This is a frequently asked question and a source of confusion for many, when building a new home. Below we have outlined the details on Builder Lien's as they are associated with Construction Draw mortgage Financing.

The "10% Builder Lien Holdback Act" is a mandatory retention of 10% of the contract price by the owner (or often facilitated by the solicitor), and serves as a financial safety net to pay for potential claims by contractors and suppliers for unpaid work or materials.

Simply put, when you as the homeowner obtains approval for a draw mortgage, these draws are paying/funding the builder and your homes construction. That said, if there is a situation where the builder does not pay its tradespeople or suppliers they have the right to place a lien against the title of your home.

This holdback amount is held for a specific period after the project's substantial completion (typically 60 days, depending on the jurisdiction) or after each draw stage, to allow for claims to be filed. If no liens are filed, the holdback is released to the contractor/builder; however, if liens are filed, the holdback can be used to satisfy those claims.

In terms of our Bank and lending partners, this 10% holdback is not a requirement of the Bank per se, its an actual 'Act' that is typically enforced and highly recommend by the solicitor acting on your behalf.

Purpose and Process of the Holdback

Protection for Unpaid Claims: It provides a pool of money that can be used to pay subcontractors or suppliers who may not have been paid by the general contractor.
Incentive for Payment: It encourages contractors to complete their work on time and to the required standard, as they often rely on the holdback for their final payment.

Lien Period: After the work is completed and deemed "substantially performed," the owner must hold the holdback for a statutory period (often 60 days).
Lien Filing: During this period, any contractor or supplier who has not been paid can file a builder's lien against the property.
Release or Payment: If no liens are filed, the holdback is released to the contractor at the end of the period. If liens are filed, the owner can use the holdback to pay those claims, potentially reducing the amount that the contractor receives.
Jurisdictional Differences: Holdback rules, especially the duration of time and whether funds must be in a separate account, can vary significantly between provinces. We recommend speaking to your solicitor to understand the requirements of the province you are building in. It is also important to note that, the lien act can differ from residential to commercial construction.
Statutory Obligation: The holdback requirement is a legal obligation under builders' lien legislation, not a contractual one.

What is a Builder Lien Holdback?