Construction Lien Holdback in Ontario

What Is a Construction Lien Holdback?

A construction lien holdback is a statutory portion of contract payments that must be withheld under Ontario’s Construction Act. Its purpose is to create a dedicated pool of funds to satisfy potential construction lien claims filed by unpaid subcontractors, trades, or suppliers.

In Ontario, the standard holdback is 10 percent of the value of work performed or materials supplied under a construction contract.

The holdback is not optional. It is a legal requirement imposed on owners and, in turn, contractors down the payment chain.

Purpose of the Holdback

The holdback exists to protect parties who contribute labour or materials to a construction project but do not have a direct contract with the property owner. If those parties are not paid, they may file a construction lien against the property. The holdback ensures that funds are available to satisfy valid lien claims without requiring the sale or refinancing of the property.

The holdback is strictly for securing lien claims. It is not intended to serve as leverage for correcting deficiencies or performance disputes.

How the Holdback Works

Standard Regime (Current Rules)

• 10 percent is withheld from each progress paymentHoldback is retained until the lien period expires

• The lien period is generally 60 days after substantial performance of the contract or last supply of services/materials

• If no liens are registered, the holdback must be released

• If liens are registered, the holdback remains in place until liens are resolved

• 
  

New Annual Holdback Release (Effective January 1, 2026)

Recent amendments to the Construction Act introduce mandatory annual release of holdback on long-duration projects:

• Owners must publish an annual notice on the contract anniversary

• A new 60-day lien window runs from the notice date

• If no liens are preserved or perfected, accumulated holdback must be released

• This improves contractor cash flow while maintaining lien protection

Forms of Holdback

Holdback may be held as:

• Cash

• Letter of credit

• Bond in prescribed form

The form depends on contract terms and lender or owner requirements.

Relationship to Construction Loans

From a financing perspective, the lien holdback directly affects project cash flow, lender security, and borrower access to funds.

Impact on Borrowers

1. Holdback reduces immediately available construction funds

2. Borrowers cannot deploy holdback capital for ongoing project costs

3. Release occurs only after lien risk is cleared

   
   

Impact on Lenders

1. Holdback reduces risk of unpaid trades filing liens ahead of lender security

2. Provides a controlled fund to resolve lien claims without impairing mortgage priority

3. Often monitored through construction draw administration

   
   

Impact on Project Budgeting

• Draw schedules must account for statutory holdback

• Borrowers must carry sufficient working capital to bridge retained funds

• Holdback is a key consideration in construction loan underwriting

What the Holdback Does Not Cover

• It is not a deficiency or warranty reserve

• It is not a penalty for incomplete work

• It cannot be withheld for quality disputes unrelated to lien claims

  
  

Typical Holdback Calculation Example

If a contractor completes $500,000 of work:

• Progress payment approved: $500,000

• Statutory holdback (10%): $50,000

• Net payment released: $450,000

• Holdback retained until lien period expiry

  
  

Key Takeaways

Construction lien holdback is a mandatory 10 percent statutory retention

• It secures payment for subcontractors and suppliers

• It remains in place until lien risk expires or liens are resolved

• It directly affects construction loan cash flow and lender risk management

• It is not a performance or deficiency holdback

  
  

Bottom Line

A construction lien holdback is a legally required security mechanism embedded in Ontario’s Construction Act. In construction financing, it represents withheld capital that cannot be used during the build but materially reduces lien exposure for owners and lenders. Properly accounting for holdback is essential in structuring construction loan budgets, draw schedules, and borrower liquidity planning.