Canada: Construction Lending

Last Updated: March 23 2006

Article by John Hutmacher, ©2006 Blake, Cassels & Graydon LLP

This article was originally published in Blakes Bulletin on Real Estate, March 2006

Lenders taking security on Canadian real estate have to consider a number of special factors where construction of the project in respect of which the security is being granted has not yet commenced or where construction will not be complete prior to the advance of funds.

While many of the features of construction loans are similar to those arising for completed real estate projects, there are also important differences. Some of these differences, and the steps that lenders should take to deal with the risks they create, are described below.

Feasibility of Project

If funds are being borrowed to enable a borrower to complete the construction of improvements, the lender will want to know whether the project is feasible, given the funds available. Are the loan proceeds, together with equity contributions from the borrower, sufficient to complete the project as budgeted? Does the construction budget represent a realistic estimate of the costs to complete the project? The lender must undertake a careful review, often with the help of expert consultants, of the borrower’s construction budget and the plans and specifications for the proposed improvements, all with a view to confirming that sufficient funds will be available to complete the project as contemplated.

Cost to Complete Basis

Once the lender is satisfied that the project is feasible within the parameters of an approved budget, it will usually require that the loan funds be advanced in stages, in a series of separate advances, based upon the progress of completion of construction. This is to ensure that the loan funds being advanced closely match the construction costs being incurred. At the time of each advance, the lender will require that the borrower deliver a written draw request in a prescribed form, confirming the amount of loan funds requested and attaching copies of invoices from contractors to whom the loan funds will be disbursed. In the draw request, the borrower will also be required to certify that, based upon the latest estimates, the aggregate amount of loan funds advanced, together with the unadvanced portion of the loan, will be sufficient to complete the project in accordance with the approved budget and plans. The lender and its consultants will keep a close eye on project expenses in relation to the approved budget and will always want to be satisfied that the undrawn portion of the loan is sufficient to pay the costs to complete the project. If there are any shortfalls, the borrower will be called upon to contribute additional funds to bring the amounts into equilibrium.

Priority of Security

Since construction may be ongoing for a lengthy period of time, steps will also have to be taken to protect the priority of the lender’s mortgage security to the full extent of all funds advanced. On the date of the initial advance of funds, the borrower’s lawyers will be required to deliver a title opinion confirming the priority of the mortgage security as of that date. On the dates of subsequent advances, the title opinion will have to be updated to confirm that the security continues to have the required priority with respect to each subsequent advance.

Construction Liens

Lenders also have to be particularly concerned with the existence of construction liens. As a general rule, no funds should be advanced in the face of a construction lien registered against title to the property, and any liens should be vacated or discharged before subsequent advances occur. In Ontario, construction liens registered after the date of a loan advance can "shelter" under the priority of any unvacated liens that existed at the time of the advance. Thus, by advancing funds in the face of a construction lien, lenders run the risk of losing priority for the amount of the advance not just to existing registered lien claimants, but to all those capable of subsequently sheltering under the unvacated lien. Accordingly, lenders inevitably insist that any construction liens be vacated before making loan advances, since holdbacks, undertakings and other devices do not provide adequate protection for the lender. Fortunately, in Ontario, construction liens can be vacated quickly and borrowers have a court mechanism available to them for posting alternative security for the claim, while freeing title from the lien.

Security Documents

In addition to the real and personal property security documents commonly obtained for non-construction loans, construction lenders frequently obtain additional security unique to the fact that the project being secured is under construction. One such item of additional security is an assignment of material contracts pertaining to the construction, including all building and construction contracts, plans and permits. This will enable the lender to complete the project with the existing team of contractors and suppliers if the lender is forced to realize on its security. Depending upon the corporate structure of the borrower, it may also be appropriate to obtain a completion guarantee from a principal or parent company of the borrower.


Insurance requirements are different for projects under construction than for completed projects. The borrower will be required to take out builders "all risk" insurance, which provides for enhanced coverage for buildings under construction. Depending on the size of the project, it may also be appropriate to require that the borrower’s contractors obtain specified insurance coverage and that the borrower’s architect and engineers have errors and omissions coverage in place.

The foregoing represents only a brief summary of some of the issues arising with respect to construction loans. In consultation with legal counsel, lenders can take a number of steps to ensure that their interests are best protected, notwithstanding that the underlying real estate asset is under construction.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
16 Oct 2018, Seminar, Toronto, Canada

Join Blakes lawyers for our 10th annual overview of recent legal and regulatory developments and practical strategies to navigate the changing regulation of Canada’s payments industry.

26 Oct 2018, Other, Vancouver, Canada

Cybersecurity, including data privacy and security obligations, has become a critical chapter in every company’s risk management playbook.

30 Oct 2018, Other, Toronto, Canada

Please join us for discussions on recent updates and legal developments in pension and employee benefits as well as employment law issues.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions