Transcript Deconstructing Construction Liens

Deconstructing
Construction
Liens
What is a Lien?
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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)
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 person’s lien arises and takes effect when
the person first supplies services or materials to the
improvement.”
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
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.
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.”
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.”
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.”
Why are there liens?
4. Report of the Attorney General’s 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.”
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.”
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. ”
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.
How does our Lien Act balance these
interests?
Pre 1983
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A lien claimant’s 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
How does our Lien Act balance these
interests?
Post 1983
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An owner’s 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)
Post 2002
Even better!
Post 2002
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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)
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.
Priorities
Complete statutory code
Part XI
ss. 72 – 85
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
Overall Priorities Scheme
ss. 72 – 75:
ss. 76 – 77:
upon
Administrative
Over-arching priority
s. 76: Purchaser pro tanto
s. 77: General priority over all
executions, unless recovered
Overall Priorities Scheme
ss. 72 – 75:
ss. 76 – 77:
s. 78:
s. 79 – 80:
Administrative
Over-arching priority
Priorities over mortgages
Priorities among lien claimants
s. 79: Persons who comprise
class
s. 80: Priority between and within
class
Overall Priorities Scheme
ss. 72 – 75:
ss. 76 – 77:
s. 78:
ss. 79 – 80:
ss. 81 – 85:
Administrative
Over-arching priority
Priorities over mortgages
Priorities among lien claimants
Special priorities
s. 81: Workers
s. 82: General liens
s. 83: Insurance proceeds
s. 84: Proceeds of sale
s. 85: Priorities on insolvency
Overall Mortgages Scheme
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s. 78(1):
s. 78(2):
s. 78(3):
s. 78(4):
s. 78(5):
Over-arching priority of lien
Except: Building mortgage
Except: “Prior” mortgages (prior advance)
Except: “Prior” mortgages (subs. advance)
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) don’t apply to mortgages before 1983
s. 78(10): Financial Guarantee Bond
The Whole Prior/Subsequent Thing
First lien arises
Prior mortgages
Subsequent mortgages
Prior advances
Subsequent advances
Value of land determinative
Advances without
notice determinative
Building mortgage
exception
Building mortgage
exception
Special priority for deficiency in holdback
Advance
Before 1st lien arose After 1st lien arose, but
before registration of
Registration
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
After 1st lien s. 78(6) priority
arose
s. 78(4), priority for
everything in s. 78(3)
plus all advances before
registration or written
notice of lien
s. 78(6), priority for all
advances before
registration or written
notice of lien, less any
deficiency in holdbacks
Example
Lien # 1
Arises
Mortgage
A (Land)
Advance
A1
Advance
A2
Lien # 1
Expires
Lien # 2
Registered
Advance Mortgage Advance Advance
A3
B (Building) B1
B2
Example
Lien # 1
Arises
Mortgage Advance
A (Land)
A1
Advance
A2
Lien # 1
Expires
Lien # 2
Registered
Advance Mortgage Advance Advance
A3 B (Building) B1
B2
1.Mortgagee B advanced in the face of a lien,
so that advance B2 loses priority to all liens
Example
Lien # 1
Arises
Mortgage Advance
A (Land)
A1
Advance
A2
Lien # 1
Expires
Lien # 2
Registered
Advance Mortgage Advance Advance
A3 B (Building) B1
B2
2. Advance B1 is a good advance.
Example
Lien # 1
Arises
Mortgage Advance
A (Land)
A1
Advance
A2
Lien # 1
Expires
Lien # 2
Registered
Advance Mortgage Advance Advance
A3 B (Building) B1
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
Example
Lien # 1
Arises
Mortgage Advance
A (Land)
A1
Advance
A2
Lien # 1
Expires
Lien # 2
Registered
Advance Mortgage Advance Advance
A3 B (Building) B1
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
Example
Lien # 1
Arises
Mortgage Advance
A (Land)
A1
Advance
A2
Lien # 1
Expires
Lien # 2
Registered
Advance Mortgage Advance Advance
A3 B (Building) B1
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.
Questions & Answers
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.)
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.)
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.)
Q: Who gets the benefit of a single lien
claimant’s 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.)
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.)
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.)
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 mortgagee’s
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.),
aff ’d. [1998] O.J. No. 5041 (Ont. C.A.)