Chapter 6: Holdbacks by the Owner

6.1 | What is the fund into which the owner’s holdback must be paid?
Holdback account

Commentary: this fund is known as the “holdback account.” It arises under section 5 which provides that the owner must establish a holdback account for each contract under which alien may arise and pay into that account the amount of the owner’s required holdback from the contractor.

6.2 | Where must the account be created?
Account at savings institution

Commentary: the account must be established at a “savings institution.” See paragraph 5.8 as to the meaning of this term.

6.3 | If the owner establishes the account, does the owner control it?
Administration of account

Commentary: the Act requires that the account be administered jointly with the contractor from whose payment the holdback was retained. This would normally mean that the signatures of both are required for any withdrawals or other dealings with the account.

6.4 | What if there is more than one owner?
Multiple owners

Commentary: section 5(5) provides that where there is more than one owner, only one of them is required to establish and administer the holdback account. This is phrased in permissive terms, and does not prohibit each of two or more owners being administrators of the holdback account if they wish.

6.5 | When must the owner establish more than one account?
Multiple accounts

Commentary: when the owner engages a head contractor to do substantially all of the construction work, only one account will be required. When the owner acts as project manager and directly engages persons such as an excavator or landscaper to do particular aspects of the project, a separate account must be created for each of those contractors.

The purpose of having multiple accounts in this kind of situation is to simplify administration. If there were a “blended” account containing the holdbacks from several contractors, administration of the account would be unnecessarily complicated.

6.6 | Must a holdback account be opened for every project?
When holdback account is not required

Commentary: the Act identifies three situations in which the owner is not required to open a holdback account.

First, an account need not be opened where the holdback is retained by the mortgagee under section 4(4).

[See section 5(4) and paragraph 5.8]

There is no requirement to open a holdback account where the government is an owner. In this context, “government” means the government of the province of British Columbia.

[As to the application of the Builders Lien Act to public bodies, see chapter 20]

A holdback account does not need to be created where the aggregate value of work and material provided under the contract is less than $100,000.

[See section 5(8)(b)]

6.7 | What remedy does a contractor have if the owner fails to establish a holdback account?
Failure of owner to establish account

Commentary: a failure of the owner to establish and pay into a holdback account, may be treated by the contractor to treat that as an act of default. The contractor may suspend operations on ten days’ notice.

[See section 5(7)]

6.8 | What are some of the rights to funds held in a holdback account?
Rights in account

Commentary: funds in the holdback account are charged with the payment of liens arising under the contractor from whom the holdback was retained. Subject to the rights of those lien holders, the funds are held in trust for the contractor.

[See sections 5(2)(a) and (b)]

Subject to a different agreement between the parties, interest on the funds held in the holdback account accrues to the owner during the holdback period and to the credit of the contractor after the holdback period has expired.

[See section 5(6)]

6.9 | How are conflicts between the owner and the contractor concerning the administration of the account resolved?
Conflicts over administration of account

Commentary: the Act permits any administrator of a holdback account to apply to the court for directions respecting its administration. On such an application, the court may make any order it considers appropriate. The Act also sets out some specific orders the court can make including an order:

(a) that the owner establish and maintain a holdback account
as sole administrator;
(b) that some or all of the money in the holdback account be paid
into court under section 23 for the removal of claims of lien;
(c) that an administrator be removed or replaced;
(d) that a lien holder be paid.

[See section 5(3)]

In some cases, the source of conflict may be the fact that the Act provides insufficient guidance on aspects of administration of the holdback account. The government has a power to enact regulations respecting the administration of holdback accounts. Regulations have not yet been made under that power.

[See section 47(2)(c)]

6.10 | When can money be paid out of a holdback account?
Payment out of account

Commentary: in section 5(2)(b) the Act stipulates that money must not be paid out of the account without the agreement of all administrators. The most straightforward situation in which the administrators will agree to payment out is where the holdback period has expired and the possibility of any lien claims under the contractor is exhausted. The Act authorizes payment of the holdback at that time.

[See section 8(4)]

Agreement might be withheld where the owner wishes to look to the holdback to remedy deficiencies and will not agree to payment out to the contractor.

[See paragraph 16.2]

The Act also provides for the early release of a portion of the holdback retained from a contractor where particular subcontracts have been certified as completed.

[See paragraph 10.16]

Payment out of the holdback account may also be made to give effect to an order of the court made under section 5(3). Examples would be an order to pay money into court under section 23 to remove lien claims or to pay a particular lien holder.

It is important to note that the provision concerning payment out of the account with the agreement of all persons is phrased negatively. It does not create a general power which permits payment out of the account whenever that is the joint wish of the administrators. Payment out can only be made in circumstances authorized by the Act. What is being agreed by the administrators is that the circumstances in which the Act authorizes the payment out, in fact exist.

6.11 | What happens if the improvement is sold before the holdback period expires?
Sale during holdback period

Commentary: in most cases, the rights of the parties in respect to the holdback account will be dealt with as a matter of contract between the buyer, seller and contractor. If, in practice, these situations present difficulties, the government is empowered to make regulations “governing rights in relation to holdback accounts on a sale of an improvement by an owner.”

[See section 47(2)(d)]

6.12 | How can a lien holder get information about the holdback account and its operation?
Right to Information

Commentary: a lien holder is entitled to submit a written request to the owner requiring information in relation to:

• • the location of the holdback account,
  • its account number, and
  • particulars of credits to and payments from the holdback account.

[See section 41(1)(a)(ii)(iii)]

6.13 | Who is entitled to interest on the holdback account?
Interest on account

Subject to a different agreement between the parties, interest on the funds held in the holdback account accrues to the owner during the holdback period and to the credit of the contractor after the holdback period has expired.