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The construction industry often struggles with determining when builders’ liens can and must be filed. The British Columbia Builders Lien Act (“BLA”) imposes “substantial completion” as the statutory milestone that triggers the claim of lien filing period. This article provides an overview of the mandatory timelines associated with the substantial completion triggers and then discusses the often difficult task of determining substantial completion.
Sections 20 and 22 of the BLA set out that the allowable time for filing a claim of lien is no later than 45 days after the earliest of the following triggering events:
It is important to note that once a triggering event occurs, the 45-day time limit to file a claim of lien starts to run. If or when a second event takes place, the already commenced 45-day time limit is not reset or renewed. Whenever a contract is deemed complete without the issuance of a certificate of completion, confusion can arise because a contractor may have unwittingly lost its legal entitlement to register a valid claim of lien because the 45-day lien filing period has expired. Should that happen, a contractor who missed a lien filing deadline may be able to commence a Shimco action in which it asserts a lien against unreleased holdback funds.
Certified Versus Deemed Completion
The substantial completion milestone can be “certified” by issuance of a certificate of completion or be deemed complete in accordance with the BLA.
The BLA identifies the “3-2-1 formula” and the “improvement completion” as the two approaches for determining whether a contract, subcontract, or improvement can be either certified or deemed complete, in fact.
The 3-2-1 formula is used to certify complete a head contract or subcontract. The formula details are set out in section 1 of the BLA as follows:
. . . a head contract, contract or subcontract is substantially performed if the work to be done under that contract is capable of completion or correction at a cost of not more than
(a) 3% of the first $500 000 of the contract price,
(b) 2% of the next $500 000 of the contract price, and
(c) 1% of the balance of the contract price.
Note that the 3-2-1 formula cannot be used to certify complete cost-plus or unit-rate contracts or subcontracts that lack guaranteed target contract prices, because there is no final “contract price”. Therefore, these types of contracts make determining completion difficult, if not impossible, until the project is totally complete in fact. For example, where a contractor has billed $300,000 on account of work completed pursuant to a cost-plus contract with no guaranteed target contract price, but the scope of work remains incomplete, then the 3-1-2 formula is unworkable because there is no “contract price” based on which to calculate the three percent.
Improvement Completion Approach
When the 3-2-1 formula is unworkable or a certificate of completion is not requested or issued, the BLA provides for an “improvement completion” approach, which allows for an improvement to be deemed completed “if the improvement or a substantial part of it is ready for use or is being used for the purpose intended.”
The BLA does not define the phrase “substantial part” or when an improvement is “ready for use”. Therefore, in contrast to the 3-2-1 formula, the improvement completion approach is a principally subjective exercise.
Note the improvement completion approach must only be employed if the owner did not engage a head contractor. For example, when the owner contracts directly with various trade contractors there are multiple “head contracts” and no one head contractor can be said to have been “engaged to do substantially all of the work” with respect to an improvement.
Application and Conclusion
A real-world example is most effective to illustrate the many difficulties owners, consultants, and contractors may encounter when attempting to certify or deem complete a contract.
Suppose that an owner and head contractor entered into a cost-plus contract for the construction of a condominium tower, with no guaranteed stipulated target contract price. To date, the contractor has billed $5.6 million on account of the work. The only incomplete scopes of work are the delivery and installation of the elevator cab and installation of some mechanical elevator components.
The 3-2-1 formula cannot be used to certify or deem complete the contract because it is a cost-plus agreement. The only remaining option under the BLA is to assess whether the improvement can be deemed complete using the improvement completion approach, which invites frequent disagreement between parties and, as described in greater detail below, may contravene the strict language of the BLA.
The owner may argue that the missing elevator cab and incomplete mechanical components represent a substantial part of the improvement and therefore the “improvement or a substantial part of it” is not ready for use. The contractor may argue that the elevator cab and remaining mechanical components represent an insubstantial part of the overall improvement and therefore a substantial part of the improvement is ready for use.
The language of the BLA could lead to an even greater inconsistency. Read in its grammatical and ordinary sense, subsection 20(2)(b) stipulates that the improvement completion approach comes into play only if the owner did not engage a head contractor. In our example, the owner retained a head contractor, which makes inoperable the improvement completion approach. In the result, the 3-2-1 formula cannot be used to certify or deem complete the cost-plus head contract while the improvement completion approach is not operative because the owner engaged a head contractor.
While this article addresses some of the inconsistencies that can arise out of the provisions of the BLA, owners and contractors can take precautionary actions to safeguard their legal rights, both on-site and in the head office. Construction industry participants are well advised to seek timely legal advice from counsel who focus on construction law and builders’ liens.
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Articles | Sep 15, 2020
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