LIFE CYCLE OF A BUSINESS

Geoff and Amanda, a married couple, found a business that they really wanted to buy.

However, they knew that without legal advice they could inherit some of the existing business owner’s debts. They had also heard horror stories about business owners who had trouble getting financing because their corporate records were not properly created and maintained. Having heard about Beacon Law’s Business Start-Up NavigatorTM program, and wanting things to go smoothly, they made an appointment to meet with Del….

–>> Read more by clicking here to download the PDF Newsletter

BUSINESS LEGAL CHECK-UP

Craig Grier, Local Business Owner

Having worked for others for others for over 25 years, Craig Grier decided that his mid-forties was as good an age as any to start his own business. With the support of his wife Bonnie, Craig would use the knowledge and perspective he had gained over the years. Confident of success and free to turn to his connections, he viewed running his own company as the culmination of his career that could carry on for many years. That was 1996.

–>> Read more by clicking here to download the PDF Newsletter

B.C.’s BUILDERS LIEN ACT

B.C.’s Builders Lien Act came into force on February 1, 1998. It updated and in some cases significantly changed the law under the former Builders Lien Act.

Overview of the Act
The objectives of the Builders Lien Act are to ensure that construction funds are used for their intended purpose, and to protect those who add value to a building under construction. To fulfill its objectives, the Act uses three main strategies:

1) The Act provides a form of security to contractors, subcontractors, workers and suppliers who work on a building that is under construction – the builders lien. A builders lien is a charge on property by a person who has supplied work or material to a building under construction. A builders lien may be claimed by a contractor, subcontractor or worker. These are all defined terms under the Act and may also include architects, engineers and suppliers of materials.

2) The Act creates a pool of money out of which claims may be paid, by requiring an owner to hold back 10% of each payment to the contractor – the builders lien holdback. The builders lien holdback provides two functions:

  • It ensures that there is a pool of money out of which builders lien claims can be paid (although it does not guarantee payment of those claims).
  • It limits an owner’s liability for lien claims. If an owner complies with the holdback provisions of the Act, his or her maximum liability for lien claims will be limited to the amount of the 10% holdback or the unpaid balance of the contract price, whichever is greater.

3) The Act helps to ensure that money intended to finance construction is used for that purpose by imposing a trust on money received by contractors and subcontractors in connection with the construction project – the statutory or deemed trust. Contractors and subcontractors are deemed to be trustees of the money received by them. The persons engaged directly by them are the beneficiaries of the particular trust fund.

Time Limits for Filing Liens and Releasing the Holdback
The Act creates a multiple holdback system, requiring a 10% holdback on each contract and each subcontract. Trades that complete their work early no longer have to wait for completion of the entire project for release of their holdback. Their lien filing period, however, is also shortened.

The deadline for filing builders liens was extended from 31 to 45 days. The time for retaining the holdback was extended from 40 to 55 days.

These time periods begin on the date a payment certifier issues a certificate of completion for a contract or subcontract. A payment certifier is a person identified in the contract or subcontract, such as an architect or engineer. If there is no such person, it is the owner alone for each contract, and the owner and contractor together for each subcontract.

If a certificate of completion has not been issued, the lien filing and holdback periods begin on the date the head contract has been substantially completed, abandoned or terminated or, if there is no head contract, on the date the improvement has been substantially completed or abandoned. The Act includes provisions that define when a contract or improvement has been completed or abandoned.

A certificate of completion will not extend the lien filing and holdback periods if time has already started to run under the previous paragraph.

For strata lots, the Strata Property Act prohibits the filing of a lien after 45 days from the date of purchase, and extends the time for retaining the holdback to 55 days after the purchase.

Obviously, the provisions for determining when the lien filing period and holdback period has expired are complex, and when in doubt legal advice should be obtained.

The Holdback Account
The owner is required to pay the 10% builders lien holdback into an account at a bank or credit union. If the owner fails to do this, the contractor can stop working and sue the owner for damages arising from the work stoppage. The Act requires that the owner and contractor administer the holdback account jointly, so any withdrawals will require the signature of both the owner and the contractor. The holdback account will be treated like a trust account. If the owner acts as the contractor, a separate holdback account will be required for every contract with the owner.

The requirement that the 10% lien holdback be paid into an actual account is a new requirement not found in the previous Act. There are two exceptions. The first is where the total value of work and materials is less than $100,000 (e.g. renovations and small projects). The second is where the owner has a construction mortgage with a “savings institution ” and authorizes the savings institution to disburse the mortgage money. In that case the lender must hold back 10% of the mortgage money from each mortgage draw, and the lender will be liable to the owner and any lien holders if it fails to fulfill its obligations in relation to the holdback.

In the past, lenders held back 10% of each mortgage draw. In most cases, lenders now advance 100% of each draw, but want to ensure that the owner pays 10% into the holdback account.

Protection for Non-Contracting Owners
Owners such as landlords who have not contracted for the work being performed on their property may now file a Notice of Interest at the Land Title Office to protect themselves from lien claims. The notice warns that the owner’s interest in the land is not subject to lien claims unless the work was done at the express request of the owner.

Priority of Mortgage Advances
Advances under a mortgage made after the filing of a claim of lien do not have priority over the claim of lien. However, the Act eliminates the problem created under a previous court case which made it impossible for a lender to advance funds to complete a project under foreclosure when liens were filed. The lender may now apply to the court for an order that subsequent advances will have priority over filed lien claims. If the court is satisfied that the advances will be applied to complete the improvement and will result in an increased value of the land and improvement at least equal to the amount of the proposed advances, the court “must” make the order.

Requests for Information
Under the Act, a lien holder and certain other parties may request information from the mortgage lender, including the terms of the mortgage and particulars of the advances made. The lender must comply within 10 days after receiving the request.

Other Changes
The Act contains several other changes, including a shorter limitation period for breach of trust claims, methods of applying to court to cancel lien claims, changes to the 21-day notice to lien claimants to enforce their lien, and rules on where to start legal proceedings to enforce a lien claim.

NEW RULES FOR RAISING CAPITAL

One of the biggest challenges for any new business is raising the money needed to get the business started. Many entrepreneurs start with a loan from family, friends or a financial institution. For companies based on a new concept or technology, a bank loan may not be available until the product or service is proven. A loan from family or friends may not cover the costs of research and development.

Another method for raising money is to sell shares to investors. However, the regulations and restrictions that apply have made this method too costly for many new businesses. In response to this concern, the British Columbia Securities Commission adopted new rules in April to make it easier for businesses – especially small and medium size businesses – to raise money from investors. The new rules also increase the opportunities for investors to make speculative investments in amounts that fit within their personal comfort levels.

The rules create four new and expanded exemptions from the prospectus disclosure requirements that apply to companies raising money from the public.

The four exemptions are summarized below:

  • Accredited Investor Exemption – allows companies to raise any amount of money from financial institutions, pensions, investment dealers, established companies and wealthy individuals (as defined in the rules) without a disclosure document.
  • Family, Friends and Business Associates Exemption – allows companies to raise any amount of money from family members, close friends and close business associates (as defined in the rules) without a disclosure document.
  • Private Issuer Exemption – allows “private issuers” (generally companies with less than 50 shareholders) to raise money from family members, close friends, business associates and wealthy individuals without a disclosure document.
  • Offering Memorandum Exemption – allows companies to raise any amount of money from anyone provided that the investor acknowledges the risks of investing and receives an offering memorandum – a short, simple disclosure document. Investor protection provisions have been added giving purchasers almost identical rights to those they get under a prospectus. The rights include a two-day right to cancel the purchase and broader rights to cancel or sue for damages if there is a misrepresentation in the offering memorandum.

The new rules are the results of a joint project of the B.C. and Alberta Securities Commissions. The new rules apply in both provinces (although Alberta has additional restrictions for the offering memorandum exemption). If we can help your company take advantage of these new rules to raise capital, or if you have questions about how they might affect you as an investor, please call us.

Canada’s First Judgment on Intellectual Property and the Internet

Earlier this year, the Supreme Court of British Columbia delivered Canada’s first trial judgment regarding intellectual property rights in the context of the Internet. The case, BCAA v. Office and Professional Employees’ International Union, arose out of a strike by employees of BCAA. The union set up a series of protest websites similar to the BCAA website to spread its views.

The union’s original protest website copied the metatags and the layout of BCAA’s website, and contained trade-marks owned by BCAA. It used the domain name “bcaaonstrike.com”. Later versions of the website contained fewer of BCAA’s trade-marks and metatags.

BCAA sued, claiming that the website’s domain name and metatags, by themselves or in combination with the layout of the website, constituted the tort of passing-off and trade-mark infringement, and that the colours, layout and functionality of the website constituted copyright infringement. Since no Canadian cases had yet dealt with these issues, the court obtained guidance by reviewing several cases from the United States and the United Kingdom.

Passing-Off and Trade-mark Infringement
The court held that the union’s original website did constitute passing-off, as its close similarity to the BCAA website would have caused confusion to the public about the source of the website.

However, the later versions of the website were held not to constitute passing-off. Some of the factors that shaped the court’s decision included the following:

  • The union’s domain name included ‘bcaa”, a trademark of BCAA, but because of the addition of the phrase “on strike” it was not identical to BCAA’s trade-mark
  • The union was not selling competing services, but was exercising its right to free expression guaranteed by the Charter of Rights and Freedoms
  • The subsequent websites included express disclaimers that they were not connected with BCAA
  • BCAA did not provide any evidence of any user actually being confused about the source of the website.

Copyright Infringement
The court agreed with BCAA that the unique design of BCAA’s website was an “artistic work”, and that the union’s substantial copying of the design by the union for its site constituted copyright infringement.

However, because BCAA could not prove that it had suffered any actual losses as a result of the union’s activities (through loss of business, confusion to the public, or damage to reputation), the court awarded only nominal damages of $2,500.

This case has important implications for intellectual property and e-business owners, and is sure to form a cornerstone of future Canadian jurisprudence in this area.

Why Incorporate?

A common question asked by entrepreneurs starting a business is “Should I incorporate?” The most common answer is: “It depends”.

A business is owned either as a proprietorship, a partnership, or a corporation.

Proprietorship

A business owned by one individual (a “sole proprietor”) is a proprietorship. This is the simplest form of business structure, as it may only require a municipal business license and the registration of the business name (unless it is the proprietor’s own name) with the provincial government (this does not protect the name!). The proprietor is personally responsible for all of the liabilities of the business, and all of the income and assets of the business belong to the proprietor.


Partnership

If a business is owned by more than one individual it is a partnership. Partners are personally and jointly responsible for the debts of the business, and any partner can create a binding obligation of the business. Profits and losses are shared equally, unless otherwise agreed. Losses can be deducted from the personal taxable income of the partners. Partnerships for “trading, manufacturing or mining” are required to register with the provincial government under the Partnership Act.


Limited Partnership

A “limited partnership” is a special type of partnership often used to raise money because investors, as limited partners, are responsible for the liabilities of the partnership only up to the amount of money or property they contributed to the partnership (unlike a regular partnership where every partner is personally responsible for the full amount of the partnership’s liabilities). A limited partnership is created only after extensive information is filed with the provincial government.

Corporations

Incorporation is the act that creates an entity known as a corporation, or limited company (the term “company” usually means a for-profit corporation, while the term “corporation” includes other types of legal entities, including non-profit societies).

A company is owned by its shareholders and managed by its directors and officers. It is possible, and very common, for one person to be the sole shareholder, director and officer.

The benefits of incorporating your business include:

1) Limited Liability

One of the most important benefits of incorporation is limited liability. If you incorporate your business, your company is responsible for the debts and obligations of the business. As a shareholder, you are not personally responsible if your company cannot pay its debts or is sued by a customer.

However, if you signed a personal guarantee of the company’s lease, bank loan, or other indebtedness, you will lose this benefit for those obligations. Further, a judge may strip away the limited liability protection (called “lifting the corporate veil”) if you do not treat the company as a separate entity, or do not observe certain legal formalities such as documenting annual meetings. In addition, if you are a director of the company, you can be personally responsible for unpaid wages, GST, payroll deductions, WCB assessments and other amounts.

2) Tax Advantages

Corporate tax rates are generally lower than personal tax rates. Most privately held companies earning active business income will pay tax of approximately 13.5% on the first $500,000 of taxable income compared to over 40% if the income was earned by an individual in the top marginal tax bracket. It is important to note that this is for the most part only a tax deferral. You will pay taxes at the personal tax rates when you take money out of the corporation.

A company allows for maximum flexibility in tax planning. For example, you can decide when to pay dividends to the shareholders, and which shareholders will receive dividends. As well, the $800,000 capital gains exemption on the sale of a small business is only available on the sale of shares of a qualifying company and not on the sale of a proprietorship or partnership. If the shares qualify for the exemption, the first $800,000 of capital gains is exempt from tax.

3) Access to Capital

Proprietorships and partnerships can only raise capital by borrowing, from themselves or others. A company can raise capital by those methods, but also by selling shares. Although this involves giving up some ownership of the company, shares offered to investors (including employees) can be tailored so that you maintain control of the company. You may not sell shares to the public unless you file a prospectus or offering memorandum with the B.C. Securities Commission.

In addition to having more options for raising capital, companies may have an easier time raising capital because they are often seen by investors and lenders as having more credibility.

4) Perpetual Existence

Unlike a proprietorship or partnership, a company does not cease to exist on the death of its owner(s). Instead, it continues to live on, with ownership transferred to the shareholders’ heirs. Many Canadian companies are well over 100 years old. The ability for a company to continue beyond the life of its owners can give a business greater stability, allowing it to plan over a longer term and have easier access to capital.


Disadvantages of Incorporation

If you are starting a business, it might not be a good tax strategy to incorporate right away. If your business loses money in the first few years, you can use your losses to offset your other income or even recover personal income taxes paid in previous years. On the other hand, if you incorporate your business the losses stay in the company where they can only offset the corporation’s future profits. If the company is never profitable you will miss the chance to deduct the losses.

Incorporation also involves extra legal and accounting costs, although the lower corporate tax rates and greater ability to raise capital may offset these costs.

Canada v. B.C.

If you do choose to incorporate your business, the next decision is to choose the jurisdiction of incorporation. The vast majority of B.C. companies are incorporated under provincial jurisdiction, but with the growth of the online economy and “globalization”, more and more entrepreneurs choose to incorporate federally. Each jurisdiction has its pros and cons.

Heightened Name Protection for Federal Corporations

One of the most common reasons for choosing to incorporate federally is the increased name protection given to federal corporations. While all provincial jurisdictions screen potential corporate names, Corporations Canada applies the most stringent tests before granting the right to use a name. This guarantees that, once incorporated, the name has a protected status second only to trade-mark protection.

Extraprovincial Registration

Whether you have a federal or a B.C. company, it must be registered in each province in which it carries on business. This means that a federal company that operates in B.C. must incur the extra expense of registering in B.C. On the other hand, a federally incorporated company has the constitutional right to carry on business anywhere in Canada under its own name. A B.C. company does not have this right. If a B.C. company wants to expand to another province and another company with a similar name already exists in that province, the B.C. company will have to register in that province under a different name.

If you are considering opening a business, or have already done so, call us to discuss your options.

Competition, Customers and Confidential Information

Employee mobility is at an all time high. As employees look for better opportunities they are moving between jobs and employers more than ever. Many employers are concerned about losing customers and confidential information when employees leave. It is now common for employers to require new employees to sign non-competition agreements (also called restrictive covenants) and confidentiality agreements. The courts are increasingly being asked to decide if these agreements are enforceable.

The General Rule

In the absence of a non-competition agreement, there is no general restriction on an ex-employee soliciting or doing business with customers of a former employer. However, employees owe a duty of good faith to their employer. This duty is broken if, for example, an employee (while still employed) copies customers lists for use after the employment has ended. On the other hand, the duty is not broken if, after termination, the ex-employee obtains customer names from memory or from public directories such as the phone book.

In addition to the duty to act in good faith, company directors, officers and “key employees” owe a fiduciary duty to their employer. These employees may not compete “unfairly” against their former employer.

A B.C. judge was recently asked to stop two investment portfolio managers from competing against their former employer. The former employer claimed that the two employees owed it a fiduciary duty. The fiduciary duty would prohibit the employees from soliciting the clients of the former employer. The two employees collectively managed about $350 million, accounting for 25% of the employer’s assets under management. However, they were simply two of eleven portfolio managers, without any special status and no supervisory or executive duties. As a result, the court ruled that they did not owe fiduciary duties to the employer.

Non-Competition Agreements

To protect its customer base and goodwill, an employer may require that its employees sign non-competition agreements, which prohibit competition against the employer after the employment is terminated. Every non-competition agreement includes a geographic area and a period of time within which the employee promises not to do certain things. 

When the agreement limits the freedom of the employee to use his or her skills and expertise after the employment has ended, the question arises whether the agreement is illegally in restraint of trade. The courts will hold a non-competition agreement to be in restraint of trade and therefore unenforceable unless the employer can prove that:

  1. it has a legitimate “proprietary interest” (e.g. goodwill) that deserves protection;
  2. the agreement is reasonable in terms of geographic area and duration; and
  3. the agreement is not otherwise contrary to the public interest (for example, would upholding the agreement deprive the local community of the services offered by the ex-employee).

The question for the courts really comes down to this: “Is the purpose of the agreement to protect the employer’s legitimate trade secrets and customer data, or to simply eliminate competition?”

What is Reasonable?

What is a reasonable geographic area and period of time depends on the particular circumstances for each agreement. A U.S. judge recently refused to uphold a non-compete clause that would have prevented an employee from working for any competitors of the employer, an internet service provider, for a 12-month period following termination of employment. The judge ruled that a one-year restriction was unreasonable, commenting that in the internet industry, one year “is several generations, if not an eternity.”

Judges are less likely to uphold non-competition agreements contained in employment contracts than those contained in contracts for the sale of a business, recognizing that the parties to employment contracts are often not on an equal footing. If an employer requires a non-competition covenant, an employee often has little choice in the matter.

Confidentiality Agreements

There is no general restriction on an ex-employee using the skills and general “know-how” acquired in the course of employment in future employment. Any agreement imposing such a restriction would be against public policy and unenforceable. However, the use of an employer’s trade secrets by former employees is restricted. The distinction between the proper use by former employees of their skill and general “know-how” and the improper use of trade secrets can be difficult to make. A confidentiality agreement can reinforce the restriction against the use of trade secrets and clarify what type of information is protected.

Employment Contracts – Are They Worth It?

With increasing payroll taxes and new human rights and employment standards regulations, it’s not easy being an employer these days. Making matters worse, whenever there is a dismissal, there is a risk that the former employee will sue. Recent court awards indicate that employers can be liable for substantial damages.

In one recent BC case, a jury ordered an employer to pay over $100,000 to a junior sales representative who was dismissed after 10 weeks of employment. Although the Court of Appeal reduced the award to $41,000, the case still illustrates the potential dangers for employers when dismissing employees.

The employee in this case was fired without any notice. She sued for damages for wrongful dismissal. She also claimed damages for mental distress resulting from being fired and from the way in which she was fired.

The employer was not able to prove that the employee had been fired for just cause. If an employer has just cause, an employee can be dismissed without notice. (Be aware that allegations of just cause are often disputed by employees and can be difficult to prove). 

“allegations of just cause are often disputed by employees and can be difficult to prove”

Without just cause, an employer must give an employee reasonable notice of the termination date, or continue to pay the employee’s wages for a period of time equal to a reasonable notice period. This is referred to as “pay in lieu of notice”. Employees may sue for wrongful dismissal if an employer does not provide reasonable notice or pay in lieu of notice.

In this case the jury found the employer to be guilty of negligent (but not deliberate) infliction of mental distress because of the way the employee was fired. It awarded damages for mental distress of $10,000 and punitive damages of $62,000, as well as damages for wrongful dismissal of $31,000 (about 8 months salary and bonus).

Damages for Wrongful Dismissal
The Court of Appeal upheld the award of damages for wrongful dismissal, although acknowledging that 8 months was at the high end of the scale. The employer argued that one month’s notice would have been sufficient given the employee’s young age, the junior level of her position, and the short period of her employment, factors which traditionally favour a shorter notice period.

However, the court ruled that other factors supported the longer notice period, including the poor job market in that industry at the time of the dismissal, the length of time it took the employee to find a new job, and the fact that the employer had assured the employee of long term employment.

Damages for Mental Distress
The Court of Appeal confirmed that damages for mental distress cannot be awarded unless the employer’s conduct constitutes a cause of action separate from the dismissal itself. An employer does not owe a duty to dismiss an employee in such a way as to reduce any risk of mental suffering. The court reversed the jury’s award for punitive damages.

However, applying a 1997 decision of the Supreme Court of Canada, the Court of Appeal held that an employee can be compensated by way of an extended notice period if the employer acts unfairly or in bad faith in the way it dismisses the employee. While the court overturned the jury’s award for mental distress of $10,000, it increased the award for failure to give reasonable notice by the same amount (by extending the notice period from 8 months to 11 months). This resulted in a total award of over $40,000.

Employment Contracts
As a result of cases like this one, employers are increasingly using employment contracts to attempt to limit the amount that must be paid to employees that are terminated.

When there is no written agreement, an employer dismissing an employee without cause must give at least the amount of notice required under the Employment Standards Act. The employer is also subject to the common law requirement to give reasonable notice, which generally exceeds the minimum standards imposed by the Employment Standards Act. The reasonable notice required at common law is based on various factors, including those discussed in the above case. 

“employment contracts can limit the amount of notice required”

Written employment contracts can limit the amount of notice required. For these provisions to be enforceable, the contractual notice period must be at least equal to the minimum notice required under the Employment Standards Act.

The notice provisions must also be clear and there must be mutual agreement that the contractual notice will be binding. Employers cannot rely on notice provisions unilaterally imposed during the course of employment. The result is that any employer who wishes to contractually limit notice on termination must do so with caution.

While a written agreement provides employers with more protection and certainty, the courts will not always enforce these contracts. This is because the law considers employment to be a unique relationship that is subject to special protection. In addition, many terms of the employment contract are implied by common law. Provincial laws, such as the Human Rights Code and Employment Standards Act, impose other terms.

Employers who decide to prepare written employment agreements should review them and get legal advice. This will increase the chances that the agreements are enforceable, and will reduce the employer’s legal and severance costs in the long run. For more information on this or any other employment-related issue, please contact us.

Income Splitting – New Rules

In the last federal budget, the government announced plans for a special tax to discourage income splitting with minor children.

Presently, dividends paid on shares owned by minor children are taxed at the child’s marginal tax rate. The new rules introduced in the budget will impose tax at the top marginal rate on certain types of income received by children age 17 and under. The type of income subject to the tax will include:

· dividends on unlisted shares (whether received directly or through a family trust or partnership); and

· income from a partnership or trust arising from the trust or partnership providing goods or services to a business carried on by a relative of the child.

The tax will apply for the 2000 and later taxation years, with no exceptions for existing structures. It will not affect income splitting plans involving spouses or children age 18 and over.

FAQs About B.C.’s Builders Lien Act

B.C.’s Builders Lien Act came into force on February 1, 1998. It updated and in some cases significantly changed the law under the former Builders Lien Act.

In this article we answer questions about the Act from the perspective of a landlord, an owner building a house, a purchaser, a contractor and a lender:

Q. I am a landlord of a commercial building. How can I protect myself from lien claims for work done for my tenants?

A. The Act permits you to file a Notice of Interest against your property at the Land Title Office. The notice warns that the your interest in the land  is not bound by a builders lien unless the work was done at your express request. Any trades who supply work or materials to your property for your tenants will not be able to claim a lien against your interest in the property, unless you authorized the work.

Q. I am having a house built for me. What is a builders lien holdback and is it necessary?

A. The Act requires you to hold back 10% of each payment to the contractor (the builders lien holdback) in a special account so that there is money available for payment of liens. Without a holdback, you could be responsible for the full amount of all lien claims even if the contract price was already paid in full.

Q. What do I do with the holdback?

A. As the owner, you are required to pay the holdback into an account at a savings institution. If you don’t, the contractor can stop working and sue you for damages arising from the work stoppage. If you don’t have a general contractor, a separate holdback account is required for every contract. Withdrawals from the holdback account will require the contractor’s signature as well as your own.

Q. Is a special holdback account always necessary?

A. Yes, with two exceptions. The first is where the value of work and material supplied is less than $100,000 (e.g. renovations). The second is where you have authorized the construction lender to disburse the mortgage money on your behalf, in which case the lender holds back 10% from each draw. However, this results in an area of liability for lenders that most will not be willing to enter.

Q. I am purchasing a new home. Should I be worried about builder’s liens?

A. Yes. If you purchase the home within 45 days of its completion, there could be lien claims filed after you become the owner. You could be in the position of having to pay the liens, even though you already paid the purchase price in full. The Act deals with this problem by permitting purchasers to hold back 10% of the purchase price from the seller until the time for filing liens expired, but these provisions have not been proclaimed. As a result, you must ensure that your contract permits you to hold back funds if the time for filing liens has not expired by closing.

Q. I am a framing contractor. Do I still have until 31 days after substantial completion of the building to file a builders lien?

A. No. You now have until 45 days after a payment certifier issues a certificate of completion for your contract. The payment certifier is usually the architect or engineer, but may be the owner or the owner and general contractor together if your contract does not identify the payment certifier. However, regardless of when or whether a certificate of completion is issued, you may not file a lien after 45 days from the date of substantial completion, abandonment or termination of the general contractor’s contract (or, if there is no general contractor, of the project).

Q. Do I still need to wait until 41 days after substantial completion of the entire building to receive my share of the builders lien holdback?

A. No. Under the multiple holdback system, the general contractor maintains a separate holdback for each subcontract, which will be released 55 days after the payment certifier issues a certificate of completion for that subcontract.

Q. I work for a bank. The bank is ready to advance a draw on a construction mortgage, but there are liens filed against the property. The draw is needed to complete the building. How can the bank’s advance have priority over the liens?

A. The general rule is that advances made by a lender after a lien is filed do not have priority over the lien. However, it may be possible for the bank to apply the advance to the payment of the liens. The Act also allows the bank to apply for a court order that the mortgage advance will have priority over the filed liens. The court will make the order if it is satisfied that the advance will be applied to complete the construction and will result in increased value to the property at least equal to the amount of the advance.

For more specific information on how the Builders Lien Act affects you, contact us at your convenience.