Mid-Market Breakout: Construction - Liens Presenters: Jane Dietrich, Cassels, Brock & Blackwell LLP Howard Krupat, DLA Piper Canada LLP Dan Wootton, Grant Thornton Ltd.

Construction Lien and Trust Claims The Purpose of the Construction Lien Act The construction industry can lead to high risk scenarios where there are multiple parties involved on a construction project and where such parties are effectively unsecured creditors. For example, Suppliers and Subcontractors may work on a project without any direct contract or relationship with the project Owner. The Construction Lien Act (Ontario) operates to provide relief for unpaid suppliers and subcontractors in particular, in the event of non-payment or the insolvency of the Owner or other Contractors. It does so through two distinct remedies: (i) construction lien claims; and (ii) construction trust claims. The challenge with the CLA is that the lien and trust remedies can be perceived to conflict with and change the priority landscape under an insolvency and restructuring process. This presentation will focus on liens, trusts and how they impact the various stakeholders in an insolvency and restructuring process.

Construction Lien and Trust Claims Lien Claims and Holdback - The First Line of Defence for Unpaid Contractors and Suppliers Construction Lien Act - R.S.O. 1990, CHAPTER C.30 Creation of a lien A person who supplies services or materials to an improvement for an owner, contractor or subcontractor, has a lien upon the interest of the owner in the premises improved for the price of those services or materials. R.S.O. 1990, c. C.30, s. 14 (1). Holdback Requirement – The Construction Pyramid Each payer on a contract or subcontract must hold back 10% of the price of the services or materials as they are supplied until all lien periods have expired or have been discharged. The holdback fund provides for a pool of proceeds that is available to lien claimants. Any party who preserves a valid claim for lien has a charge against the project property that is capped at the lesser of the amount owing to them and the available holdback fund. The CLA includes a priority scheme for the distribution of holdback funds among competing lien claimants.

Construction Lien and Trust Claims Lien Claims and Holdback - The First Line of Defence for Unpaid Contractors and Suppliers Lien Registration Liens must be preserved (through registration on title or delivery, depending upon the type of project and property) within 45 days from the earliest of: publication of a certificate of substantial performance; the date the contract is completed (contractors); the date the contract is abandoned (contractors); the date of last supply (subcontractors); and the date of the issuance of a certificate of completion (subcontractors). Lien Perfection Liens must be perfected in order to remain enforceable and to avoid expiration. In order to perfect a lien, legal action must be taken within 45 days of the deadline to preserve the lien. Legal action in this instance would include the commencement of the lawsuit and, for most liens where the lien has not been vacated through the posting of security, the registration on title to the lands of an issued “certificate of action”.

Construction Lien and Trust Claims The second line of defence for unpaid contractors and suppliers. Generally, all amounts received to finance and pay for a construction project represent a trust for the other contractors and subcontractors working on the same project. Owners must ensure that any project proceeds be used for the specific project only. Otherwise they may be found in breach of the construction trust. Contractors and Subcontractors have the same responsibility for when they receive payment for their work and where they have engaged their own subcontractors to assist with their work. Any Owner, Contractor or Subcontractor must pay those who are working for them prior to applying the residual proceeds to their own use and benefit. Directors, officers and responsible employees of the Owner, Contractor or Subcontractor can be held personally liable for a breach of trust by their company.

Construction Lien and Trust Claims Trust Claims - The Basics Owner’s Trust (s.7): All amounts received by the owner for the improvement constitute a trust fund for the benefit of the contractor Contractor’s and Subcontractor’s Trust (s. 8): All amounts owing to a contractor or subcontractor under a construction contract constitute a trust fund for the benefit of a supplier of services or materials to the improvement who is owed money by that contractor or subcontractor Vendor’s Trust (s. 9): Proceeds of sale by the owner less certain sale expenses constitute a trust fund for the benefit of the contractor To comply with the above trust obligations, all payers under a contract ought generally to ensure that all funds they receive for a project are traceable and identifiable and retained for the benefit of the trust beneficiaries. They otherwise risk a finding that they have breached their trust obligations.

Construction Lien and Trust Claims How does this impact stakeholders? Construction Lien and Trust claims rank ahead of secured creditors and proven trust claims rank ahead of professional fees. Statutory trust claims and deemed trust claims can provide further complexity. Secured lenders can mitigate this exposure by monitoring a borrower's projects (i.e. percentage of completion vs. budget, WSIB certificates, segregation of accounts, inter-company/project borrowing). Additional collateral and guarantees can also assist in mitigating losses from an insolvent borrower. Professionals (i.e. receivers, trustees and counsel) should consider seeking third party deposits and guarantees for their fees as the debtor's assets may be subject to significant trust claims. The following is an example of the primary stakeholders that may be affected when a general contractor becomes insolvent.

INTERESTS AT STAKE ON AN INSOLVENT CONSTRUCTION PROJECT Project Owner Surety (Performance and Payment Bond) Insolvent General Contractor Secured Lender Subcontractor/ Creditor Subcontractor/ Creditor Unsecured Creditors Supplier/ Creditor

INTERESTS AT STAKE ON AN INSOLVENT CONSTRUCTION PROJECT Project Owner Surety (Performance and Payment Bond) Insolvent General Contractor Secured Lender Subcontractor/ Creditor Subcontractor/ Creditor Unsecured Creditors Supplier/ Creditor

INTERESTS AT STAKE ON AN INSOLVENT CONSTRUCTION PROJECT Project Owner Surety (Performance and Payment Bond) Insolvent General Contractor Secured Lender Subcontractor/ Creditor Subcontractor/ Creditor Unsecured Creditors Supplier/ Creditor

INTERESTS AT STAKE ON AN INSOLVENT CONSTRUCTION PROJECT Project Owner Surety (Performance and Payment Bond) Insolvent General Contractor Secured Lender Subcontractor/ Creditor Subcontractor/ Creditor Unsecured Creditors Supplier/ Creditor

INTERESTS AT STAKE ON AN INSOLVENT CONSTRUCTION PROJECT Project Owner Surety (Performance and Payment Bond) Insolvent General Contractor Secured Lender Subcontractor/ Creditor Subcontractor/ Creditor Unsecured Creditors Supplier/ Creditor

Where Are We Going? Update on Ontario's Construction Lien Act review process Potential areas of reform How insolvency filings may be impacted

Questions? Dan Wootton, CIRP Senior Vice President Grant Thornton Limited T +1 416 360 3063 E Dan.Wootton@ca.gt.com Howard Krupat Partner T 416.365.3510 F 416.777.7421 E howard.krupat@dlapiper.com Jane O Dietrich Partner T 1 416 860 5223 F 1 416 640 3144 E jdietrich@casselsbrock.com