Canada: Landlords’ Protection From Mechanics’ (Builders’) Liens

Canadian provinces have enacted legislation, generally known as Builders' Lien or Mechanics' Lien Acts that allow a claim for a lien against real property. A contractor, doing work for a tenant, is given an opportunity to make the landlord's interest in the property subject to the lien in addition to the tenant's interest. At the same time, the legislation provides protection to landlords and owners from being unwittingly bound by liens against their property for work commissioned by their tenants. This protection can be found in section 12(1) of New Brunswick's Mechanics' Lien Act, RSNB 1973, c M-6 which was recently considered by Justice McNally of the New Brunswick Court of Queen's Bench in Penniac Construction Limited v. Cominar Real Estate Investment Trust et al., 2013 NBQB 232 and wherein McNally J. followed Ontario judicial interpretations of what constitutes "notice to landlords", which could bind their property and make them liable to pay such a lien, under the Act.

BACKGROUND The Plaintiff, Penniac Construction Limited ("Penniac") completed a number of leasehold improvements on a warehouse property, owned by the defendant, Cominar Real Estate Investment Trust ("Cominar") and leased to the Defendant, Focus Logistics Ltd. ("Focus"). Following the formation of the lease, Cominar and Focus met with Penniac to discuss the upcoming construction work on the property which would be required to meet the tenant's needs. Two contracts were discussed and formed. The first was between Cominar and Penniac, exclusively, and was for work needed to accommodate the new tenancy. The bill for this contract was paid for in full by Cominar. The second contract dealt with leasehold improvements requested specifically by Focus and the quotation provided was titled, "Tenant Fit-Up for Focus Logistics" (the "Fit-up"). The estimate and plans for the Fit-up were sent to Cominar, who advised Penniac that a clause should be included in the estimate for Focus to authorize and accept the quote. The bill for the Fit-up came to $54,241.13 which was never paid and for which Penniac brought its claim against Focus, added Cominar to their lien claim and sought a declaration that it was entitled to a mechanics' lien on the real property.

THE COURT'S DECISION The Court quickly found Focus liable for the cost of the Fit-up. With regard to the claim against Cominar, Penniac argued that as owner of the property, their interest in the property was subject to the mechanics' lien. Although Cominar did own the property, the Court found it was not an "owner", in this case, as defined by the Mechanics' Lien Act, which definition would have required Cominar to have requested the work and materials for the Fit-up from Penniac.

The Court then examined section 12(1) of the New Brunswick Mechanics' Lien Act which provides where the real property upon which the lien attaches is leasehold, the fee simple may also be subject to the lien if the person doing the work or supplying the material, such as Penniac, gives notice in writing by registered letter or personal service to the owner or his agent, such as Cominar. If the owner or his agent fails, within 10 days, to return notice that he will not be responsible for the work or materials, the owner may be bound by a lien for the work and materials provided by the contractor.

Penniac argued that it put Cominar on notice when it forwarded Cominar a copy of its quotation to Focus and the plans for the Fit-up. Penniac relied upon a 1985 New Brunswick Court of Queen's Bench decision in which the Judge found the defendant property owner received sufficient notice when they were aware of the nature of the work being done.

Rather than following the earlier New Brunswick case, Justice McNally reviewed a number of Ontario decisions which considered that province's similar protections under its Construction Lien Act, R.S.O. 1990, c. 30. Among these, McNally J. considered the more recent decision of 1276761 Ontario Ltd. v. 2748355 Canada Inc., [2006] O.J. No. 4740, where the landlord was provided with, what the Ontario Superior Court of Justice deemed, "notice events" which included details of the work, meetings with the landlord and contractor relating to the work, review and approval of plans by the landlord, the landlord's awareness of additional work, and its own awareness of the construction costs. The Ontario Court found that notice sufficient to make the landlord or owner liable could not be overshadowed or buried in a document, but needed to be something "attention-getting" and which provided a trigger point so that the landlord would be made aware of when the clock started to run for his time to disclaim responsibility to contractors.

Justice McNally found this approach to be a practical one and stated that what is required under the Act is that such a notice from a builder must "clearly signal a potential liability on the part of the landlord" to make them liable to the builder as an owner.

He then found that Penniac had not intended to put Cominar on notice for the purposes of the Act, but had sent the quote and plans only to ensure that Cominar approved of the nature and scope of the work to be done in its building.

McNally J. added that even if the forwarding of that information to Cominar by Penniac had constituted notice, Cominar's advice that Penniac needed to get approval from Focus to do the work would have constituted notice that Cominar would not accept responsibility.

This decision was not appealed.

LEASEHOLD PROVISIONS IN OTHER PROVINCES The Nova Scotia's Builders' Lien Act, R.S.N.S. 1989, c. 277 provides landlords with protection similar to that in New Brunswick. In Acadia Drywall Supplies Ltd. v. BBL Con Design Build Solutions Ltd., 2013 NSSC 13, the tenant of a property retained a contractor who special ordered 26 barrels of product.

The contractor accepted only six of the barrels before refusing to take delivery of the remaining barrels. The Plaintiff supplier subsequently filed a Claim for Lien against the contractor, tenant and landlord (the "Defendants") pursuant to which the Defendants brought a motion to vacate and discharge the lien. The Nova Scotia Supreme Court recognized that the landlord's fee simple interest was not subject to a lien without the statutorily mandated consent, which had not been provided. Without this consent, the lien could only attach to the leasehold interest in the real property, not the fee simple interest, and only for the value of the materials delivered to the site.

Equivalent mandatory notice provisions can be found in section 8(1) of the Newfoundland and Labrador Mechanics' Lien Act, RSNL 1990, c M-3 and section 11(1) of Prince Edward Island's Mechanics' Lien Act, RSPEI 1988, c M-4. In Newfoundland and Labrador landlords and owners have 15 days to respond and avoid a lien on their property once they receive proper notice, while in Prince Edward lsland the time period is just 10 days.

FUTURE CONSIDERATIONS Despite the fact that Justice McNally found that there was insufficient notice to make Cominar liable to Penniac for a lien on Cominar's real property and, therefore, not liable to pay Penniac its claim, owners of real property and landlords must remain diligent when dealing with their tenants and their tenant's contractors to ensure that they, and their property, do not become liable to contractors when tenants fail to pay such contractors for improvements to their leasehold interest in real property.

The representative of Cominar at the trial testified that despite all his many years and experience in the commercial leasing business, he was not even aware of the provisions of Section 12 of the Act and its potential to subject the fee simple interest of a landlord to a Mechanics' Lien for work done at the request of a tenant. Owners and landlords should ensure that when they receive any information in writing from a tenant's contractor, with respect to work done or to be done on a tenant's property, a clear and immediate message is sent to such a contractor that they will not be responsible for payment for a tenant's debt.

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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