Construction Liens and Mortgage Financing

Ontario’s Construction Act gives qualifying persons who supply services or materials to an improvement statutory lien rights. For a borrower, that means unpaid construction obligations can become a title and financing problem even where the property value is strong.

A construction lender may therefore require evidence about contractor payments, statutory holdbacks, lien status and title before advancing or taking out the construction mortgage.

Current section 22 of Ontario’s Construction Act requires a payer under a contract or subcontract under which a lien may arise to retain a basic holdback equal to 10% of the price of the services or materials as they are actually supplied under the contract or subcontract.

That statutory holdback is part of the construction-payment chain. It is not the same thing as a lender’s contractual draw holdback, a construction contingency, an interest reserve or money the borrower informally keeps “just in case.”

Ontario amended the Construction Act so that current section 26 contains annual release mechanics for holdback, including notice and payment timing. The current Act provides that an owner publishes a notice of annual release and contains specified timing for payment following publication. Related regulations prescribe the notice form and publication process.

This means older construction-finance explanations that describe holdback only as one amount released after project completion can be incomplete for current Ontario projects. Transitional rules can also matter for projects spanning the change. Borrowers should rely on project counsel for the actual holdback calendar.

The current Construction Act contains 60-day preservation periods tied to specified events under section 31, and a preserved lien generally expires unless perfected within the later statutory perfection period described by section 36. Which clock applies can depend on the claimant’s role, last supply, contract completion/abandonment/termination and certificates or notices.

This page should not be used to calculate a claimant’s deadline. A borrower, contractor or lender dealing with an actual unpaid claim, registered lien or threatened lien requires immediate Ontario construction-law advice because missing the applicable date can change rights.

Section 78 of Ontario’s Construction Act contains specific priority rules involving liens and mortgages, including rules that can treat mortgage advances differently depending on timing and circumstances. Construction financing therefore cannot safely assume ordinary registration chronology answers every priority question.

This is one reason construction lenders rely heavily on lawyers for title searches, advance instructions and lien clearance before each material disbursement.

At the first advance, title may be clear. Weeks later, new work has been supplied, payment disputes may exist and lien rights may have arisen even if nothing is yet registered. The lender is being asked to release additional money into a changed legal environment.

Title searches, declarations and payment evidence are therefore part of draw underwriting, not merely the final discharge process.

A registered lien is visible on title and normally creates an immediate issue for sale, refinancing or further advances. But lien rights can exist before registration, which is why a clean title search alone may not answer every construction-payment question.

The lender and lawyer may require additional evidence about recent work, payments and statutory holdback rather than relying only on the land registry snapshot.

Depending on the transaction, the lender or lawyer may request statutory declarations, contractor invoices, proof of payment, subcontractor information, holdback calculations, certificates/notices or other evidence before releasing funds.

The purpose is not to make the borrower prove that no future dispute is possible. It is to reduce the risk that new mortgage money is advanced while known construction obligations remain unresolved.

If part of each payment must remain retained under the statutory regime, the contractor/subcontractor chain may receive less immediate cash than the gross value of completed work. At the same time, the lender can have its own draw retention.

A construction cash-flow plan should therefore track gross work completed, lender advance, statutory holdback obligations, contractor payment timing and borrower cash separately. Treating the appraised progress value as cash available to trades can create a shortfall.

A disputed lien can interfere with title, draws, sale or refinancing until it is resolved, discharged, vacated or otherwise dealt with through the legal process. The mortgage lender does not have to decide the merits of the construction dispute before protecting its security.

The borrower should separate two questions: Is the claim legally valid? and What must happen for the lender to continue funding? The first is legal; the second is governed by the commitment, lender risk decision and counsel.

A permanent lender may require clear or acceptable title, confirmation of completion, outstanding deficiency treatment, appropriate insurance and legal opinions before paying out construction debt. An unresolved construction claim can therefore block the takeout after physical completion.

The project is not financially complete until the physical, legal and financing completion states align.

General mortgage guidance can explain holdback concepts, financing consequences and the statutory framework, but it cannot determine a claimant’s deadline, lien validity, priority, trust claim, amount owing, discharge remedy or litigation strategy from incomplete facts.

When an actual lien, notice, unpaid contractor or priority dispute exists, the borrower should obtain advice from an Ontario construction lawyer while also confirming how the issue affects the lender’s remaining draws or permanent takeout financing.