Deconstructing Construction Liens

1
Deconstructing Construction Liens
2
What is a Lien?

• 1. A creature of provincial statute
• 1873 Ontario
• 1879 British Columbia Nova Scotia
• 1884 Northwest Territories
• 1890 Newfoundland
• 1902 Manitoba
• 1903 New Brunswick
• 1907 Saskatchewan
• 1914 Yukon
• 1930 Alberta
• 1936 Prince Edward Island
• 1999 Nunavut (adopting N.W.T. statute)

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What is a Lien?

• 1. A creature of provincial statute
• 2. With broad, overriding application
• all contracts deemed amended to conform (s. 5)
• lien claimant deemed purchaser pro tanto upon
  registration of a lien (s. 76)

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What is a Lien?

• 1. A creature of provincial statute
• 2. With broad, overriding statutory application
• 3. That arises upon the mere doing of work
• s. 15 A persons lien arises and takes effect
  when the person first supplies services or
  materials to the improvement.

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What is a Lien?

• 1. A creature of provincial statute
• 2. With broad, overriding statutory application
• 3. That arises upon the mere doing of work
• 4. And expires on the mere passage of time
• 45 days to preserve
• 45 more days to perfect
• Expires after 2 years unless set down for trial

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What is a Lien?

• 1. A creature of provincial statute
• 2. With broad, overriding statutory application
• 3. That arises upon the mere doing of work
• 4. And expires on the mere passage of time
• 5. And causes the most delightful mayhem in
  between.

7
Why are there liens?

• 1. Hickey v. Stalker (1923), 53 O.L.R. 414
  (C.A.)
• Meredith C.J.C.P
• Speaking generally, the object of the
  Mechanics Lien Act is to prevent owners of land
  getting the benefit of buildings erected and work
  done at their instance without paying for them.

8
Why are there liens?

• 2. Minneapolis-Honeywell Regulator Co. v. Empire
  Brass Mfg. Co. Ltd. 1955 3 D.L.R. 561
  (S.C.C.) Rand J
• The Act is designed to give security to persons
  doing work or furnishing materials in making an
  improvement on land.

9
Why are there liens?

• 3. Teepee Excavation Grading Ltd. Niran
  Construction Ltd. (2000), 49 O.R. (3d) 612 (Ont.
  C.A.)
• Carthy J.A.
• The Construction Lien Act serves a specialized
  purpose in a narrow field. A lien claimant may
  commence an action, provide shelter for other
  claimants, obtain a form of execution before
  judgment, and proceed to trial in summary fashion
  without production of documents, discovery or
  other interlocutory steps except by leave.

10
Why are there liens?

• 4. Report of the Attorney Generals Advisory
  Committee on the Draft Construction Lien Act,
  1982
• The need for the types of remedies provided by
  the Mechanics Lien Act emanate from the
  complicated nature of contractual relationships
  within the construction industry, and the
  credit-granting practices which are an integral
  part of that industry. Ordinary contractual
  remedies are believed to be inadequate in the
  face of such phenomena.

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Why are there liens?

• 5. D.N. Macklem, D.I. Bristow, Construction
  Builders and Mechanics Liens in Canada, 6th
  ed., Vol. 1, (Toronto Carswell, 1990) at p.
  1-3
• (citing Scratch v. Anderson, 1917 1 W.W.R.
  1340)
• The land which receives the benefit shall bear
  the burden.

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But

• Canada Law Journal, Vol. XIII, N.S., January
  1877
• But as to the subject matter involved, probably
  the best thing to do would be to repeal the
  Mechanics Lien Act in toto. The enactment is in
  itself unnecessary and illogical, the wording is
  obscure, and its provisions unintelligible and
  contradictory. The Act has resulted in more harm
  than good to the honest and prudence mechanic.

13
Why are there liens?

• 1. Prevent unjust enrichment
• 2. Create a special class of creditors
• 3. Who enjoy special procedures
• 4. And ultimate recourse to the land improved
• 5. While doing as little violence as possible to
  established property rights and day to day
  commerce.

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How does our Lien Act balance these interests?
Pre 1983

• A lien claimants statute (substantial
  compliance)
• Titles often cluttered with extravagant liens
• Liens used to coerce owners /mortgagees to pay or
  lose their project
• Time periods ambiguous (subjective)
• Owners left defenseless

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How does our Lien Act balance these interests?
Post 1983

• An owners statute (strict compliance, s. 6)
• Extensive statutory remedy scheme for slander of
  title (ss. 35, 86)
• Time periods clear (objective, concept of
  publication of certification of substantial
  performance)
• Procedures toughened up and expanded (ss. 39, 40
  noting in default)

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Post 2002

• Even better!

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Post 2002

• Dominance of trust remedy (Part II) over lien
  remedy (Part III)
• Trust claim is not registered on title
• Trust has no time periods to observe
• Trust not limited to holdback
• Trust benefits from same summary procedure as
  liens (Villa Verde)
• Trust invokes mind-numbingly draconian personal
  liability section (s. 13)

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Q Where do all these concepts come together?

• A Priorities
• Where vested interests in real property collide
  head-on with special rights granted to lien
  claimants.

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Priorities

• Complete statutory code
• Part XI
• ss. 72 85

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Overall Priorities Scheme

• ss. 72 75 Administrative
• s. 72 Lien enforceable in spite of
  default
• s. 73 Lien Assignable
• s. 74 General Lien
• s. 75 OK to take other security

21
Overall Priorities Scheme

• ss. 72 75 Administrative
• ss. 76 77 Over-arching priority
• s. 76 Purchaser pro tanto
• s. 77 General priority over all
  executions, unless recovered upon

22
Overall Priorities Scheme

• ss. 72 75 Administrative
• ss. 76 77 Over-arching priority
• s. 78 Priorities over mortgages
• s. 79 80 Priorities among lien claimants
• s. 79 Persons who comprise class
• s. 80 Priority between and within class

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Overall Priorities Scheme

• ss. 72 75 Administrative
• ss. 76 77 Over-arching priority
• s. 78 Priorities over mortgages
• ss. 79 80 Priorities among lien claimants
• ss. 81 85 Special priorities
• s. 81 Workers
• s. 82 General liens
• s. 83 Insurance proceeds
• s. 84 Proceeds of sale
• s. 85 Priorities on insolvency

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Overall Mortgages Scheme

• s. 78(1) Over-arching priority of lien
• s. 78(2) Except Building mortgage
• s. 78(3) Except Prior mortgages (prior
  advance)
• s. 78(4) Except Prior mortgages (subs.
  advance)
• s. 78(5) Except Special priority against
  subsequent mortgages
• S. 78(6) Except General priority against subs.
  mortgages
• s. 78(7) Except Some trustees
• s. 78(11) Except All home buyer mortgages
• s. 78(8) Postponement
• s. 78(9) (2) and (5) dont apply to mortgages
  before 1983
• s. 78(10) Financial Guarantee Bond

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The Whole Prior/Subsequent Thing

• First lien arises

Prior mortgages
Subsequent mortgages
Prior advances
Subsequent advances
Advances without notice determinative
Value of land determi- native
Building mortgage exception
Building mortgage exception
Special priority for defi- ciency in holdback
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Advance Registration Before 1st lien arose After 1st lien arose, but before registration of written notice of lien
Before 1st lien arose s. 78(3), priority for actual value of premises at time lien arose / total value of all advances to that date s. 78(4), priority for everything in s. 78(3) plus all advances before registration or written notice of lien
After 1st lien arose s. 78(6) priority s. 78(6), priority for all advances before registration or written notice of lien, less any deficiency in holdbacks
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Example
Lien 1 Arises
Lien 1 Expires
Lien 2 Registered
Advance A1
Mortgage A (Land)
Advance A2
Advance A3
Mortgage B (Building)
Advance B1
Advance B2
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Example
Lien 1 Arises
Lien 1 Expires
Lien 2 Registered
Mortgage A (Land)
Advance A1
Advance A2
Advance A3
Mortgage B (Building)
Advance B1
Advance B2
1. Mortgagee B advanced in the face of a lien,
so that advance B2 loses priority to all liens
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Example
Lien 1 Arises
Lien 1 Expires
Lien 2 Registered
Mortgage A (Land)
Advance A1
Advance A2
Advance A3
Mortgage B (Building)
Advance B1
Advance B2
2. Advance B1 is a good advance.
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Example
Lien 1 Arises
Lien 1 Expires
Lien 2 Registered
Mortgage A (Land)
Advance A1
Advance A2
Advance A3
Mortgage B (Building)
Advance B1
Advance B2
3. Mortgage B is a building mortgage and a
subsequent mortgage, so it loses priority to
the extent of any deficiency in the holdback
31
Example
Lien 1 Arises
Lien 1 Expires
Lien 2 Registered
Mortgage A (Land)
Advance A1
Advance A2
Advance A3
Mortgage B (Building)
Advance B1
Advance B2
4. Advance A3 is a subsequent advance (after
Lien 1 arose). Therefore, unless Lien 1 was
registered or notified, Advance A3 is
additional priority for Mortgagee A
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Example
Lien 1 Arises
Lien 1 Expires
Lien 2 Registered
Mortgage A (Land)
Advance A1
Advance A2
Advance A3
Mortgage B (Building)
Advance B1
Advance B2
5. Advances A1 and A2 are prior, so priority
is lesser of actual value of land at the time
the lien arose or total of A1 A2.
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Questions Answers
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Q What if a mortgagee has more than one
intention? Is it still a building mortgage?

• A Yes.
• A mortgage can be segmented for the purposes of
  determining priorities. Where first intention was
  the acquisition of land, the first advance was
  held not to be building mortgage.
• Royal Bank v. Lawton Developments Inc.
• (1994), 16 O.R. (3d) 450 (Ont. Gen. Div.)

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Q When is an advance actually made? When the
mortgagee releases the money?

• A No, when the mortgagor gets the money.
• An advance is made not when the mortgagee
  releases the funds, but only when the owner
  acquires actual control of the money advanced.
• Marsil Mechanical v. A. Reissing Reissing
  Enterprise Ltd. (1996), 26 C.L.R. (2d) 148 (Ont.
  Gen. Div.)

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Q What if the land is worthless? What is the
actual value of the premises when the first lien
arose then?

• A Zero, no priority for the mortgagee.
  Environmental contamination can render the
  premises value nil for the purposes of
  determining priorities between prior mortgagee
  and lien claimants.
• Park Contractors Inc. v. Royal Bank of Canada
• (1998), 38 O.R. (3d) 290 (Ont. Gen. Div.)

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Q Who gets the benefit of a single lien
claimants priority?

• A All lien claimants.
• All lien claimants have the benefit of that
  priority to all advances made subsequent to the
  registration of the first lien.
• Norwon Electric Sault Co. v. Ross
• (1984), 7 C.L.R. 1 (Ont. H.C.)

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Q What if a mortgagee makes an advance in the
face of a lien? Does it lose priority for that
advance against all liens or just the prior
registered liens?

• A All liens.
• Priority is lost against all liens, even if the
  preserved lien is later vacated from title.
• Boehmers v. 794561 Ontario Inc.
• (1995), 21 O.R. (3d) 771 (Ont. C.A.)

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Q Do advances include interest?

• A Yes.
• Principal and interest are equally secured under
  a mortgage. Advances include interest. Interest
  payments on mortgages therefore have priority
  over lien.
• 830889 Ontario Inc. v. 607643 Ontario Inc.
• (1990), 43 C.L.R. 181 (Ont. Gen. Div.)

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Q What if a mortgagee advances negligently, to
the prejudice of lien claimants? Can the lien
claimants sue for negligence?

• A No.
• No. In view of the sweeping benefits of s. 78,
  courts have held that even a mortgagees
  negligence will not avail lien claimants, as no
  independent duty of care exists.
• Con-Drain Co. (1983) Ltd. v. 846539 Ontario Ltd.
  
• (1997), 35 C.L.R. (2d) 230 (Ont. Gen. Div.),
  affd. 1998 O.J. No. 5041 (Ont. C.A.)