Wednesday 27 June 2012

Construction Liens: The Basics for Homeowners

As a homeowner undertaking a renovation project on your property, you may or may not be aware that the title to your property could become encumbered by a construction lien. Construction liens can create serious problems when you want to sell or mortgage your property. They also can affect your credit rating. Construction liens are a very complex and technical area of law. These actions are governed by the Construction Lien Act and have many different requirements than any other court action. If you find yourself in a construction lien dispute, you should speak to a lawyer with experience in construction liens to help you deal with the situation and avoid any possible costs and delays.

What is a Construction Lien?

A lien is a security interest registered against the title to real property by a person who supplied labour or materials to your property. It can prevent you from selling or re-financing your property. It can also be a threat to your current mortgage, and your current mortgage may even have a provision requiring you to remove a lien from your title. In an extreme case, a lien claimant may be able to force a sale of your home.

Who Can Register a Construction Lien?

A construction lien can be registered by almost any person who supplied labour or materials related to construction, demolition or other improvements to your property. A lien can be registered by your contractor, a sub-contractor, or even the business from which your contractor bought your fixtures and materials.

To the surprise of many homeowners, there does not have to be a direct contractual relationship between the person who registers the lien and the homeowner.

There are two situations that commonly arise that homeowners should be aware of:

Scenario #1 – General Contractors and Sub-Trades

If you, as a homeowner, hire a general contractor to oversee the construction project and the general contractor hires a tradesperson to complete a specific aspect of the project, that tradesperson could register a construction lien against the title of the property even though there was no direct contract between the homeowner and the tradesperson.

Scenario #2 – The “Renovation-Happy” Tenant

Another example of where a construction lien might be registered against the title to a property is where the homeowner leases the property in question to a tenant. If the tenant contracts with someone to carry out work on the property and doesn’t pay that contractor, that contractor might register a lien against the home. However there are some important additional restrictions on the right of a supplier who works for a tenant to lien the owner’s title.


Timelines and Construction Liens

The right to lien a property arises when the person first supplies services or materials to the property. In order to keep a lien alive, the lien claimant must do a number of things within a number of deadlines. The lien claimant must preserve the lien, which usually means registering a claim for lien on title, usually within 45-days after the lien claimant’s last substantial supply or work. Then the lien must be perfected , which usually means starting a court action and registering proof of that on title, usually within 90 days after the last day of supply or work.

There are other deadlines and quite a few variations and exceptions to these rules. Complying with the all the requirements established by the Construction Lien Act can be complex but is essential to creating and keeping a valid lien. If the lien claimant has failed to follow the correct procedure, you may be able to get the lien taken off your title much more easily than would otherwise be the case. It is important therefore to consult a lawyer that specializes in this area as soon as possible.


How to Remove a Lien

There are two primary ways to remove a construction lien from the title to a property:


Consent and settlement

If the dispute can be settled and an agreed amount paid to the lien claimant the lien claimant can register a discharge of the lien from your title. Even if you cannot agree on how much the lien claimant should be paid, you might be able to agree to have someone else hold an agreed amount as security for the lien claim until the dispute is resolved, and have the lien clamant register a discharge of the lien.


Payment into Court

If it is not possible to reach an agreement, a property owner can pay the amount of the lien claim plus 25% as security for legal costs into court. The court will then issue an order discharging the lien against the title. An owner doesn’t even need to tell the lien claimant that he or she is going to do this.

If you have strong evidence that the lien is for an excessive amount, an owner can also ask the court to decide on a lesser amount to be paid into court. In this situation, however, you have to tell the lien claimant about your request and give the lien claimant a chance to tell the court his or her side of the story.

In both situations described above, the money paid into court, or held in trust by an agreed upon person, will be held until the lien claimant continues with the construction lien court action and the court decides how much, if any, the lien claimant should be paid.

Conclusion

Construction liens are complex, technical and time consuming. The information provided above has really only scratched the surface of the area of construction liens. There are many other aspects of construction liens that impact someone involved in a construction lien action. For this very reason, it is important to consult with a lawyer that has experience in this area as soon as possible. The team at Augustine Bater Binks LLP would be happy to consult with you on any issue with respect to construction liens.



[The above article is for general informational purposes only and is not legal advice. If you live in the Ottawa area and would like advice about a legal issue please email us or call 613-569-9500 to speak with one of our lawyers or a member of our staff.]  






Tuesday 5 June 2012

Executor's Compensation


What is it?

Executor’s compensation is the money that is paid by an Estate to the trustee(s) or executor(s) who manage the Estate. A trustee or executor is the person appointed in a will to manage the affairs of the deceased's estate. Although those terms refer to different roles they are often used together because the same person(s) is often appointed to take on both roles. Normally, after a person dies, there are bills to pay, there are bank accounts to manage (i.e. close the existing account and open a new account in the name of the Estate), there are taxes to be paid, there may be real estate to manage or sell, there may be disputes to settle etc. When all is resolved, hopefully there will be a balance in the Estate to distribute to the beneficiaries under the will.

Some estates are large in value and some estates are small in value. Some estates are complex and require that the executors do a lot of work. Some estates are simple and don't require that the executors do much work at all. No one is expected to work for free. The question becomes, how much financial compensation should an executor receive for the work they do on behalf of a particular Estate? That is the issue known as "Executor's Compensation.”

How much should be paid to an executor?

       Should the Executor Waive Compensation?

The first point to recognize is that where the executor and the residual beneficiary are the same person there is no financial benefit (and a tax disincentive) for the estate to pay executor’s compensation. In those cases the executor would normally waive any compensation. For instance, a husband may appoint his wife as his primary executor and may also name her as the sole residual beneficiary of his will. In that case there would be no point in paying her compensation for her work as an executor. Effectively, she would be paying herself and she’d have to pay income tax on the money paid to her as executor’s compensation whereas the bequest under the will is not subject to income tax. (See Scenario #1 at the end of this article.)

      Where Executor’s Compensation is Claimed by an Executor

Where the executor claims executors compensation, how is that compensation quantified? It may be that the residual beneficiary and the executor come to an agreement as to a fair and reasonable allowance to be paid for executor’s compensation. If the parties are unable to agree upon an amount, then the executor is entitled to pass his/her accounts and in the process of passing accounts to claim executors compensation. It is then up to the beneficiaries (or some of them) to object to the passing of accounts. In Ontario a single judge of the Superior Court of Justice has jurisdiction to quantify executor’s compensation. Set out below is a summary of the legal guidelines and principles applied by the Court in fixing executors compensation.



Statutory Authority

In Ontario the statutory authority enabling the Court to permit a fair and reasonable allowance upon a passing of accounts for the effort expended in the administration of the estate is found in section 61 of the Trustee Act, which says that;

“A trustee, guardian or personal representative is entitled to such fair and reasonable allowance for the  care, pains and trouble, and the time expended in and about the estate, as may be allowed by a judge of the Superior Court of Justice.”

The courts have developed guidelines for quantifying what is “fair and reasonable” compensation. The usual starting point is an amount equal to 5% of the estate or:


2.5% on capital receipts;

2.5% on capital disbursements;

2.5% on revenue receipts; and

2.5% on revenue disbursements.
In addition, the courts will often allow a management fee of 2/5 to 3/5 of 1% of the average annual value of the gross assets under administration.

It is also possible for the executor to request a special (i.e. additional) fee where additional compensation is required to fairly compensate the executor for the work and responsibility taken on by him/her.

The case law interpreting section 61 of the Trustee Act has developed 5 factors which are to be considered in reference to executor’s compensation on a passing of accounts:


a. The magnitude of the trust;

b. The care and responsibility involved;

c. The time occupied in performing the duties;

d. The skill and ability displayed; and

e. The success which has attended its administration.

Toronto General Trusts Corp. v. Central Ontario Railway Co. (1905), 6 O.W.R. 350;1905 CarswellOnt 449 (Ont. H.C.)
The law concerning executor's compensation is set out in Jeffery Estate (Re) (1990), 39 E.T.R. 173, 1990 CarswellOnt 503 (Ont. Surr. Ct.) at paras. 13 & 16 in the following terms:
  
“… In Ontario, at least, a practice has developed of awarding compensation on the basis of 2 ½ per cent against the four categories of capital receipts, capital disbursements, revenue receipts and revenue disbursements along with, in appropriate cases, a management fee of 2/5 of 1 per cent per annum on the gross value of the estate…. Beyond this, of course, the cautionary words of the Re Atkinson case, emphasize that the use of percentages must not become a ritual.


To me, the case law and common sense dictate that the audit judge should first test the compensation claims using the “percentages” approach and then, as it were, cross check or confirm the mathematical result against the five factors approach set out in Re Toronto General and Central Ontario Railway ….The process is not scientific but it is not intended to be: in the estate context, it is a search for an award which reflects fairness to the executor; in a real sense, the search is for an appropriate quantum meruit award in a unique setting.”
In the case of Laing Estate v. Hines (1998), 167 D.L.R. (4TH) 150 O.C.A; 1998 CarswellOnt 4037 (Ont. C.A.) the Ontario Court of Appeal confirmed the law as expressed in Jeffrey Estate. At ¶ 9 of the Laing case the court stated:


“A court on a passing of accounts is obliged to first test the compensation claimed by applying the percentages and then cross checking the result in reference to the five factors with a view to achieving a fair and reasonable result.”


Conclusion

The ultimate question that the court must answer is what amount is “fair and reasonable” for the work performed and the responsibilities undertaken by the executor. The answer to that question is arrived at by:



1. Applying the percentages (i.e. 5% of the value of the estate);

2. Cross checking the result of the percentage approach in reference to the five factors

3. Using a broad brush approach rather than a fine calculation approach in considering the result.
Note:

Executor compensation issues can be very complex. Should such issues arise it is recommended that a lawyer be consulted to deal with the factual and legal circumstances of a particular case.

 
Scenario #1

The testator dies leaving an estate with a value of $1.0M. The testator appoints his wife as executor and she is the sole residual beneficiary of the estate.

If the wife did not take any executor's compensation she would receive $1.0M as residuary beneficiary.

If the wife took the normal executor’s compensation of 5% of the value of the estate as executor's compensation she would receive $50K as executor’s compensation and the balance of the estate ($950K) as residuary beneficiary. Note however that executor's compensation is taxable income (as wages) and therefore the wife would have to pay income tax on the $50K of say $20,000.00. In this case, as a result of claiming executor’s compensation, the wife would receive $980K (after tax) rather than $1.0M.

Logically therefore, where the executor and the sole residual beneficary are the same person, the executor will waive their entitlement to compensation and none will be paid.


Scenario #2

The testator dies leaving an estate with a value of $1.0M. The testator appoints his brother as executor. The testator’s wife is the sole residual beneficiary of the estate.

If the brother did not take any executor's compensation the wife would receive $1.0M as the residuary beneficiary.

If the brother asked for and the wife agreed to executor’s compensation of 5% of the value of the estate as executor's compensation the brother would receive $50K as executor’s compensation and the balance of the estate ($950K) would be paid to the wife as residuary beneficiary. The brother would have to pay tax on the executor’s compensation he received.


Scenario #3

The testator dies leaving an estate with a value of $1.0M. The testator appoints his brother as executor. The testator’s wife is the sole residual beneficiary of the estate.

The testator’s brother seeks the normal executor’s compensation of 5% of the value of the estate as executor's compensation. The testator’s wife objects to the brother receiving $50,000.00. The brother passes his accounts and the court applies the percentages and then the 5 factors to determine if the compensation is fair and reasonable. The brother may receive $50,000.00 or he may receive less depending upon the view of the Court as to what is “a fair and reasonable allowance”.



Scenario #4

The testator dies leaving an estate with a value of $100K. The testator appoints his brother as executor. The testator’s wife is the sole residual beneficiary of the estate.

The testator’s brother seeks the normal executor’s compensation of 5% of the value of the estate as executor's compensation plus a special fee due to the large amount of work involved in this particular estate. In this case the amount payable by applying the percentage approach is only $5,000.00. The testator’s wife objects to the brother receiving more than $5,000.00. The brother passes his accounts and the court applies the percentages and then the 5 factors to determine if the compensation is fair and reasonable. In this case it may be that matrix of quantum of the estate and quantum of work required of the executor justifies an additional payment. Again, it depends upon the view of the Court as to what is “a fair and reasonable allowance”.



[The above article is for general informational purposes only and is not legal advice. If you live in the Ottawa area and would like advice about a legal issue please email us or call 613-569-9500 to speak with one of our lawyers or a member of our staff.]