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Modular prefabricated construction is not new to Canada – Moshe Safdie’s Habitat 67 at the Montreal Expo stands as iconic evidence of this fact. Once considered a novelty, this construction method has in recent years moved into the mainstream. Its growth has been fueled by technological advancements and ongoing industry challenges, including labour shortages, the affordable housing supply crisis, and ever-increasing pressure on schedules and budgets.
The appeal is not hard to understand. Modular construction delivers significant time savings by allowing design and construction to proceed in parallel rather than sequentially. It also takes place in a controlled and highly automated environment, helping to minimize material waste and reduce errors that drive costly rework. Equally important, modular construction is versatile across a wide range of building types and lends itself readily to future expansion or relocation of structures. Recognizing these benefits, the public sector has actively promoted this delivery model through housing programs across all levels, such as CMHC’s modular housing initiatives, further accelerating its uptake in the market.
As modular prefabricated construction sees wider use, its distinctive sequencing of off-site fabrication and on-site assembly raises a critical legal question: do lien rights apply to modular and portable units that are prefabricated away from the construction site but ultimately become part of a stationary, permanent structure on the land?
Like any good legal question, the answer depends on a number of factors, such as whether the modules have been delivered to and installed at their final destination, the degree of customization and annexation to the land, the intentions of the parties, and whether the structure enhances the land itself or merely the business operating on it.
In Ontario, courts are generally inclined to find modular prefabricated structures lienable where they were commissioned for an identifiable property or project, where they enhance the value or utility of the land, and where the parties’ intentions point toward permanence on site. However, the closer a modular project falls to the off‑site, non-project specific end of the spectrum, the less likely such activities enjoy the protection of a lien. The considerations are similar in other jurisdictions across Canada.
The Legal Conundrum
Modular prefabricated construction falls at the intersection between manufacturing and construction. The base modules are first manufactured off-site in a highly automated, factory-like environment. They are then transported to the project site and assembled onto substructures. As a result, at least two sites exist in any modular construction project – the facility where the modules are fabricated, and the construction site where the substructures are built to receive the modules for final assembly.
This two-site paradigm introduces uncertainty for lien rights, which are designed for a world where construction happens primarily on-site and sequentially such that the connection between the work/materials and the land being improved is obvious and immediate. That connection is what underpins lien protection, as the labour and capital have been absorbed into and thereby enhance the value of the land. In modular construction, however, that connection is less obvious and must be established to attract the protection of a lien.
How Ontario Courts Have Approached Lienability
Under Ontario’s Construction Act, a construction lien arises when a person supplies services or materials to an improvement for an owner, contractor, or subcontractor.1 In the modular context, the perceived impermanence of modular prefabricated structures may cast doubt on whether they qualify as an “improvement” (i.e., a structure intimately connected with the land) and therefore lienable. The fact that these structures can be assembled, disassembled, and relocated can make them seem less likely to add lasting value or utility to the land as required by the Construction Act for lienability. The Ontario Superior Court of Justice in its 2023 decision, On Point Ltd. v. Conseil des Écoles Catholiques du Centre Est et al., (“On Point”) reasoned, however, that the inherent mobility does not veto lien protection where the modular structure is sufficiently customized and integrated into the project site and is intended to remain there for the foreseeable future.2
In that case, the court found that prefabricated modular classrooms – installed as temporary solutions to accommodate a school’s enrolment fluctuations for an indeterminate duration – did furnish value and utility to the land.
The portable classrooms were anchored to the land through a specially designed support and anchorage system, and they were integrated into the school’s existing infrastructure through dedicated hydro masts wired into the school’s electrical grid, as well as the heating and air ventilation systems.3 The structures were also fitted with blackboards, lighting systems, and storage space. Given the degree of customization and integration, removing the portable classrooms from the site was no simple task. They operated not so much like self-contained units that could be picked up and redeployed in a site-agnostic fashion, but more like a natural extension of the school building itself.
The parties also intended and treated the modular classrooms as a permanent feature. The classrooms were not intended to be leased or returned to the supplier or redeployed elsewhere if enrolment later declined or after a new wing might be added to the existing school building.4
The modular structures first arrived in two halves and were assembled on-site specifically to expand the school’s capacity to accommodate a growing student population. Although a temporary solution, the court found that the lands were in fact improved by portable classrooms in terms of functionality.5
Beyond the question of whether the modular structures constitute an improvement, several additional factors also pointed in favor of lien protection. The supplying party knew where the modular structures would ultimately be installed (though not at the outset of the procurement process) and delivered the materials to that final destination for assembly.6 This fact satisfies the remaining requirement for a lienable supply – namely, that services or materials be supplied for an owner, contractor, or subcontractor in connection with an identified improvement. The court also relied on the school board’s practice of retaining a 10% holdback (despite no such contractual requirement) to infer that it likely contemplated portable-related work as lienable.7
What About Off-Site Modules?
Materials must be delivered to, or near, the project site to be lienable.8 Ontario courts have not yet had to consider a lien claim where the prefabricated modules remain entirely off-site – that is, before delivery to the final construction site for installation. As modular construction becomes more prevalent, this scenario will probably reach the courts.
The key question then would be whether courts will be prepared to interpret “a designated location in the immediate vicinity of the premises” (as it is phrased in the Construction Act) to include off-site factories where modules are manufactured.9 There is a compelling argument for doing so: modular construction is front-loaded, with significant labour and capital invested before delivery. Suppliers should have some degree of protection against the risk that their work may never fully materialize on site if a project is abandoned midstream. As courts’ analysis of lien claims increasingly gravitates towards the necessity of the materials to project completion and the benefit conferred, with less emphasis placed on the physical or spatial connection to the land, there may be a principled basis for extending lien protection to this particular scenario.
Concluding Remarks
With the present paucity of case law relating to modular construction, On Point is welcome guidance and, we expect, will act as persuasive authority in other Canadian jurisdictions – especially in relation to circumstances where the prefabricated materials have been delivered to site.
In respect of modular structures manufactured with no particular site in mind and designed to operate as self-contained units with a high degree of mobility, we would observe that such structures are less likely to attract lien protection. Lienability, and specifically whether a supply of modular prefabricated components constitutes an “improvement”, remains a highly fact-specific inquiry, turning on the construction method, the degree of customization and specificity, and the parties’ intentions. Once lien rights do arise, strict compliance with applicable preservation timelines becomes critical.
If lien legislation is to evolve to reflect modern construction practices, there is room for consideration of whether lien protection ought to extend to modular fabrication for materials on and off site as a way to overcome present uncertainties. Given the complexity of the lien regime and its nuanced application to modular construction, parties to modular construction projects are strongly encouraged to seek legal advice to fully understand the extent of their rights and obligations.
Footnotes
1 Construction Act, RSO 1990, c C.30, at para s 14(1).
2 On Point Ltd. v. Conseil des Écoles Catholiques du Centre Est et al., 2023 ONSC 1341 at paras 92, 97.
3 ibid at paras 120-130.
4 ibid at paras 99-101.
5 ibid at para 159.
6 ibid at para 93.
7 ibid at paras 104-110.
8 Construction Act, RSO 1990, c C.30, at para s 1(2).
9 ibid at para s 1(2)(b).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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