Landlord Beware: Amendments to Construction Act (Ontario) Include Subjecting Landlords to Liens

Significant changes to the Construction Act (Ontario) (the “Act”) in place as of July 1, 2018 create new risks for landlords providing tenant inducements under leases entered into after that date.

Landlords should take note of the revised Section 19(1) of the Act, as follows:

19(1) If the interest of the owner to which a lien attaches is leasehold, and if payment for all or part of the improvement is accounted for under the terms of the lease or any renewal of it, or under any agreement to which the landlord is a party that is connected to the lease, the landlord’s interest is also subject to the lien, to the extent of 10 percent of the amount of such payment.

That is to say, if a landlord agrees to provide tenant inducements or funding or financial support covering tenant’s work giving rise to a lien, that landlord’s interest in the property is subject to the lien for up to 10% of the amount the landlord agreed to provide.

Section 87.3(1)(c) of the Act clarifies that the new Section 19(1) only applies to leases entered into after July 1, 2018. With respect to leases in place prior to July 1, 2018, landlords need not worry about liens attaching to their leasehold interests unless the contractor has given notice of the improvement and the landlord has not responded that it will not assume responsibility within 15 days.

However, landlords need to adjust the way they draft tenant inducement and equivalent clauses when negotiating leases moving forward. Where a lease or related agreement includes financial support for a tenant’s improvements, the lease should provide for a holdback of 10% of the total inducement until 60 days after the work is completed and a title subsearch confirms that no liens have been filed.

McCarthy Tétrault’s Real Property & Planning group is able to advise on how to adapt to the legislative changes to the Construction Act (Ontario). Please contact us with any questions and visit our webpage for more information on our group.

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