What is “Lock-up” and When Does it Occur?
These questions were not considered by a Canadian court until the recent British Columbia Supreme Court decision of Skadberg Construction v. Buchholz, 2010 BCSC 869.
“Lock-up” is the stage of residential construction at which point the walls, windows, and doors are in place so that the structure may be secured. Residential construction contracts often require the payment of different percentages of the contract price (“progress payments”) until the whole of the contract is paid upon completion of the project. The occurrence of “lock-up” is often a point at which a progress payment is due under such contracts.
Skadberg involved a dispute between an owner and builder regarding the performance of a contract to construct a duplex on the owner’s land. The parties agreed that 30 percent of the total value of the contract was due to the builder at lock-up. However, the term was neither defined in the contract nor was its meaning discussed by the parties prior to the contract’s formation.
The builder claimed lock-up was achieved on January 25, 2008. The owner refused to make the relevant progress payment because she did not consider the project to be at lock-up, citing the following shortcomings:
- Several windows had not been installed and were instead boarded over;
- Two interior garage doors had not been installed;
- The interior staircases had not been installed leaving the second floor of the duplex accessible only by ladder;
- The chimneys were not installed; and
- The duplex lacked structural integrity and required moment frames.
The owner considered lock-up as having occurred when the “building was closed in or when you had a key in the door”. The builder argued lock-up only required “having a roof on the structure and having most of the doors and window framing done.”
The builder suspended construction for non-payment. The owner alleged the builder breached the contract by abandoning construction before lock-up.
The question for the Court was whether construction had reached lock-up and whether the builder or owner was justified in refusing to carry out or pay for the work, respectively.
The Court declined to adopt a hard and fast definition of “lock-up”. Instead, the Court held the term should be given a flexible interpretation considering the facts and circumstances of the particular project:
While there is no standard or trade definition of “lock-up”…the term is commonly used and well understood in the construction industry. The term has some flexibility. It does not absolutely require the windows, exterior doors, or temporary staircases to be installed. Its specific meaning must be derived from the construction agreement itself, along with the particular facts and circumstances of the building project to which it is being applied.
In applying this approach, the Court held the builder was reasonable in not installing certain items, including particular doors and windows, given those items would need to be removed during further construction.
The Court held the builder was entitled to abandon the project when the owner refused to make the lock-up payment. The Court held the owner breached the contract and was ordered to pay the lock-up claim, contractual interest, and special costs for her “reprehensible conduct” which included unfounded allegations of fraud against the builder and failing to disclose relevant documents in the course of the proceedings.
The Skadberg decision can be compared with the Australian decision of Cardona & Anor v. Brown & Anor  VSC 368, rendered August 23, 2010.
In Cardona, the Court was called upon to review a decision of the Victoria Civil and Administrative Tribunal (the “Tribunal”) which determined the lock-up stage of a residential construction contract had been achieved despite the existence of a gap in the external wall of the premises between its ceiling height and the roof line, and a garage which lacked both roller and conventional doors.
The Tribunal’s decision would be uninteresting but for the fact that “lock-up” is statutorily defined in section 40 of Victoria’s Domestic Building Contracts Act 1995 (the “Act”). The section seemingly requires the completion of a home’s external walls before lock-up is achieved:
…the stage when a home’s external wall cladding and roof covering is fixed, the flooring is laid and external doors and external windows are fixed (even if those doors or windows are only temporary).
The owners maintained the Tribunal’s decision was wrong given the gap in the external wall, and the Tribunal had strictly applied the provision of the Act against a builder in Bobo’s Fashion Pty Ltd. v. MJF Property Developments Pty Ltd.  VCAT 1090, where the Tribunal found an owner was justified in refusing to make a payment due at lock-up when garage doors had not yet been installed in a residential unit.
The Court confirmed the Tribunal’s “flexible” approach despite the clear wording of the Act, noting that the project’s plans did not contemplate any external cladding above its ceiling height to seal off what would ultimately be an open cavity between the home and the garage. The Court held the “fixing” required by the definition in the Act was not more than required by the plans and, in the circumstances, the plans were complied with when the lock-up payment was requested.
Interestingly, the courts of British Columbia and the Australian state of Victoria developed similar approaches to the determination of lock-up, regardless of the statutory inclusion of the term in the latter jurisdiction.
Notwithstanding the Skadberg decision, builders should clearly define the phases of construction in their contracts where those contracts refer to the phases for the provision of progress payments.