Canada: Advancing Mortgage Funds In The Face Of A Lien In Alberta – Don't Do It

This is an unusually long blog-post on a tricky area of Builders' Lien law in Alberta. The first part of this post provides a quick Q&A for lenders/mortgagees; the second part deals with the underlying substantive legal considerations when advancing in the face of a lien.

Consider the following example: An owner of some lands takes out a mortgage to finance the construction of a building. The mortgage is registered on the title and the first half of the mortgage monies are advanced on that date. Sometime later, a contractor who worked on the building registers a builders' lien on the title. The owner then requests the lender to advance the remainder of the mortgage monies. In this instance who takes priority – the lender or the contractor? Should the lender advance the remainder of the funds? And what are the risks of doing so?

Generally speaking, priorities for title encumbrances are determined by the date of registration. Mortgages and advances made under mortgages are entitled to priority as against lienholders who registered after the mortgage has been registered or advance has been made. That being said, in much of the country (particularly in Ontario), the common admonishment to lenders is that they should "never advance in the face of a lien". This is because under the Ontario Construction Lien Act, subsequently filed liens can "shelter" or "tack onto" the priority of earlier registered liens (see Thomas G. Heintzman's excellent blog, for further discussion of this issue). Unlike Ontario, Alberta does not permit "priority sheltering" and thus does not enforce a hard "thou shall not advance in the face of a lien" paradigm. That being said, as discussed below, maybe it should. Advancing in the face of a lien in Alberta does hold certain risks.

Q & A

What is the Builders' Lien Act, RSA 2000 c B-7 (BLA)?

In Alberta, and elsewhere in Canada, contractors, material suppliers and labourers have the ability to register a builders' lien on real property if they have undertaken work on or in respect of an improvement on those lands. When a lien is registered against real property, it creates an interest in the land for the lien claimant. This interest, however, may not be the only claim on title. Registered liens may compete with other interests in the land, such as a mortgage or an advance on an existing mortgage. An important aim of the BLA is to strike a balance between these types of competing interests and rank the priority for each.

Who has priority, the lender or the lienholder?

Lenders have priority over builders' liens, to the extent that the mortgage is registered and advanced prior to the registration of the lien. A lender is only entitled to priority as against lienholders who registered after the lender advanced the funds. Builders' liens registered prior to the date of the mortgage or advance take priority over that mortgage or advance. Accordingly, a lender should not advance monies when there is a registered builders' lien on title or if the lender has received actual notice of a lien, as the advance will lose priority to the registered lien.

What is the best practice for advancing mortgage monies from a lender to a borrower in Alberta?

When advancing mortgage funds in Alberta, best practice is for the lender to review the title for the subject lands for any registered liens (or other new charges that might affect the lender's security). If title is clear, the lender may advance that same day (and only that same day), under section 12 of the BLA, without fear of losing priority.

Can the lender advance if there is a builders' lien registered on title?

In some circumstances, a lender may wish to advance funds even though a lien remains on title. For example:

  • the registered lien might be for a small amount of money;
  • the risk caused by not advancing may outweigh the risk of losing priority to the registered lien; or
  • the lender may already have a registered discharge for the lien.

If, for practical reasons, the lender wishes to advance in the face of a lien registered on title, it should be aware that the endorsed lien will take priority to the advance. In addition, the lender also risks losing priority on the advanced funds to additional unendorsed/undisclosed liens filed that same day. (i.e. liens that that have been filed the same day but that have not yet shown up on the certificate of title). As such, in these circumstances, if the lender chooses to proceed despite this risk, best practice is to conduct a title search and make the advance towards the later part of the day (typically, after 3:00 PM). Liens are almost always registered on title the same day they are filed, thus a search near the end of the day is more likely to reveal the presence of any liens filed the day of that search.

Can a lender advance if it has been provided a registered discharge of the lien, but the lien still remains on the certificate of title?

Unlike registering liens, discharging liens from title can take from a few days to a couple weeks for the Alberta Land Titles Office to effect. As such, in order to keep the smooth flow of funds running in a construction project, lenders in Alberta will often accept proof of lien discharges as sufficient evidence of clear title in order to advance funds. This practice is not free of risk. Generally speaking, a lender is better off to wait until the title is clear of all liens before advancing funds. That being said, if for practical reasons the lender chooses to advance funds anyway, it should be aware that it risks losing priority on that advance to both the lien(s) still registered on the title (despite the discharge(s) in hand) and to additional unendorsed/undisclosed liens filed the same day the advance is made. As such, in these circumstances, best practice is to conduct a search of the title and make an advance towards the later part of the day – typically, after 3:00 PM – as this search is likely to reveal any liens registered that day.

THE LAW

Under the BLA, two provisions are of central importance to the issue of priority between lienholders and lenders and the subsequent advancement of funds.

Section 11 governs priority between lenders on the one hand and lienholders on the other, giving priority to the lender to the extent that the mortgage is registered and advanced prior to the registration of the statement of lien.1 This section ensures the mortgages/advances granted prior to the registration of a builders' lien enjoy priority over those liens.

However, because section 11 only deals with priority when the mortgage advance has been made prior to the registration of a builders' lien, the question then arises as to what happens when the lender advances money after a lien has been registered but before it is made aware of the registration. In most situations, this won't be a problem, as liens are typically endorsed/disclosed on title the same day they are registered. Problems can and do arise, however, where both the loan advance and registration of a lien happen on the same day as a result of the delay between filing a lien and its subsequent endorsement on title. Section 12 of the BLA was included in the legislation specifically to deal with this situation.

Section 12 of the BLA provides protection to a lender, and deems the monies to have been advanced before the registration of any lien not disclosed by a search of the title certificate notwithstanding that a lien was registered on the day that the search was made, when three preconditions have been met:

a) first, a search has been made of the certificate of title on the date funds are advanced;

b) second, at the time of the search there is not any lien endorsed on that certificate of title; and

c) third, on the day that search is made, in reliance on that search, mortgage money is advanced under a mortgage registered against that title.

Accordingly, if there is "not any" lien on title, the lender is entitled to rely on the clear certificate of title in advancing monies under a mortgage. Section 12 is important as it accounts for the lag-time between "registration of a lien" and the Land Titles endorsement (publication) of that lien on the certificate of title. It allows lenders to advance funds with peace of mind, despite the fact there may be a pending lien that they have no way of knowing about yet.

If, however, the lender learns that a lien has been registered against the title, the lender will not have "relied" on the clean title search and the section 12 BLA exception will be non-operative. Accordingly, the lender's advance will rank behind the lienholder's lien in priority.

But what if a lien is disclosed on the title but the lender wishes to advance funds anyway because, for example, the lender has proof the lienholder has registered a discharge of the lien, or the risks/costs of not advancing outweigh the risks/costs of losing priority to the disclosed lien? An example of a balancing of risks/costs is a situation where the title discloses a single lien for $300 but the borrower risks defaulting on its obligations if the lender does not advance the next mortgage installment. In this situation, the lender will need to know whether its risk is restricted to just the disclosed liens or to both the disclosed and (potential) undisclosed liens.

In Alberta, in the absence of direct case law on this point, common industry and legal practice has been to assume that the risk in such situation is limited only to disclosed liens. This makes commercial sense and expiates the smooth flow of money through the construction pyramid. However, section 12 does not necessarily support this interpretation. The problem lies in precondition (b) [ss.12(b)], which requires that at the time of the search there is not any lien endorsed on that certificate of title. In other words, at the time of the search there must be no lien endorsed on that title, regardless of whether the lender holds registered discharges for the endorsed liens or otherwise. Arguably, the presence of a lien (any lien), gives the lender notice that there may be other, undisclosed, liens pending endorsement at the Land Titles Office. Again arguably, if the intent of the legislature was simply to provide protection from any undisclosed lien upon searching title, regardless of the presence of a disclosed lien, section 12(b) would be superfluous and unnecessary.

On the other hand, one might argue that section 12(b) must be read in concert with the entire section which provides that "money is deemed to have been advanced before the registration of any statement of lien not disclosed by that search". This wording indicates that the advance gains priority as against any lien not disclosed by a search of title. Therefore, a lien disclosed by the search would take priority over the advance; however liens not disclosed by the search would not take priority.

THE BOTTOM LINE

Given the confusion when advancing funds in Alberta, and until and unless the courts resolve this ambiguity, best practice is for the lender to review title for any registered liens. If title is clear, the lender may advance that same day (and only that same day) without fear of losing priority to the lien. If the title has a registered lien, and the lender wishes to advance anyway, the lender should be aware that it risks losing priority to a lien or liens filed that same day.

We invite your comments or questions.

To view the original article, please click here.

Footnotes

1 Royal Bank v Hallmark Golf Developments Inc., 1993 CarswellAlta 210 at para 9.

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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