Canada: Ontario Superior Court Clarifies Priority Of Construction Lien Claimants Over Building Mortgages

The Ontario Superior Court of Justice in BCIMC Construction Fund Corp. et al. v. 33 Yorkville Residences Inc et al.¹ recently held that construction lien claimants are entitled to one holdback fund of 10%, regardless of the number of building mortgages registered on title to the subject property improved.

Background

In BCIMC Construction, the Court was asked to interpret section 78(2) of the Construction Act (the "Act"). In short, this section provides that where a mortgagee takes a mortgage with the intention to secure the financing of an "improvement," the liens arising over that improvement have priority over the mortgage(s), to the extent of any deficiency in the holdback. This holds true irrespective of the priority of the mortgage.

The respondents were the owners of a property being developed at 33 Yorkville Avenue in Toronto (the "Property"). They were placed in receivership by an order of the Court on March 27, 2020. At this time there were six mortgages registered against the property, two of which were building mortgages pursuant to section 78(2) of the Act. On March 11, 2021, an approval and vesting order was granted for the sale of the Property, which included an order for the unopposed distribution of the proceeds of sale, totaling $300 million.

The applicants, who provided various construction services for the respondents (including demolition, the digging of a deep construction pit, and dewatering services), claimed a combined figure of approximately $3.4 million in liens against the respondents and Property. The applicants also argued that the Act should be interpreted to favour lien claimants.²

Section 22(1) of the Act prescribes that the basic holdback requirement is 10%. However, the applicants relied on the fact that there were two building mortgages on the Property. They argued that the proper interpretation of section 78(2) of the Act meant that they were entitled to priority over each building mortgage to the extent of the deficiency in the holdback, meaning they were entitled to a 20% holdback fund. In summary, due to there being two building mortgages on the Property, the applicants were attempting to claim a 20% holdback fund.

Ontario Superior Court's Decision

Justice Penny of the Ontario Superior Court of Justice dismissed the applicants' claim on the grounds that the lien claimants' interpretation of section 78(2) of the Act limited the meaning and effect of key words in the section and implicitly read in additional language that is not present.³ Justice Penny found that there was no provision that provided a 10% holdback fund for each building mortgage. An interpretation like this would serve to arbitrarily diverge from the general scheme of the Act, which provides for a single 10% holdback fund. To illustrate this, Justice Penny found that such an interpretation would put the lien claimants in a better position than had the owner kept the 10% holdback. In other words, they would arbitrarily benefit under a scenario where an owner fails to keep the holdback.

Justice Penny's decision clarifies that there exists only one holdback available to lien claimants irrespective of the number of building mortgages registered on a property.

Moreover, the Court rejected the applicant's assertion that the Act should be interpreted in favour of lien claimants. Pointing to the decision in RSG Mechanical Incorporated v. 1398796 Ontario Inc.,⁴ the Court emphasized that, when read as a whole, the Act has no underlying goal of prioritizing lien claimants. The Court further stated that this interpretation by the lien claimants would create an element of unfairness into the trail of mortgage priorities, meaning that non-building mortgagees could be subordinated to numerous holdback funds if there was more than one building mortgage.

Implications of BCIMC Construction

This case raises relevant considerations for, among others, mortgagees, trades and other contractors, especially as the cost of construction increases with inflation, while providing clarity for lenders engaged in construction financing. However, for trades, contractors and other parties involved in the construction of developments, not much has changed in the legislative landscape from this decision. It has simply reiterated the statutory provisions in the Construction Act providing for a single 10% holdback fund which will rank in priority to building mortgages (and loans taken to repay such mortgages).

Note: Lien claimants have appealed BCIMC Construction

On May 13, 2022, the lien claimants appealed Justice Penny's decision. It will likely take some time before there are any final determinations on this issue. However, as it stands, construction lien claimants are entitled to one holdback fund, regardless of the number of building mortgages registered on the property.

Footnotes

1. BCIMC Construction Fund Corp. et al. v. 33 Yorkville Residences Inc et al., 2022 ONSC 2326 (CanLII) ("BCIMC Construction")

2. Ibid at para 27.

3. Ibid at para 21.

4. RSG Mechanical Incorporated v. 1398796 Ontario Inc., 2015 ONSC 2070 (CanLII)

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