In a previous blog post, we reviewed the steps that a contractor or supplier must take in order to first “preserve” and then “perfect” a construction lien under Ontario’s Construction Act – that is, to prevent it from expiring. Preservation occurs by registering a lien with the Land Registry Office. Perfection then requires a lien claimant to commence a court action to enforce the lien, and to file a corresponding Certificate of Action with the Land Registry Office.
However, section 36(4) of the Construction Act creates an alternate method for perfecting a construction lien, called “sheltering.” Sheltering allows a contractor’s or supplier’s lien (once it has been registered/preserved) to be perfected by another lienholder commencing a court action to perfect their own lien. In other words, a claim advanced by one contractor can automatically perfect liens held by other contractors working on the same project.
To qualify for sheltering, the rules set out in s. 36(4) are as follows:
- The “sheltered” lien must have first been preserved;
- The “sheltering” lien must have been perfected within the time limit for the sheltered lien to be perfected; and
- The sheltered lien will only be perfected “as to the defendants and the nature of the relief claimed in the statement of claim under which it is sheltered”.
The rules also state that a sheltered lien, once perfected via sheltering, will not become invalid as a result of the sheltering lien later being shown to have been invalid. Finally, a defendant facing a sheltered lien claim is entitled to request and receive particulars of the claim of the sheltered claimant (since that claimant will not themselves have filed a claim containing particulars).
The case law surrounding sheltering has tended to focus on the question of how closely related the sheltered lien relates to the sheltering lien. For example: can a contractor have its lien perfected even if the work it did was entirely unrelated to the work performed by the other, sheltering, contractor? Can sheltering occur even if the sheltering party is a subcontractor who worked under the sheltered contractor?
The courts have firmly stated that the sheltering provisions are to be interpreted broadly and generously. As long as the sheltered contractor was doing work on the same project as the sheltering contractor, the sheltering will be valid. It is not necessary that the sheltered contractor’s work be a direct component of the sheltering contractor’s work. The courts have called this “vertical sheltering”, but have stated that the Construction Act provisions should instead allow for “horizontal sheltering”. Thus, instead of being overly rigorous and narrow in determining how the sheltering and sheltered liens are related, courts should be permissive in allowing lien claims on a project to be perfected even amongst unrelated subcontractors. It is even possible for a subcontractor’s claim to perfect the lien of a contractor higher up in the construction pyramid.
Despite the courts’ permissive approach to the law of sheltering, any contractor seeking to perfect a lien should be wary of depending on the actions of another party. Coordinating with other claimants can provide economies of scale in litigation, but it will always be safer and more certain for a lien claimant to retain control by perfecting their own lien. Any contractors considering advancing a claim should obtain legal advice as early as possible in the process to avoid falling afoul of the Construction Act’s strict deadlines.