Construction liens, trusts and payment bonds

A subcontractor deep in the contract chain has a problem: it has improved the owner's property, but it has no contract with the owner. If the general contractor fails, a contract claim against it may be worth little. Construction law solves this problem with statutory security: a lien that attaches the value of work to the land itself, trusts that protect construction money, and payment bonds from a surety that guarantee payment. These rights are powerful, but they are created by statute, they depend on strict deadlines, and they are lost permanently if those deadlines are missed. This lesson explains how they work and how construction managers protect and manage them.

Why liens exist

The idea behind a construction lien is simple. Those who supply labour, services or materials to improve land should be able to look to the land for payment, because the owner benefits from the improvement. A lien gives a claimant a charge on the owner's interest in the land, which can be enforced by a court-ordered sale if the claim is not paid or secured. In practice, few liens end in a sale. A registered lien clouds the owner's title, blocks financing draws and sales, and pushes the parties to resolve the payment dispute.

In the common law provinces, liens are created by provincial statutes: Ontario's Construction Act, British Columbia's Builders Lien Act, Alberta's Prompt Payment and Construction Lien Act and their equivalents. In Quebec, the Civil Code of Québec grants a legal hypothec to persons who took part in the construction or renovation of an immovable. The statutes share the same structure: who can claim, what must be done to preserve the lien, when it must be enforced, and how much the owner can be made to pay.

Preserving and perfecting a lien

Under Ontario's Construction Act, a lien arises when a person supplies services or materials to an improvement. To keep it, the claimant must preserve it by registering a claim for lien on title to the land (or, on certain public land, by giving written notice to the owner) within 60 days after the earliest of the triggering events: publication of a certificate of substantial performance, completion of the claimant's contract or subcontract, or abandonment or termination. The claimant must then perfect the lien by starting a court action and registering a certificate of action within 90 days after the last day on which the lien could have been preserved. A lien that is not preserved or perfected in time expires. The 2026 amendments kept this event-based expiry, after an earlier amendment that would have made liens expire annually was reversed.

How much the owner can be made to pay

The lien statutes protect owners who follow the rules. If an owner retains the statutory 10 % holdback and pays it out only when the lien period has expired with no liens preserved, its liability to all lien claimants is generally limited to the holdback amount, plus any amounts it paid after receiving written notice of a lien. An owner who pays out holdback early, or keeps paying after receiving notice of a lien, risks paying twice. Owners and contractors can remove a registered lien from title by paying security into court or posting a lien bond, which then stands in place of the land.

Construction trusts

Most common law provinces also create statutory trusts over construction money. Under Ontario's Construction Act, money received by an owner for the improvement, money owed to and received by a contractor, and money received by a subcontractor are trust funds for the benefit of those below them in the chain, until those people are paid. A contractor that uses project funds to pay overhead on another job while its subcontractors remain unpaid breaches the trust. Directors and officers who assent to or acquiesce in a breach can be personally liable, even if the company is insolvent, and from 2026 trust claims and lien claims can be joined in one action. Trust rights are especially valuable when a contractor fails and a lien has expired.

Payment and performance bonds

A surety bond is a three-party guarantee. The principal, usually the contractor, buys the bond from a surety, an insurance or bonding company, for the benefit of the obligee, usually the owner. Two bonds matter most.

• A performance bond protects the owner if the contractor defaults: the surety may complete the work, arrange for completion or pay the owner up to the bond amount.
• A labour and material payment bond protects subcontractors and suppliers: if the contractor does not pay them, they can claim on the bond.

In Canada, standard bond forms such as CCDC 221 (performance bond) and CCDC 222 (labour and material payment bond) are common, typically at 50 % of the contract price each. Ontario's Construction Act requires both bonds on public contracts of $500,000 or more. A payment bond claimant must give written notice to the surety and principal within the time the bond sets, often 120 days after the claimant last supplied work, and sue within the bond's limitation period, often one year. Payment bonds are a key protection on public projects, where liens may be limited or unavailable.

Managing lien and bond risk

• Contractors and subcontractors: diarize lien and bond deadlines for every job from the first day of work; send required notices early; never let an unpaid amount drift past the deadline in hope of a settlement.
• Owners and payers: retain holdback or retainage correctly; collect waivers or statutory declarations with each payment; check title or county records before paying; require bonds on large projects.
• Everyone: keep accurate records of the last day work was supplied, because many deadlines run from it, and minor warranty or repair work may not extend the period.

Removing liens and dealing with exaggerated claims

A registered or recorded lien clouds title and can stall a project's financing, so owners and contractors often need to remove it quickly while the dispute is resolved. The usual method is to post security, either money paid into court or a lien bond from a surety, in the amount the statute requires, often the amount of the claim plus an allowance for costs. The court then orders the lien removed from title, and the claimant's rights attach to the security instead of the land. The underlying dispute continues.

Lien statutes also discourage abuse. A claimant who registers a lien for an amount it knows is exaggerated, or registers a lien without a reasonable basis, can be liable for damages caused by the lien and for costs. Claims should be calculated carefully, should exclude amounts not yet earned or not secured by the statute, such as damages for lost profit on unperformed work in many jurisdictions, and should be supported by the contract, invoices and records. A modest, well-founded lien is far more effective than an inflated one.

When a project is in financial trouble, lien and bond rights become the most valuable assets a subcontractor has. Insolvency proceedings can freeze contract claims against a failed contractor, but properly preserved liens, trust claims and bond claims usually survive and may be paid ahead of ordinary creditors. This is another reason never to let a lien or bond deadline pass while waiting to see how a dispute develops.