By Dan W. Melnick and Pavneet Grewal

A recent decision of the BC Supreme Court is of significance to owners or general contractors seeking to discharge claims of liens from title to lands.

In Savory 2588 Developments Ltd. v HQM Contracting Ltd., 2024 BCSC 1733 (“Savory”), the BC Supreme Court cautioned against conflating two frequently used mechanisms for discharging claims of builders liens under sections 23 and 24 of the Builders Lien Act, SBC 1997, c 45 (the “Builders Lien Act”) and addressed the use of hearsay evidence on applications to discharge claims of lien.

Background

In BC, the Builders Lien Act requires the person primarily liable for a construction contract or subcontract (often the owner or general contractor) to retain a “holdback” of 10% of the value of work or materials, or the amount of payments made in respect of the contract or subcontract, whichever is greater.

Under section 23(1) of the Builders Lien Act, an owner may discharge its liability for liens by paying into court the lesser of: the total amount of the lien claims, or the amount owing to the contractor if that amount is at least equal to the legally required holdback. Under section 24, an owner may discharge a lien by posting sufficient security to the Court, typically in the form of cash or a lien bond in an amount equal to the claim of lien, to ensure the availability of funds to satisfy a claim.

Facts

The BC Supreme Court considered a section 23 application brought by the owner and its general contractor (the “Petitioners”) seeking to discharge builders’ liens from title to lands being developed.

The general contractor (the “General Contractor”) had entered a subcontract (the “Subcontract”) with a subcontractor (the “Subcontractor”) to complete structural and landscape concrete work. The Subcontractor later terminated the Subcontract. Before termination, the Subcontractor engaged several sub-subcontractors (the “Sub-subcontractors”) who claimed they were not paid for their work. The Sub-subcontractors filed lien claims totaling $276,086.10.

The Petitioners applied to discharge the liens under section 23 by paying $182,229.39 into Court. This amount was less than 10% of the amounts paid under the Subcontract and, therefore, appeared to be less than the holdback required by the Builders Lien Act. The Petitioners argued that they were entitled to deduct the costs of deficiencies and incomplete work from the amount of the price of the Subcontract, thereby reducing the 10% holdback that the General Contractor was required to maintain under the Builders Lien Act.

The parties also presented conflicting evidence on the amount owed by the General Contractor to the Subcontractor, the value of the work or materials provided by the Subcontractor, and the total payments the General Contractor made to the Subcontractor. Each of these figures was crucial in assessing whether the proposed amount was sufficient to discharge the liens of the Sub-Subcontractors.

The Decision

The Court refused to discharge the liens and ordered that the appropriate holdback amount be determined by summary trial. In rejecting the Petitioners’ arguments, the Court noted that the Petitioners had conflated sections 23 and 24 of the Builders Lien Act.

The Petitioners relied on M3 Steel (Kamloops) Ltd. v. RG Victoria (Construction) Ltd., 2005 BCSC 1375, a case which encouraged that, for applications under section 24 (but not section 23), the Court should try to set an amount that would “do justice” between the parties when faced with conflicting evidence. However, the Petitioners’ application was brought under section 23, not section 24. While section 24 grants the Court broader discretion to consider all of the relevant circumstances in deciding whether to cancel a lien, section 23 applications require a specific holdback amount to be determined based on direct evidence from the parties. The two provisions have significantly different evidentiary standards.

The Court also found the Petitioners’ evidence regarding the proper holdback amount to be insufficient. The Petitioners relied on two affidavits to support their calculations of the amounts that should be paid into court to discharge the claims of lien. Both affidavits contained hearsay evidence without identifying the source of that evidence. This was contrary to the Rules of Court, which require that a person swearing an affidavit states the basis of their information and belief when they are not speaking from personal knowledge (i.e. when they are relying on hearsay evidence). These evidentiary issues rendered the Petitioners’ evidence insufficient to discharge the claims of lien.

With respect to the Petitioners’ argument that it was entitled to reduce the holdback by the costs to remedy the deficiencies and incomplete work of the Subcontractor, the Court clarified that although deficiency set-offs may impact the “actual holdback” (i.e. the amount retained by an owner or general contractor over and above the 10% holdback required under the Builders Lien Act), such set-offs do not reduce the minimum 10% statutory holdback as required by the Builders Lien Act.

Key Takeaways

When applying to discharge or cancel a lien, owners and contractors must ensure that they do so under the appropriate section of the Builders Lien Act and that their application is supported by admissible evidence. If the court does not have the necessary information to calculate the holdback then it will be unable to cancel a lien and discharge the owner’s liability for that lien under section 23 of the Builders Lien Act.

Our team has extensive experience with construction and builders lien matters, including the discharge of liens under sections 23 and 24 of the Builders Lien Act. We are ready to assist with any questions you may have regarding filing, prosecuting, or defending claims of builder liens, or any other construction-related matters.