent location on site. Determining the actual completion date may therefore require a retrospective assessment of the state of the work and the estimated cost of completing or correcting the remaining work at different points in time.
It is equally important to understand what the 3-2-1 test does not do. Where an owner has engaged a head contractor and no certificate of completion applies to a particular subcontractor, substantial performance of that subcontractor’s own subcontract does not, by itself, necessarily trigger that subcontractor’s 45-day lien registration period. In the absence of an applicable certificate of completion for such subcontract, the statutory trigger is generally completion, abandonment or termination of the head contract, assuming there exists a head contractor as is defined by the Act. Accordingly, the 3-2-1 analysis relevant to the ultimate lien registration deadline may be the substantial performance of the head contract, rather than substantial performance of the individual claimant’s subcontract.
A later certificate of completion also does not restart or extend a lien registration period that has already begun to run because of an earlier statutory triggering event. Parties should therefore be cautious about relying solely upon certificates of completion when determining lien deadlines. The factual state of completion of the head contract may be equally important.
Projects Without a Head Contractor
The analysis is different where the owner has not engaged a head contractor. Where there is no head contractor and no applicable certificate of completion has triggered the lien registration period, the 45-day period is generally measured from completion or abandonment of the improvement itself.
The 3-2-1 formula is not the statutory test for determining when an improvement is completed. Instead, the Builders Lien Act provides that an improvement is completed when the improvement, or a substantial part of it, is ready for use or is being used for its intended purpose. This distinction can be particularly important on construction management projects (i.e., using a CCDC 5A contract coupled with CCDC 17 contracts between the owner and each trade contractor) where the owner contracts directly with individual trade contractors and no single contractor is responsible for substantially all of the work.
For example, completion of an electrical contractor’s trade contract does not necessarily mean that the improvement itself has been completed. If there is no applicable certificate of completion for that trade contract and no head contractor was engaged by the owner, the broader state of the improvement must be considered. The particular project delivery structure should therefore always be carefully scrutinized before determining the applicable lien registration deadline.
The Builders Lien Act contains an additional rule concerning strata lots. Construction of a strata lot is considered completed, or a contract for its construction substantially performed, no later than the date the strata lot is first occupied. Occupancy can therefore create an important outside date when determining the applicable lien registration period for work relating to a strata lot.
Abandonment
Abandonment can also trigger the lien registration period. For the purposes of the Builders Lien Act, a contract or improvement is generally deemed abandoned after 30 consecutive days during which no work has been performed in connection with the contract or improvement.
There are important exceptions where the cessation of work results from matters such as a strike, lockout, sickness, weather conditions, holidays, a court order, shortage of material or another similar cause. Unlike completion under the 3-2-1 test, the Builders Lien Act expressly uses the concept of “deemed” abandonment. Whether abandonment has occurred therefore requires consideration not only of how long work has stopped, but also of why the work stopped.
Do Not Rely on the Date of Your Last Work or Promises of Payment
A common misconception is that a contractor or subcontractor has 45 days from its last day of work to register a builders’ lien. That is generally not the test under the British Columbia Builders Lien Act. A subcontractor may have finished its work months before the applicable lien registration period begins. Conversely, a subcontractor may still be performing deficiency or corrective work after the applicable lien registration period has already started. Lastly, trades that routinely perform work near the end of a project, such as landscaping or architectural concrete work, may find themselves in the undesirable position of commencing their work after the applicable lien registration period has already begun to run or, in some circumstances, has already expired. Also, performing additional work (for example, under change orders) does not necessarily extend or restart the lien registration period. The proper analysis requires identification of the applicable statutory triggering event.
Another frequent problem arises where an unpaid contractor or subcontractor delays registering a lien because payment has been promised. The parties may be negotiating an outstanding change order, awaiting financing, reconciling invoices or repeatedly advising that payment will be made shortly. Those discussions do not stop the statutory lien registration period from running.
A promise to pay, ongoing settlement negotiations or delivery of a demand letter generally does not preserve lien rights that would otherwise expire. Where an account remains unpaid and a potential lien deadline is approaching, the safer course is ordinarily to preserve the lien rights while commercial discussions continue.
Practical Steps When an Account Becomes Overdue
Construction and material supply businesses should treat lien protection as part of ordinary accounts receivable management rather than waiting until an account becomes seriously overdue. Once a significant account becomes unpaid, the relevant project documents should be assembled promptly. These will commonly include the head contract, subcontract, purchase orders, approved and disputed change orders, invoices, payment applications, certificates of completion, deficiency lists, project schedules and correspondence relating to completion of the work.
The contractual structure should then be identified. In particular, consideration should be given to whether there is a head contractor, whether any certificate of completion has been issued, whether the head contract has reached the 3-2-1 substantial performance threshold, whether the improvement is ready for its intended use and whether any contract or the improvement has been abandoned or terminated.
The applicable lien deadline should then be diarized conservatively. Waiting until day 44 or day 45 creates unnecessary risk. Problems with the legal description of the property, ownership information, execution of the prescribed claim of lien or Land Title Office filing can become significant if discovered at the last minute.
Registration Is Not the End of the Process
Registering the builders’ lien preserves the lien claimant’s security, but further steps are required to maintain and enforce it. A lien claimant must generally commence an action in the British Columbia Supreme Court to enforce the lien within 1 year after registration. Where the lien remains registered against title, a certificate of pending litigation must also generally be registered within that period.
The 1-year period can be shortened substantially if the lien claimant is served with a notice to commence an action under the Builders Lien Act. In that circumstance, the lien claimant may have only 21 days to commence the required proceeding and take the steps necessary to preserve the lien. All lien enforcement deadlines should therefore be diarized immediately following registration.
Protecting Unpaid Construction Accounts
Builders’ liens are one of the most effective statutory tools available to construction businesses attempting to protect unpaid accounts in British Columbia. Their effectiveness, however, depends on acting within strict statutory deadlines.
The critical question is usually not when an invoice became due or when the claimant last attended the project. The proper analysis requires identification of the project’s contractual structure and the event that triggers the 45-day lien registration period. Particular care is required where no certificate of completion has been issued. On a project with a head contractor, the head contract can become completed for the purposes of the Builders Lien Act once the statutory 3-2-1 substantial performance threshold has been reached. That event can occur without any formal certificate or notice and can therefore start the lien registration period without an obvious administrative event alerting potential lien claimants.
Early review provides the greatest opportunity to identify the correct deadline, preserve available security and continue commercial payment discussions without unnecessarily compromising lien rights.
