Canada: Advances In The Face Of Liens: RSG Mechanical Inc.'S Guide To Owners And Lenders

This article originally appeared in The Construction Economist. The Construction Economist is a publication of the Canadian Institute of Quantity Surveyors (CIQS) and can be found at http://www.ciqs.org/english/the-construction-economist 

The Ontario Construction Lien Act ("CLA") attempts to strike a balance between the interests of those at the top of the construction ladder (i.e., owners) to have the necessary funds flow to complete a project and the interest of those at the bottom of the construction ladder (i.e., suppliers and small sub-trades), with limited bargaining power, that require the protection afforded by the ability to possibly halt a project by registering a construction lien against title to the project to ensure that they receive a portion of the pool of funds held back for their benefit.

In theory, the scheme is fairly simple. Pursuant to section 24 of the CLA, upon notice of a lien, anyone paying down the construction ladder has to withhold not only the statutorily required minimum of 10 percent of the value of the services and materials provided, but also the entire value of the claim for lien.

Similarly, under section 78 of the CLA, a mortgagee, whether a prior mortgagee making a subsequent advance or a mortgagee that registered its interest after work commenced, is discouraged from making an advance after a lien is registered against title and/or it receives notice of the lien by having the lien, as well as any subsequent liens that are registered against title, take priority over said advance.

In order to permit funds to continue to flow once a lien is registered against title, the parties either have to settle or the face value of the lien, plus the statutorily calculated security for costs, have to be paid into court pursuant to section 44 of the CLA, whereby the lien ceases to attach to the land and becomes a charge against the amount paid into court. By paying said funds into court and vacating the lien, the party posting said security is put in the same position as if the lien had not been preserved or written notice had not been given and payments may continue to be made.

Typically, the party on the rung above the lien claimant will vacate the lien.

Unfortunately, when someone on a rung of the construction ladder between the owner and the subtrades which registered liens becomes insolvent, the number of liens that are registered may be significant and the amount of money that needs to be posted may require the mortgagee to step in.

In such circumstances, financers and developers need to ensure that the subsequent flow of funds strictly complies with the provisions of the CLA, failing which, said parties may needlessly increase their exposure.

The Divisional Court's decision in R.S.G. Mechanical Inc. v. 1398796 Ontario Inc. ("R.S.G. Mechanical"), highlights, amongst other things, this particular issue and provides guidance as to how a mortgagee or owner can vacate liens without increasing their exposure beyond their statutory holdback obligations under the CLA.

In R.S.G. Mechanical, the developer, Bloorwood, purchased a parcel of land in 1999 with the intention to build sixty-one townhouses and potentially thereafter develop a high-rise condominium.

Not having the necessary funds to purchase the lands, post Tarion new home warranty security, and/or finance the construction itself, Bloorwood obtained funds from investors, financers, and its own shareholders, which secured their respective interests by way of registering mortgages against title to the land.

By May 2004, Bloorwood, which acted as its own general contractor and contracted directly with each trade, had constructed and sold forty-nine of the sixty-one planned townhomes and had ran out of money. As a result, fourteen (14) claims for lien by eleven (11) lien claimants, totaling $804,226.27, were registered against title to the lands.

By June 4, 2004, Bloorwood's registration with Tarion had expired and construction had effectively halted in the summer of 2004.

At that time, there were still 12 more townhomes to be finished and sold, as well as the proposed high-rise development, and the first/fourth mortgagee retained a general contractor, Maystar General Contractors Inc. ("Maystar"), as the mortgagees wanted to complete the remaining townhomes in order to mitigate their losses and maximize their recovery.

In order to have the sales close, the 14 liens needed to be vacated and, although the ten percent statutory holdback was found to be $424,537.00, a total of $978,588.74, being the full value of the liens plus security for costs, had to be posted to vacate the liens.

Accordingly, the first/fourth mortgagee provided $424,533.00 in funds to counsel for the third mortgagee to vacate the liens and on December 30, 2004, the liens were vacated.

After the liens were vacated, the mortgagees paid Maystar $309,465.00 for work that it had commenced on November 1, 2004, and Maystar completed 6 of the townhouses.

Thereafter, the mortgagees made a further payment to Maystar of $339,671.50 to complete the remaining 6 townhouses.

The lien actions were consolidated and referred to Master Polika, who found that by posting security and obtaining an order vacating the liens the mortgagees had made an advance under section 78 of the CLA and the lien claimants were entitled to not only the value of the deficiency in the holdback, being $424,537.00, but also had priority over the mortgagees with respect to the balance of the funds used to vacate the liens and should be paid in full from the security.

Master Polika also found that the lien claimants had priority over the mortgagees with respect to the amounts paid to Maystar to complete the 12 remaining townhomes.

On the motion to confirm Master Polika's Report, Justice Meyers found that the monies used to complete the 12 townhomes and funds used to post security were not advances under the CLA, the lien claimants were only entitled to deficiency in holdback, being $424,537.00, and Master Polika's report should be amended accordingly.

In affirming Justice Meyers' decision, the Divisional Court held that in order for funds delivered by a mortgagee to be deemed an 'advance', an owner or owner's delegate needs to acquire actual control of the money. Funds delivered in escrow to counsel for the sole purpose of vacating liens are not an advance that would increase a party's liability under the CLA. Furthermore, the fact that the funds held in escrow are not eventually posted and a bond was used to vacate the liens is immaterial, provided no funds were released from escrow until after the liens were vacated.

With respect to Master Polika's finding that the lien claimants would have priority over funds paid to Maystar, the Divisional Court held that, provided a trade does not receive payment when the liability was incurred (i.e., the work was done) on the understanding that it will not be paid prior to liens being vacated, subsequent payments to a trade for work done prior to the liens being vacated would not increase a party's liability under the CLA.

Although it would be preferable to vacate liens without relying on the mortgagee to do so, R.S.G. Mechanical sets out how to have a mortgagee provide funds to vacate liens and have replacement trades commence work prior to vacating liens, without increasing its liability to lien claimants.

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 Mondaq.com.

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

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please 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

Mondaq.com (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 www.mondaq.com

To Use Mondaq.com 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.

Disclaimer

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.

General

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