Written by: Michael Gibson
Michael Gibson is a lawyer at Miller Thomson LLP and is one of the authors of the textbook on condominium law in Alberta. He has extensive experience in condominium law, advising developers, corporations, boards, managers, and owners.
Outdated payment processes expose condo corporations to fraud, financial losses, and legal risks, making it crucial to understand how fraud occurs and implement key protective strategies.
Construction liens can be a nightmare for homeowners, but for condominium owners, they often become a tangled web of confusion and risk—especially when common property is involved.
Construction liens can be a headache for any homeowner, but can be particularly challenging to deal with in condominiums. This is, at least in part, primarily due to the inevitable disparity of information between condominium boards and their ownership when work is done on common property and in units.
Construction liens may be registered against a unit owner’s title, with very little knowledge or input from the individual unit owner themselves. To explain this process, it is important to review how construction liens arise and how they are currently treated in condominiums in particular.
What Are Construction Liens?
Construction liens are a legal mechanism available to contractors/builders to enforce the payment of invoices for labour and materials supplied to a property owner. In accordance with the Prompt Payment and Construction Lien Act, a contractor who supplies labour and/or materials that benefit a property owner has a right to register a lien against the property owner’s title to enforce the collection on any unpaid invoices. That is, where labour and materials are supplied to the benefit of a property owner, the contractor who supplied those labour and materials is entitled to a registered security against the property if they were not paid for their services.
The Subcontractor Challenge
Sometimes, this means that an unpaid subcontractor has lien rights against an owner’s property, despite the fact that the owner has paid the general contractor. If the general contractor does not pay their subtrades, those subcontractors may have lien rights against the owner’s property, notwithstanding the fact that the general may have actually been paid.
This lien right arises under the Prompt Payment and Construction Lien Act because the subcontractor’s efforts were supplied to the benefit of the property owner, and the subcontractor is entitled to compensation for those efforts.
The Disparity of Information
An obvious disparity of information and control arises in this system. The property owner may have directly hired and paid a general contractor for some work done on their property.
The property owner will often, though, have very little control or input over the subtrades hired by the general contractor. Liens can arise against the property through no direct fault of the property owner, who may have to pay out the liens and seek reimbursement from the general contractor.
One way or another, there is potential for exposure for any property owner, who may find themselves embroiled in a bitter dispute between a general contractor and a subcontractor.
The situation is even more complicated with condominiums, where there is an added layer of potential disparity of information and control over contractors.
References
1. Chesney, S. (2022, July 28). Uptick in fraud a wake-up call for condos. Retrieved from YalePGC: https://www.yalepgc.ca/uptick-in-fraud-a-wake-up-call-for-condos/
2. Association of Financial Professionals. (2024, March 15). 2024 AFP Payments Fraud and Control Survey Report. Retrieved from AFP Online: https://www.afponline.org/training-resources/resources/survey-research-economic-data/details/payments-fraud
3. Hanny, C. (2024, 04 28). Toronto small business forced to close after losing money to cheque fraud that TD couldn’t stop. Retrieved from The Globe and Mail: https://www.theglobeandmail.com/business/article-canada-small-business-cheque-fraud/
4. Tomlinson, K. (2011, 05 03). Banks don’t look at names, signatures on cheques. Retrieved from CBC News: https://www.cbc.ca/news/banks-don-t-look-at-names-signatures-on-cheques-1.978046
Governance & Maintenance Responsibilities
As a form of collective property ownership, condos operate through democratically elected boards, who manage the affairs of the condominium corporation.
Through this democratic governance structure, one of the primary responsibilities of condominium boards is the maintenance of the shared real property. In carrying out these duties, condominium boards will often have cause to hire a contractor.
Whether an intensive restoration job, an elevator modernization, a building envelope refurbishment, or any other capital project, condominiums will constantly have need for construction service professionals in carrying out their maintenance and repair obligations.
This fact, though, comes with the potential for complicated construction lien claims when condominiums or their general contractors fail to pay for labour and materials that may be supplied.
How Construction Liens Arise
The Condominium Property Act contains special provisions for dealing with construction liens that may arise in the condominium setting. In the condominium context, there are essentially three ways a construction lien may arise:
This fact, though, comes with the potential for complicated construction lien claims when condominiums or their general contractors fail to pay for labour and materials that may be supplied.
1. owner-Hired Contractors:
Where a unit owner hires a contractor to do work in their own private unit. In this case, any construction liens that arise are against the owner’s title to their unit and their share in the common property only. This is not dissimilar to the situation where the owner of a single-family home hires a contractor, the lien rights are against that owner’s property only.
2. Work on Common Property:
Where the condominium corporation hires a contractor to do work in respect of the common property and such work is intended for the benefit of the common property generally, such as restoration work following a water loss that affects multiple units, a building envelope or elevator refurbishment project, or any other common property work for which the condominium corporation may need to hire a contractor. In these cases, any construction liens that arise are against the title of owners of all units in proportion to the unit factors assigned to their units, as well as the common property generally. These liens are unique to condominiums.
3. Work on Individual Units:
Where the condominium corporation hires a contractor to do work in respect of any particular unit. This type of work may arise, for example, through an insurance loss, where the condominium has to hire a contractor to repair damage to an owner’s unit, in accordance with the condominium corporation’s insurance and repair obligations. In this final case, any construction liens that arise are against the title of the owner’s unit and their share in the common property only.
When Liens Arising from Common Property Work
Construction liens that arise under item 2 from the above list tend to prove to be the most challenging for condominiums and contractors to contend with. For instance, with liens arising under these circumstances, the statement of the lien is registered against the condominium plan generally, reflecting the lienholder’s claim against the common property, but is also deemed to be registered against title to every unit.
This is because it is all the unit owners collectively who actually own the common property, in proportion to their unit factors. They are the ultimate owners of the property that benefited from the supply of labour and materials and are therefore ultimately responsible for ensuring the contractors and subcontractors are paid for the labour and materials supplied.
Impact of Liens on Unit Owners
Under this legislative scheme, there is a standard practice in the construction industry for lien claimants to register their liens against the certificates of title for all the condominium units, in addition to the condominium plan. This means, too, that in any lawsuit to enforce the liens, all unit owners personally and the condominium corporation
will be named as defendants to a lienholder’s claim. This has several logistical implications. Firstly, any lawsuit arising in respect of a simple construction lien claim may balloon to a claim against tens or hundreds of parties.
Unfortunately, lien claimants rarely clarify in their statement of lien registered on an owner’s title that the owner is only liable up their proportionate share of the total lien, based on their unit factors.
The effect is that owners may find liens registered against their titles for hundreds of thousands (or millions in larger condominiums) of dollars of major
onstruction work related to the common property generally.
This can significantly impact an owner’s ability to obtain financing or sell their unit, notwithstanding that their actual share of the total lien amount is only a fraction of the overall claim.
In fact, under the Condominium Property Act, where a unit owner pays the lienholder their proportionate share directly, the lienholder must discharge the lien against that owner’s unit and their share in the common property.
The Legal and Practical Dilemmas for Owners
The practical issue comes when lienholders have to take enforcement steps. It is the condominium board, not the unit owners, who hires contractors on behalf of the condominium corporation to perform work in respect of the common property generally. Not every unit owner will have perfect knowledge of the specific work the contractor was hired to do, or whether there is any dispute over the work completed that could impact the amount ultimately owing under any lien claim. Unit owners who had no input in hiring a contractor may find that they have a lien registered against their title and are subsequently named in a lawsuit in respect of enforcing those liens, with little to no ability to respond to such lawsuit.
Condo Corporation’s Role in Defending Lien Claims
As the statutory manager of the common property, the condominium corporation, through its board, will have the particulars of any construction contracts, what work was requested, etc. Regardless of transparency and communication efforts to keep the ownership informed, the practical reality is that each defendant owner in such cases will suffer from the inevitable information disparity, being sued and having to defend on the basis of limited information. The condominium corporation may dispute the lienholder’s claim on the basis of information not readily available to all owners.
Options for Unit Owners Facing Liens
The owner’s plight is made worse by the fact that if an owner chooses to pay their proportionate share of the lienholder’s claim, they are not immediately entitled to reimbursement by the condominium corporation, nor are they easily able to claim a reimbursement if the amounts claimed by the lienholder are subsequently reduced through Court Order or settlement with the condominium corporation.
Ensuring Better Transparency for Condo Owners
The condominium corporation is usually best positioned to respond to and deal with lienholder’s claims against the common property, but the current scheme under the legislation throws unit owners into the quagmire with little ability to protect themselves.
An aggressive lienholder may seek enforcement against the unit owners directly, regardless of any merit to their lien claims that the condominium corporation may ultimately defend, leaving those owners who do pay worse off and leaving the condominium corporation with a political and legal battle not just with the lienholder, but with many of its owners who may have independently chosen to pay the lienholder, without full knowledge of the legitimacy of the lienholder’s claims.
Moving Forward: Education & Transparency Are Key
In view of these practical issues, unless there is a legislative change to direct construction lienholders to pursue their claims directly with the condominium corporation, as with any other contractor who engages with a condominium corporation, condominium boards should endeavour to be as transparent as possible with their ownership about any major capital projects in which a construction lien might arise.
Owners, for their part, should ensure they stay educated and informed on such projects, lest they face a lien claim to which they are ill-prepared to respond.