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If you haven’t already heard, Ontario is in the middle of
a huge overhaul of its principal construction statute, now known as
the Construction Act (“Act”).
Much has been written about the new requirements affecting
landlords and the leasing world, such as the new holdback on
allowances and the elimination of landlords’ s.19(2)
rights.
It is important not to lose sight of unchanged provisions that
can impact landlords.
One such unchanged provision is the definition of
“owner”. Can a landlord be an “owner” under
the Act?
Section 19(5) of the Act now confirms what we always knew: a
landlord may be an “owner” if it meets the definition
under the Act. This opens up the landlord’s leasehold and
freehold interests to a construction lien for
improvements made by the tenant.
Of course, this question only arises in the absence of privity
between the landlord and the lien claimant. It is not unusual in
lease negotiations for the parties to agree that the landlord
undertake the construction of the tenant’s work instead of
the tenant performing the work. There may be many business reasons
why, some include: the landlord has more extensive construction
experience, the landlord can negotiate better pricing, or the
landlord wants to ensure that the construction is completed on time
and believes it can manage the construction process more
effectively than the tenant. Whatever the reason, the landlord
enters into a construction contract with the lien claimant for such
work and is then the “owner” for the purposes of the
Act.
In situations where the tenant is responsible for its work and
contracts directly with the lien claimant, the landlord may assume
it is not at risk of being an “owner” under the Act.
This is not always the case. There have been circumstances where
courts have found a landlord to be a statutory “owner”
even though it did not sign the construction contract.
Four Requirements of Ownership Test
There are four requirements for the ownership test, which must
be met for a landlord to be an “owner” for the purposes
of the Act.
First, the landlord must have an interest in the premises.
Second, an improvement must be made to the premises. The first two
requirements are not difficult to establish since the landlord
usually owns the property and improvements are being made.
The last two requirements can be less clear and require careful
analysis of the facts.
Third, the “owner” must make the request for the
improvement in question. The courts have recognized that the
request for work may be inferred from the totality of
circumstances, viewed in light of the substance of the relationship
between the parties. A landlord’s mere knowledge that
improvements will be made or are being made to its property is
insufficient to satisfy this test.
Fourth, in addition to an express or implied request by the
landlord, one or more of the following factors must be
established:
“upon whose
credit” Evidence of landlord providing
financial support. The courts have said it is not enough for the
landlord to have agreed with the tenant to pay for the
tenant’s improvements in whole or in part. Even if the lease
has provision for reimbursement, the courts have required
additional evidence of financial support by the
landlord.
“upon whose
behalf” Evidence that the tenant was acting as
an agent of the landlord when contracting with the lien
claimant.
“with whose privity or
consent” Evidence of a significant amount of direct
dealing between the owner and the lien claimant. Standing alone, a
landlord’s approval of a tenant’s plans for its
improvements to the leased premises does not satisfy the privity
and consent requirement. Key is the nature and extent of the direct
dealing.
“whose direct
benefit” Evidence of landlord receiving
substantial benefit. It is almost inevitable that a landlord will
benefit if the tenant makes improvements to the leased premises. As
such, there has to be more benefit than the benefit as a
reversioner. Case law has supported this that any benefit to a
landlord as a reversioner is not classified as being a direct
benefit.
Business reasons may compel landlords to be involved with a
tenant’s construction, but landlords should be aware that a
high level of involvement is not without risk.
It remains to be seen whether the courts will decide this
question any differently going forward than they have in the past.
To date, landlords who were able to demonstrate that they had not
been active participants in the improvements were unlikely to be an
“owner” for the purposes of the Act, especially without
strong evidence by the lien claimant.
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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