Landlords and tenants: Navigating leasehold interests, liens and the Construction Act

Changes to the Construction Act (formerly the Construction Lien Act) (the “Act”) include new provisions, which:

1. expose a landlord’s interests in premises to liens arising from a tenant’s work where a landlord and tenant agree in a lease or any agreement that is connected to the lease that the landlord will pay for all or part of the tenant’s work;
2. remove the requirement for contractors to deliver written notices of improvement to landlords (elimination of the former Subsection 19(1) notice);
3. increase the scope of information a landlord is required to provide regarding the landlord-tenant relationship; and
4. affirm the principle established in jurisprudence that where a landlord meets the definition of “owner” in the Act, the landlord will be liable as a statutory owner to claims of lien claimants arising from the tenant’s work.

Which provisions apply?

Landlords and tenants must consider whether the “old” or “new” provisions of the Act apply.

The above provisions will not apply to improvements in respect of leasehold interests if (as set out in subsection 87.3(c) of the Act):

in the case of a premises that is subject to a leasehold interest that was first entered into before July 1, 2018, a contract for the improvement was entered into or a procurement process for the improvement was commenced on or after July 1, 2018 and before the day subsection 19 (1) of Schedule 8 to the Restoring Trust, Transparency and Accountability Act, 2018 came into force (being December 6, 2018).

Under the Act, a procurement process is commenced on the earliest of the making of (as set out in subsection 1(4) of the Act):

(a) a request for qualifications;

(b) a request for quotation;

(c) a request for proposals; or

(d) a call for tenders.

Notice to a Landlord from a lien claimant no longer required

The Act now exposes landlords to liability for liens where payment for a leasehold improvement is accounted for under the lease or other agreement to which the landlord is a party that is connected to the lease.

Under the “old” provisions of the Act, a landlord’s interest in the lands being improved was only at risk of a claim for lien if the lien claimant gave written notice to the landlord prior to starting work that it was supplying services and materials to the property. However, the landlord could avoid liability if it gave notice within 15 days that it assumed no responsibility for the work.

The “new” section 19 removes the notice requirement and, instead, provides as follows (at s. 19(1)):

If the interest of the owner to which a lien attaches is leasehold, and if payment for all or part of the improvement is accounted for under the terms of the lease or any renewal of it, or under any agreement to which the landlord is a party that is connected to the lease, the landlord’s interest is also subject to the lien, to the extent of 10 percent of the amount of such payment. [Emphasis added]

Given the “new” section 19, it is prudent to consider how tenant inducement clauses are drafted. For example, if a lease or related agreement includes payment/inducement/abatement for the benefit of the tenant, consider whether it should also provide for a 10% holdback of the total inducement to be retained by the landlord until after the work is completed and the landlord is satisfied that no claims for lien have been (or can be) preserved.

Landlord’s Obligation to respond to Requests for Information under section 39

Section 39 of the Act provides that any person “having a lien” can require certain parties to provide specified information. Under the “old” section 39, landlords were not required to respond to such requests for information. But, section 39 now requires landlords to answer requests for information within twenty-one (21) days.

If a landlord receives a section 39 request for information, the landlord must provide the following information (see s. 39(1)4): (i) the names of the parties to the lease, (ii) the amount of the payment for all or part of the improvement accounted for under the lease or under any agreement that is connected to the lease, and (iii) the state of accounts between the landlord and the tenant.

Landlord a statutory “owner”

Subsection 19(5) is a new provision under the Act and provides that a landlord can be found liable to a lien claimant as if it is the “owner”, even though the work is done for the tenant. Subsection 19(5) provides:

Nothing in this section prevents a determination in respect of a premises that the landlord is instead its owner, if he or she meets the criteria set out in the definition of “owner” in subsection 1(1).

The Act defines “owner” as follows:

“owner” means any person, including the Crown, having an interest in a premises at whose request and,

(a) upon whose credit, or

(b) on whose behalf, or

(c) with whose privity or consent, or

(d) for whose direct benefit,

an improvement is made to the premises but does not include a home buyer.

If a landlord’s conduct in relation to the improvement results in the landlord meeting the criteria set out in the definition of “owner”, the landlord can be exposed to liability for the full amount of a lien, even if the lease does not include any inducement/abatement for the tenant work. While each case is fact-specific, caselaw suggests the following are some of the factors a Court will consider in determining whether the landlord is a statutory “owner”: (1) the landlord’s level of monitoring and involvement in respect of the work / improvements made, (2) whether the landlord is “requesting” the improvement, and (3) whether the landlord is “benefiting from” or “consenting to” the improvement.

We are here (working remotely) to assist with navigating through the Act, including to ensure that your leases and/or allowance clauses account for the recent amendments to the Act.