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Setting Up and Managing Holdback Accounts

 

Article written by Kent Burnham. Kent is a Partner at Nixon Wenger LLP and is the head of the Civil Litigation practice group.

Builders Lien Act, SBC 1997, c.45

The Builders Lien Act requires that a holdback be established for the person primarily liable on each subcontract under which a lien may arises.  Strict compliance with the Act would require that where there are multiple subcontractors, multiple holdback accounts be set up.  Practically speaking, this is rarely done.  Where a General Contractor is employed by the Owner, a single holdback account is generally established and administered by the Owner and General Contractor.  Subcontractors who hire sub-subcontractors are well advised to set up their own holdback account.

The amount required to be retained in the holdback is the greater of the 10% of the value of the work and materials or 10% of the value of the amount paid.

Again, as a general rule, it is easier to retain based on the amounts paid.  In circumstances where quantity surveyors are employed to determine the value of the work done, the holdback would only need to be increased if the value of the work exceeded payment and payment for that work was not to be forthcoming for some time, or if the work had ceased and invoicing was delayed for some reason.

The holdback account should be established at a savings institution and generally the Owner and General Contractor are administrators on the account.  However, should there be conflicts, Section 5(3) of the Builders Lien Act, permits an administrator to apply to the Court to have an administrator removed; to discharge liens; or to have the holdback administered by the Owner exclusively.

 

Holdback Exceptions

Important points to note include that there is no holdback retained from a worker, material supplier, architect, or engineer.  Those invoices should be paid in full when presented.  Paying them does not erode protection of the holdback vis-a-vis the other lien holders.

No holdback is required if the work is being done for a government corporation or other pubic body.  Further, no holdback is required where the aggregate value of the improvement is less than $100,000.

 

Use of Holdback Funds

Section 6 of the Act sets out a prohibition against using the holdback to repair deficiencies or to complete works that have been abandoned, or a contract has been terminated.  The prohibition does not come with any penalties, however, and as a practical matter, owners will almost never pay out the holdback when they have substantial claims for deficiencies or work that is left undone.  

Payments made from the holdback account to rectify deficiencies or complete work left undone do not reduce the liability under the holdback.  However, a contract that is partially unfulfilled or inadequately or improperly completed, may result in damages to the Owner and those damages will be set off as against any amounts that may have been due under the contract including the  holdback.

 

Rights to Information

A Contractor’s rights include knowing details and location of the holdback, its balance, and if the Owner fails to comply in maintaining a holdback or fails to provide that information, the General Contractor can suspend operation for so long as the default continues.

 

Consequences of Failing to Maintain Holdback

The most significant impact failing to retain a holdback has, is on the Owner.  An Owner is personally liable for the holdback even if they have paid out the entire contract price.  Liens by unpaid subcontractors that remain undischarged even after the General Contractor has been paid in full, create an additional burden to the Owner.

Contractors who do not properly establish and administer holdback accounts can be held personally liable as well.  Since all funds paid by an Owner to a General Contractor are impressed with a trust in favour of subcontractors, workers and material suppliers on the project, holdback funds that are not set aside or retained potentially become part of a breach of trust claim.

 

Payment Out of Holdback

The holdback is to be paid out 55 days after a contract has been completed, abandoned or a Certificate of Completion has been issued.

Section 1(2) states 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.

For strata property, it is completed no later than the date the strata lot is first occupied.

Abandonment occurs when the work has been done on a project for a period of 30 days unless the cessation of work was caused by a strike, lockout, sickness, weather, holidays, Court Order, or shortage of materials.  It is worthy of note that a project is not considered abandoned until after the 30 days, therefore, the holdback would be 85 days after the last work was done on an abandoned project.

Substantial completion is achieved when the cost to complete is less than 3% of the first $500,000 of the contract; 2% of the next $500,000 of the contract; and 1% of the balance. 

Once again, although the Act states that it is mandatory that the payout occur 55 days after completion, there are no penalties for failure to pay out.  As a result, owners often will not pay out if there is any dispute with respect to deficiencies or for incomplete work.

Unless the amount involved is significant, the best course is to rectify the deficiencies and get the money.  That said, a Court application can always be made to order the Owner to pay out the holdback because the language of the Act is mandatory.  Unfortunately, unless the amount involved is significant, it is not economically practical to pursue the remedy through the Courts.

If you have holdback questions, are concerned about liens, or contractual rights arising under a project, seek legal advice before it becomes a crisis.  Counsel can often negotiate and navigate difficult circumstances without escalating matters, thereby avoiding significant expense and delay.

 

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