Holdback Administration Basics by Adam Zasada

Strata corporations often enter into contracts for the repair of various aspects of the common property. Unfortunately, strata corporations often overlook their obligations under the Builders Lien Act regarding the obligation to retain a holdback.

The following is intended to provide some basic general information to strata corporations regarding the administration of holdback funds in connection with contracts for the repair of common property. Strata corporations are encouraged to seek legal advice to address any issues that are specific to their situation.

The following is premised on a standard form construction contract where there is a consultant to administer the contract between the strata corporation, as the "owner", and a contractor.

1. Open a separate holdback account. Once the contract has been awarded and before any money becomes due under the contract, the strata corporation should open a separate holdback account with a financial institution. If there are multiple contracts between the strata corporation and various contractors, separate accounts must be opened for each contract. The need for separate accounts does not apply where the contract is for less than $100,000.

2. Retain 10% of each payment. Regardless of the amount of the contract, the strata corporation must retain 10% of each payment made under each contract.

3. Jointly administer the holdback account. If the contract is for more than $100,000.00, the holdback account must be administered together with the contractor. The Builders Lien Act does not define what "administering" the holdback account means; however, the Act does say that no money may be paid out of the holdback account without the agreement of the contractor to whom the holdback relates.

4. Increase the holdback with each payment. As the work under the contract progresses and, assuming that there is provision in the contract for periodic payments under the contract, the holdback account will grow with each payment.

5. Consultant issues certificate of completion. Once the contractor considers that the work is complete, the contractor will request that the consultant issue a certificate of completion. Once the consultant has received such a request, within 10 days the consultant must investigate whether a certificate of completion can be issued and, if so, the consultant must issue one.

6. Delivery of certificate of completion. The Act requires the consultant to send a copy of the certificate of completion to the strata corporation and to the contractor and, within 7 days from the date of issuance of the certificate of completion, the consultant must deliver notice of the certificate of completion to any person who requests it. The Act also specifically requires that the consultant post, in a prominent place on the improvement, a notice of certificate of completion.

7. The holdback period. Payment of the holdback may not be made less than 55 days from the date of the issuance of the certificate of completion.

8. Interest on holdback monies. Interest accrued on the holdback during the holdback period belongs to the strata corporation; interest accrued after the holdback period accrues to the contractor to whom the holdback belongs.

9. Investigations prior to pay out of holdback. The strata corporation should make two primary inquiries before paying out the holdback:

a. Perform title searches on all strata lots. The strata corporation must search the title for each strata lot title to ensure that no claims of lien have been filed. These title searches should be done after the expiry of the 55-day holdback period from the date of issue of the certificate of completion.

b. Perform Court registry searches. The strata corporation must search the Supreme Court registries to ensure that no legal action claiming an interest in the holdback monies has been commenced. The only Supreme Court registry with jurisdiction is the one in the municipality or judicial district in which the lands are located. This is known as the local venue rule.

10. Use of holdback monies by strata corporation. If the contractor defaults under the contract and the holdback period has expired without any actions being commenced claiming against the holdback or without any liens filed against the titles to the strata lots in the strata corporation, the strata corporation may have a right to apply the holdback to complete the work under the contract. However, it is strongly recommended that the strata corporation seek legal advice prior to pursuing this course of action.

11. Holdback for deficiencies. There may be deficiencies in the work that has been completed. Industry practice is to provide for a deficiency holdback in addition to the holdback under the Builders Lien Act. Once the contractor has requested a certificate of completion, the strata corporation should request that the consultant declare the value of the unfinished and deficient work and the strata corporation should hold funds to that value in a separate holdback fund until that work is completed satisfactorily.