Transcript The Construction Lien Act and its Impact on Real Estate

The Construction Lien
Act and its Impact on
Real Estate Lawyers
Duncan W. Glaholt
Partner
Glaholt LLP
Copyright Glaholt LLP, January 2003
The Hidden Lien Act
 Written
Notice of Lien
 Vendor’s Trusts – Who Cares?
Copyright Glaholt LLP, January 2003
Written Notice of Lien

Defined Term (Construction Lien Act, s. 1):
“written notice of lien” includes a claim for lien
and any written notice given by a person having
a lien that
(a) identifies the payer and identifies the
premises, and
(b) states the amount that the person has not
been paid and is owed to the person by the
payer.
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Basics I
written notice of lien
≠
registration of claim for lien
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Basics II
written notice of lien
≠
constructive notice to world at
large
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Basics III
written notice of lien
≠
equivocal
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Four Ingredients of Valid Written
Notice of Lien
1. An indication that the subcontractor is supplying
material to the contractor
2. A clear statement that there is an account owed
by the contractor to the subcontractor
3. A clear statement that the subcontractor is
claiming a lien, and will register it unless payment
is made; and
4. The amount of the lien that is claimed.
(354628 Ontario Ltd. v. Mutic (1978), 20 O.R. (2d)
581 (Master))
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Effect of Notice
1. Payer stops paying
2. Mortgagee stops advancing
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If Notice is Served
1. Where lien period has expired and it is
certain that there are no other
subsisting or preserved liens, you
might accept simple countermanding
notice
2. If the job is ongoing and there are
other liens, then procedure provided
for in s. 47(1)(c) of the Act should be
followed:
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S. 47 (1)(c)

Upon motion, the court may declare, where
written notice of a lien has been given, that
the lien has expired, or that the written
notice of the lien shall no longer bind the
person to whom it was given.
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Vendor’s Trust
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Construction Lien Act, s. 9(1)
Vendor's trust, amounts received a trust
9.--(1) Where the owner's interest in a premises is sold
by the owner, an amount equal to,
(a) the value of the consideration received by the owner
as a result of the sale, less,
(b) the reasonable expenses arising from the sale and
the amount, if any, paid by the vendor to discharge any
existing mortgage indebtedness on the premises,
constitutes a trust fund for the benefit of the
contractor.
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Construction Lien Act, s. 9(2)
Obligations as trustee
(2) The former owner is the trustee of the trust
created by subsection (1), and shall not
appropriate or convert any part of the trust
property to the former owner's own use or to
any use inconsistent with the trust until the
contractor is paid all amounts owed to the
contractor that relate to the improvement.
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Purpose
Prevents the avoidance of lien claims
by means of the sale of the premises
by the original owner while there are
subsisting but unpreserved lien rights.
Particularly important in residential
subdivision construction.
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So Who Cares?
Developers!
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Co-Fo Concrete Forming Construction Ltd. v.
344602 Ontario Ltd. (1999), 50 C.L.R. (2d) 178
(Ont. Gen. Div.)




Plaintiff contractor builds foundations for
subdivision
Developer sells lots when money is still owing to
contractor
Developer did not retain any funds in trust
Developer and its officers and directors liable
for breach of trust
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How Much Priority do
Lien Claimants Have?
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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
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Overall Priorities Scheme
ss. 72 – 75:
ss. 76 – 77:
Administrative
Over-arching priority
s. 76: Purchaser pro tanto
s. 77: General priority over all
executions, unless recovered
upon
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Overall Priorities Scheme
ss. 72 – 75:
ss. 76 – 77:
s. 78:
s. 79 – 80:
s. 79:
s. 80:
Administrative
Over-arching priority
Priorities over mortgages
Priorities among lien
claimants
Persons who comprise class
Priority between and within
class
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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
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Overall Mortgages Scheme
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s. 78(1):
s. 78(2):
s. 78(3):
s. 78(4):
s. 78(5):
S. 78(6):
s. 78(7):
s. 78(11):
s. 78(8):
s. 78(9):
s. 78(10):
Over-arching priority of lien
Except: Building mortgage
Except: “Prior” mortgages (prior advance)
Except: “Prior” mortgages (subs. advance)
Except: Special priority against subsequent
mortgages
Except: General priority against subs. mortgages
Except: Some trustees
Except: All home buyer mortgages
Postponement
(2) and (5) don’t apply to mortgages before 1983
Financial Guarantee Bond
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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
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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
Mortgage
A (Land)
Advance
A1
Advance
A2
Lien # 1
Expires
Lien # 2
Registered
Advance Mortgage Advance Advance
A3
B (Building) B1
B2
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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
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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.
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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
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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
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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.
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Can lien claimants hold up
my power of sale?
What is the Financial Guarantee
Bond I hear about? Does anyone
ever use them?
Copyright Glaholt LLP, January 2003
Construction Lien Act, s. 78(10)
Financial guarantee bond
(10) A purchaser who takes title from a mortgagee
takes title to the premises free of the priority of the
liens created by subsections (2) and (5) where,
(a) a bond of an insurer licensed under the Insurance
Act to write surety and fidelity insurance; or
(b) a letter of credit or a guarantee from a bank listed in
Schedule I or II to the Bank Act (Canada),
in a form prescribed is registered on the title to the
premises, and, upon registration, the security of the
bond, letter of credit or the guarantee takes the place
of the priority created by those subsections, and
persons who have proved liens have a right of action
against the surety on the bond or guarantee or the
issuer of the letter of credit.
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Purpose:
Section 78(10) facilitates conveyance by power
of sale contained in a mortgage. A purchaser
takes title from a mortgagee free of liens where
a financial guarantee bond in the prescribed
form is registered against the title to the
premises. The bond takes the place of the
priorities created by s. 78 and the lien claimants
have a claim against the bond surety.
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Result:
Where a mortgagee obtained a financial
guarantee bond prior to a sale under a power of
sale, the subsequent purchaser takes title free of
the priority of the liens created by s. 78(2) with
respect to holdback deficiencies.
J. Sousa Contractor Ltd. v. Kinalea Development Corp.
[1996] O.J. No. 1337 (Div. Ct.)
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But:
Section 78 does not provide for the vacating of
liens (s. 44) and responds only to liens arising
from an improvement which have a priority over
the mortgage to the extent of any deficiency in
the holdbacks required to be retained.
Gilvesy Construction v. 810941 Ontario Ltd.
(1994), 17 C.L.R. (2d) 187 (Ont. Gen. Div.)
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The Liens are Vacated –
Can I Get the Owner Out
Altogether?
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Benny Haulage Ltd. v. Hamilton-Wentworth
Roman Catholic Separate School Board
(1996), 33 C.L.R. (2d) 44 (Ont. Master)
“Once the general [contractor] has posted
security, an owner is no longer a required party at
the suit of any lien claimant who’s lien has been
bonded off. If an owner is so named it should
immediately seek an order dismissing the claim
against it so no further costs are incurred.”
Copyright Glaholt LLP, January 2003