Finding a trusted contractor is no easy feat. Unfortunately, once residential property owners have done their due diligence and hired a contractor, they often fall into the trap of assuming their property is in good hands. If and when there is a dispute about the cost of materials and labour or the quality of work being provided, residential property owners tend to withhold funds. In response, contractors generally register a construction lien on the property.
Below is a summary of what a construction lien is and how to protect yourself against them.
What is a Construction Lien?
In simple terms, a lien is a notice that is registered on title to your property that tells the world that you owe a creditor money. They can be registered by anyone who has supplied services or materials to repair or improve your property. It has priority over all other judgments and other agreements affecting your interest in the property. In other words, a contractor’s right to be paid is paramount. In many cases, contractors overstate the amount of money they are owed or, worse still, some construction liens turn out to be entirely unfounded. Nevertheless, contractors may register inaccurate lien claims, which can prevent you from refinancing or selling your property. Once the lien has been registered, you can only have it removed by paying the full amount of the lien claim plus the lesser of $250,000 or 25% of the lien amount into court. For this reason, it is important for you to take preventative measures to protect yourself from exaggerated or unfounded lien claims.
Tip #1 – Enter into a Contract for Services
The most important written document is a contract for services. When one is provided, you should read over it carefully and ensure you understand its terms.
Tip #1.1: Set out the terms of payment
The contractor’s right to request payment should be limited by or contingent upon the various construction items being free of any defects and, where applicable, receiving municipal, engineering, or architectural approvals. It is unlikely that a contract for services will contain such a clause, as it strongly favours the residential property owner. However, insisting on a provision of this nature is critical. As a compromise, you may have to provide a larger deposit and, more than likely, you will have to pay more for the services being provided. By making payment contingent upon approvals and construction free of defects, you prevent the contractor from charging you and making a lien claim for items that are, in essence, incomplete.
Tip #1.2: Restrict the contractor’s ability to deviate from design, engineering, and architectural specifications
At the very least, the contract should provide that you are to receive written notification and must provide written consent before construction deviates from drawings and specifications. A written notice should set out the reasons for the deviation and the details of the modified work. By making all deviations and variances subject to notice and approval, you avoid situations where the contractor unilaterally modifies a construction item at a greater cost to you. These modified items will show up in a lien claim should you and the contractor enter a dispute and, if you do not require notice and approval, you may be stuck with the bill.
Tip #2 – Every deviation from drawings and specifications should be reflected in a revised work order or a change work order
All variances to the work order should be set out in a change work order or a revised work order that should be signed. Do not accept changes to repairs or renovations of your property by way of a verbal agreement. Each and every change should be carefully documented, justified and given a specific dollar value. If changes are not detailed in a work order, it makes it difficult to assess the dollar value of any changes, which, in turn, makes it difficult to challenge a lien claim when the modified work is deficient.
It is advisable to have the contractor personally guarantee the contract. We have found that clients that sue corporations owned by contractors are at a disadvantage because these corporations have little to no assets.
Tip #3 – Take measures to protect yourself if you do not have a contract for services
Unfortunately, many contractors do not formalize their relationship with a contract. In those situations, there are still measures you can take to protect yourself.
Tip #3.1: Obtain detailed work orders
The first thing you can do in the absence of a contract for services is request as much detail as is reasonably possible in the work order or quote being provided to you. Avoid nondescript and broad items. For example, when you are getting your kitchen renovated, the quote should not simply state: “Kitchen renovations for $14,000”. Have the contractor separate materials from labour and request separate line items for each component of the renovation or repair. Having a detailed quote makes it easier for you to isolate the cost of various construction items if the work is deficient. If a lien is registered, it is then simpler for you to argue that the lien should be reduced by the cost of the deficient line item.
Tip #3.2: Enter agreements by email
You may also attempt to enter into agreements via email, which are powerful pieces of evidence. Before construction begins and you agree to a work order, you may request that you be notified of any modifications or deviations by written notice and that a corresponding change work order or revised quote be produced. You may also stipulate that money is to be paid when the work is free and clear of defects and approvals are obtained, less the deposit. If the contractor agrees to your terms and the terms of the work order do not conflict, you will be well positioned if a contractor confronts you with an exaggerated or unfounded lien claim.
Tip #4 – Monitor and document progress
As a final note, you should visit the property regularly to take pictures (make sure the picture is date stamped), record video, and monitor progress. If you are unable to do so, you should consider hiring a professional inspector who will visit the property and monitor construction on your behalf. The aim is to detect defective work at an early stage and have it remedied as opposed to being charged for the work and having to dispute the amount once a lien has been registered.
In summary, feeling good about a contractor does not mean they are good. Accordingly, you should ensure that you protect yourself.