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Building or Renovating?
Thursday, 26 April 2012 13:11
With spring coming, you may be thinking about renovations. A bigger kitchenette would be nice, or maybe a larger office. Perhaps it is time to fix that drafty wall, or add a walk-in closet for your master bedroom. Maybe you want to add an extension.
Whatever you do, if you hire a contractor to improve or construct an extension to your property, there are special rules that must be followed or face the consequences. In Ontario, the rules are contained in the Construction Lien Act, R.S.O. 1990, c. C.30.
Before we look at the legislation, we should look at how the construction industry works on a typical project. As an example, assume a homeowner wishes to redesign their kitchen by extending it, adding new cabinetry and an additional sink. For an improvement such as this, the homeowner will probably hire an experienced contractor to do the job.
The contractor will usually have a specific expertise such as carpentry or drywall and will have a working knowledge of the other construction trades that will be required for the addition. The contractor may hire an electrician or a plumber for the electrical or plumbing work that must be installed in the project. In addition to trades, the contractor requires supplies. The price of the addition will usually include the cost of supplies and the contractor will order them from various suppliers who will look to the contractor for payment.
The homeowner has no relationship with these other trades and suppliers. The homeownerhas a contract with the contractor alone to build the addition. The contractor then contracts with the electrician or the plumber or the suppliers for portions of the work. These trades in turn may contract with other contractors to perform work at the project for them.
As you can see, the construction of this addition to the homeowner's kitchen has turned into a sort of contractual pyramid. The owner is on top and has contracted with the contractor to build the addition. The contractor then has several contracts branching down from him with suppliers of materials or services. These suppliers may, in addition, require supplies and services, and so on, and so on ...
This system works well if everyone in the pyramid has money to pay the people below them - their "subcontractors". But if the money dries up at one level, it is gone for all the subcontractors below.
In our example, if the contractor underestimated the cost of the addition or if the contractor becomes insolvent, there is a good chance that some subcontractors or suppliers would not get paid even if the home-owner paid the contractor in full for the cost of the addition. Further, these subcontractors could not claim against the homeowner for the monies owing because they did not have a contract with the home-owner. They can certainly sue the contractor based on their contract, but it will be difficult to get paid.
As a result, the lower a tradesperson or supplier is on this construction pyramid, the bigger risk he is taking of not getting paid. Someone above him may be underestimating costs or absorbing the project funds for some unauthorized purpose.
The Construction Lien Act (the “Act”) was created to regulate the amount and the timing of payments going down the construction pyramid. The crux of the legislation is this: if a property owner hires a contractor to build on or improve a property, the property owner must withhold from the contractor an amount equal to 10% of the contract price until 45 days after the project is complete. If no subcontractors have given notice to the owner of a claim for monies owing on the project before the expiry of the 45 day period, the 10% amount, called the "holdback funds", will be released to the contractor.
If the owner does not withhold 10% of the contract price from the contractor for the required period of time and instead, pays the contractor in full, the owner will be liable to any unpaid subcontractors for monies owing to a maximum amount of 10% of the contract price. As such, the owner will be paying twice.
In order to obtain payment of the holdback funds from the owners, an unpaid subcontractoror supplier will register a document against the title of the owner's property called a "Claimfor Lien". Any time the title to the property is searched in the Land Registry Office, the Claimfor Lien will be found. The owner will have trouble selling or financing the property until the lien is removed. The unpaid subcontractor or supplier will also start a court action against the contractor and the owner for all amounts owing.
If you are planning to build on or improve your property, I urge you to consult with a lawyer to determine what your obligations are under the Act. If your construction project costs $10,000, the holdback obligation is $1,000. One hour with a lawyer is a lot less than that and could save you the cost of the holdback. You should also have a written construction contract setting out important details of the construction, price, and timing.
The description of the Act in this article is very general. Each project should be looked aton its own set of facts. For example, an owner is defined in the Act as any person having an interest in a premises at whose request and upon whose credit, behalf, consent, or for whose direct benefit, an improvement is made to the premises. As such, landlords, tenants, and mortgagees have all been considered "owners" in some situations and liable to subcontractors for the 10% holdback. An unpaid subcontractor, if he is wise, will cast the net as wide as possible and all these parties will be named in a lawsuit for the collection of monies owed.
If you own stable property and rent it to a tenant who makes leasehold improvements on the property, you may be liable to the tenant’s contractor even though you had nothing to do with the construction. Section 19 of the Act allows a contractor to serve a landlord with notice of the improvements to be made on behalf of a tenant. If, within 15 days of receiving this notice, the landlord does not respond with notice that he will not be held responsible forthe improvement, he will be subject to a Claim for Lien to the same extent as the tenant.
If you have loaned a person money to purchase or make improvements to a property and secured the debt with a mortgage, as a mortgagee, you can be liable for the hold-back obligations under the Act. This liability would depend on the purpose of the mortgage, the timing of the payments, and certain notice requirements.
Even a simple job, like the hiring of a painter to paint an office, falls under the Act. If the painter does not pay his suppliers for the cost of the paint or his workers for the time they spent on the job, they can go after the owner for the 10% holdback. If your contractor tells you something different than this, get a new contractor.
As with everything, exercise caution, get a written contract, and be informed. Remember to retain 10% of the contract value for a minimum of 45 days after completion of a project. For more details, consult a lawyer to ensure that you are fulfilling your obligations under the Act and that you are protected from a claim. As with most things, prevention is a lot easier than the cure.
Catherine Willson is a partner at Willson Lewis LLP in Toronto (www.willsonlewis.com). Along standing member of the Ontario Bar, Catherine has established a successful practice inequine law, civil litigation, construction, employment law, and family law. She is a memberof the Canadian Bar Association, the Advocates Society, and the Toronto Construction Association. As well, she is a member of the Ontario Equestrian Federation. She is a regular speaker at legal and business conferences and writes on legal issues for several national publications.
This information deals with complex matters and may not apply to particular facts and circumstances. The information reflects laws and practices that are subject to change. For these reasons, this information should not be relied on as a substitute for specialized professional advice in connection with any particular matter.
Free Educational Seminar presented by Wilson Lewis LLP
Thursday, 19 April 2012 13:52
Morning Seminar: Small Claims Court
Free Educational Seminar: How to Use the Small Claims Court, presented by Willson Lewis LLP
Maximize your collection efforts and exceed your revenue goals for 2012 by using Ontario’s Small Claims Court. The Small Claims Court lets people sue for the collection of debts up to $25,000 without the expense of a lawyer. It is a very good way to collect for your services and products from delinquent debtors.
Date: Tuesday May 1
Time: 9am to 10am
Location: SCHOOL 70 Fraser Ave (corner of Liberty St)
www.schooltoronto.com
Specifically, participants will learn to:
• Pick successful claims for Small Claims Court• Determine the correct amount of damages
• Avoid missing time limits
• Prepare and serve their Plaintiff’s Claim
• Address the Defence and any Defendant’s Claim
• Navigate a pre-trial settlement conference
• Trial preparation and advocacy
• Increase their chances of success
• Obtain judgment
• Enforce their judgment
Willson Lewis LLP Barristers & Solicitors
Suite 200, 1183 King St West
416-534-9504
www.willsonlewis.com
The Family Run Business: Heaven not Hell
Monday, 30 January 2012 11:49
The Family Run Business: Heaven not Hell
Gordon Ramsay may have a firm grip in Hell’s Kitchen but has not proved as capable running the family business. A fall-out last year between the famous Michelin-starred chef and his father-in-law business partner has already resulted in three family members looking for work, could cost the celebrity chef over $20m and, if the back pages were to be believed, has severely tested his marriage. The saga is a very public and stark reminder, albeit a British one, of the added difficulties family run businesses frequently encounter.
Success in business is hard enough these days without having to maintain the loving and sometimes combustible relationships running throughout the family run business. In addition, the evolutionary nature of the family unit requires planning and management for every life or death, marriage or divorce, illness, or shift in the priorities of a particular generation. This by no means represents an exhaustive list of the extra burdens a family run business must contend with but merely illustrates the minefield that is encountered when mixing family and business.
Minefield or no, a family run business can be a unifying, personally gratifying and profitable adventure. There are, however, some key legal considerations which, if put into practice, can protect both your business and your family for generations to come. If Chef Ramsay had paid heed to these considerations then perhaps his personal business and family affairs would not currently be the stuff of gossip columns and celebrity news outlets.
Key Considerations:
- Structure
- Ownership
- Succession Planning
- Management
Structure
To facilitate structured decision making and planning for major transitions, it is advisable to organize the family business as its own entity (a corporation or partnership). Shareholder agreements can be used by a corporation to supplement the articles of incorporation and company by-laws by regulating the ownership and rights of shareholders, provide for the management of the company and resolution of future disputes while also acknowledging ethical mandates considered important by the company.
A partnership agreement is critical for any family business run as a partnership. Without a partnership agreement the Partnership Act, R.S.O. 1990, c. P.5 dictates that death or insolvency in an Ontario registered partnership will automatically result in the dissolution of the business. Partnership agreements should define the nature of the partnership, expressly acknowledge capital contributions, structure the allocation of profits and losses, define the authority of partners and provide for succession issues and conflict resolution. To ensure that the governing documents of your family business are appropriately drafted, consider consulting a lawyer equipped with the right skills to help.
Ownership
Owners interested in ensuring the success of the family business for generations to come must appreciate that management and ownership are two entirely different beasts. They shouldn’t necessarily go hand in hand. Control could rest in the hands of a few while all share equally in the ownership of the family business. Then again, it may not be in the best interests of the family or the business that everyone gets an equal share. It may be fairer for the family members in charge to have greater ownership than those who aren’t. In such cases alternative financial arrangements can be made for those not involved in the business. Ownership should be clearly defined in the governing documents of the business as should how ownership is altered or diluted upon the occurrence of certain events such as marriage, divorce, births, deaths and fractious disagreements between family members. The potential for strife and tension are considerably reduced when ownership issues are appropriately dealt with at an early stage and on an ongoing basis.
Succession Planning
Family business owners must regard themselves as responsible custodians of the family business for future generations rather than as recipients of a hereditary entitlement owed to them personally. Succession planning should be a component part of every prudently run family businesses structural, ownership or management planning. Succession planning is essential if ownership and operational control of a family run business are to be successfully and seamlessly transferred onto the shoulders of a younger generation. Tax considerations are a big aspect of succession planning. The successful transition of the business from one generation to the next necessitates providing the retiring generation with sufficient liquidity, minimizing estate taxes and preserving sufficient capital within the company to facilitate sustainability and future growth.
Issues of ownership, control and taxes must be approached from a multiplicity of perspectives: younger generations who will enter the business, younger generations who will not enter the business, spouses of younger generations and unrelated employees. Succession planning can be complex and is often complicated by marital problems, jealousy and other concerns. As such it may be prudent to rely on outside professional help to better manage the mixed bag of organizational, financial, tax, family and psychological considerations involved in succession planning. Do you have a lawyer equipped and experienced enough to quarterback such a team?
Management
Employment policies are imperative. There should be policies concerning hiring, internal promotion, compensation, standards of conduct and discipline. Job descriptions are a great way of clearly articulating the prerequisites (family tie, experience, education) for each position within a business. The policies should expressly account for any differences in the treatment of different categories of employee (step-son vs. unrelated employee of 20 years). Once written the policies need to be effectively communicated to everyone in the business and not treated like one of the family’s dark secrets. In order for the business to survive company policy must be amenable to change and where changes do occur it is important that everyone is notified accordingly. Establishing these policies early on will minimize surprises and help foster a culture of support and cooperation within your family run business.
Written policies can be written into the wall paper but it is how management is conducted day-to-day that determines the working validity of any articulated policy. Current owners should meet regularly to discuss issues of ownership, succession and management. Written records should be kept, especially concerning the relationships between family members and the business, and employment policies should be continually updated.
A prime responsibility for all custodians of the family business is the preparation of the next generation. The pool for future VP’s of the family business is potentially very small, if you want to keep management within the family, so an emphasis has to be placed on training every single day (acknowledging that sometimes meaningful training is best garnered outside of the family run business bubble). Ownership and control being the different beasts that they are, as already mentioned, means that family ownership of a business can be maintained even though control might be handed over to non-family members more adept at managing the business.
Conclusion
The financial and personal damage that resulted from Gordon Ramsay’s fallout with his step father and business partner could have been mitigated by a more pre-emptive approach to the considerations touched upon above. In addition to what has been mentioned in this article, there are many other tools available to help with the ownership and management of a family run business such as: Family Business Continuity Plans, Family Charters, Board of Advisors, and the creation of a Family Council or Assembly. In addition to these specifically crafted tools, there are professionals experienced in helping families through the variety of unique and challenging difficulties which may jeopardize the current and future profitability of a family business. Harnessing the benefits of the resources available can help protect a family run business from potential catastrophe, as a result of an all too common family fall-out.
Getting together with a lawyer experienced in this unique and challenging area, like those at Willson Lewis LLP, is your best starting point. Together the most suitable plan, perhaps as simple as drafting a shareholders agreement, can be discussed and implemented. Willson Lewis LLP can help ensure that your stewardship of the family business is one that is positively remembered and benefits your family for generations to come.
Do you have questions?
If you have any questions about family businesses, please contact your Willson Lewis counsel who will be happy to assist you.
This article contains general information only, based on the laws of Ontario, and is not intended to provide a legal opinion or advice. Readers should consult a lawyer with respect to the application of the information contained above to their particular circumstances. Readers may also contact This e-mail address is being protected from spambots. You need JavaScript enabled to view it or This e-mail address is being protected from spambots. You need JavaScript enabled to view it to discuss any specific issues.
