Copyright Glaholt LLP, January 2003 The Construction Lien Act and its Impact on Real Estate Lawyers...

Copyright Glaholt LLP, January 2003

The Construction The Construction Lien Act and its Lien Act and its Impact on Real Impact on Real Estate LawyersEstate Lawyers

Duncan W. GlaholtDuncan W. Glaholt

PartnerPartner

Glaholt LLPGlaholt LLP


The Hidden Lien ActThe Hidden Lien Act

Written Notice of LienWritten Notice of LienVendor’s Trusts – Who Vendor’s Trusts – Who

Cares?Cares?


Written Notice of LienWritten Notice of Lien

Defined Term (Construction Lien Act, Defined Term (Construction Lien Act, s. 1):s. 1):““written notice of lien” includes a written notice of lien” includes a claim for lien and any written notice claim for lien and any written notice given by a person having a lien thatgiven by a person having a lien that(a) identifies the payer and identifies (a) identifies the payer and identifies the premises, andthe premises, and(b) states the amount that the person (b) states the amount that the person has not been paid and is owed to the has not been paid and is owed to the person by the payer.person by the payer.


Basics IBasics I

written notice of lienwritten notice of lien

≠≠

registration of claim for registration of claim for lienlien


Basics IIBasics II

written notice of lienwritten notice of lien≠≠

constructive notice to constructive notice to world at largeworld at large


Basics IIIBasics III

written notice of lienwritten notice of lien

≠≠

equivocalequivocal


Four Ingredients of Valid Four Ingredients of Valid Written Notice of LienWritten Notice of Lien

1.1. An indication that the subcontractor An indication that the subcontractor is supplying material to the contractoris supplying material to the contractor

2.2. A clear statement that there is an A clear statement that there is an account owed by the contractor to the account owed by the contractor to the subcontractorsubcontractor

3.3. A clear statement that the A clear statement that the subcontractor is claiming a lien, and will subcontractor is claiming a lien, and will register it unless payment is made; andregister it unless payment is made; and

4.4. The amount of the lien that is The amount of the lien that is claimed.claimed.((354628 Ontario Ltd. v. Mutic354628 Ontario Ltd. v. Mutic (1978), 20 (1978), 20 O.R. (2d) 581 (Master))O.R. (2d) 581 (Master))


Effect of NoticeEffect of Notice

1. Payer stops paying1. Payer stops paying

2. Mortgagee stops advancing2. Mortgagee stops advancing


If Notice is ServedIf Notice is Served

1. Where lien period has expired 1. Where lien period has expired and it is certain that there are and it is certain that there are no other subsisting or preserved no other subsisting or preserved liens, you might accept simple liens, you might accept simple countermanding noticecountermanding notice

2. If the job is ongoing and there 2. If the job is ongoing and there are other liens, then procedure are other liens, then procedure provided for in s. 47(1)(c) of the provided for in s. 47(1)(c) of the Act should be followed:Act should be followed:


S. 47 (1)(c)S. 47 (1)(c)

Upon motion, the court Upon motion, the court maymay declare, declare, where written notice of a lien has where written notice of a lien has been given, that the lien has been given, that the lien has expired, or that the written notice of expired, or that the written notice of the lien shall no longer bind the the lien shall no longer bind the person to whom it was givenperson to whom it was given..


Vendor’s TrustVendor’s Trust


Construction Lien ActConstruction Lien Act, s. , s. 9(1)9(1)

Vendor's trust, amounts received a trustVendor's trust, amounts received a trust 9.--(1) Where the owner's interest in a 9.--(1) Where the owner's interest in a

premises is sold by the owner, an amount premises is sold by the owner, an amount equal to, equal to, (a) the value of the consideration received by (a) the value of the consideration received by the owner as a result of the sale, less, the owner as a result of the sale, less, (b) the reasonable expenses arising from the (b) the reasonable expenses arising from the sale and the amount, if any, paid by the sale and the amount, if any, paid by the vendor to discharge any existing mortgage vendor to discharge any existing mortgage indebtedness on the premises,indebtedness on the premises,constitutes a trust fund for the benefit of the constitutes a trust fund for the benefit of the contractor. contractor.


Construction Lien ActConstruction Lien Act, s. , s. 9(2)9(2)

Obligations as trusteeObligations as trustee

(2) The former owner is the trustee of (2) The former owner is the trustee of the trust created by subsection (1), and the trust created by subsection (1), and shall not appropriate or convert any part shall not appropriate or convert any part of the trust property to the former of the trust property to the former owner's own use or to any use owner's own use or to any use inconsistent with the trust until the inconsistent with the trust until the contractor is paid all amounts owed to contractor is paid all amounts owed to the contractor that relate to the the contractor that relate to the improvement. improvement.


PurposePurpose

Prevents the avoidance of lien Prevents the avoidance of lien claims by means of the sale of claims by means of the sale of the premises by the original the premises by the original owner while there are subsisting owner while there are subsisting but unpreserved lien rights. but unpreserved lien rights. Particularly important in Particularly important in residential subdivision residential subdivision construction. construction.


So Who Cares?So Who Cares?

Developers!Developers!


Co-Fo Concrete Forming Co-Fo Concrete Forming Construction Ltd. v. 344602 Construction Ltd. v. 344602

Ontario LtdOntario Ltd. (1999), 50 C.L.R. (2d) . (1999), 50 C.L.R. (2d) 178 (Ont. Gen. Div.)178 (Ont. Gen. Div.)

Plaintiff contractor builds Plaintiff contractor builds foundations for subdivisionfoundations for subdivision

Developer sells lots when money is Developer sells lots when money is still owing to contractorstill owing to contractor

Developer did not retain any funds Developer did not retain any funds in trustin trust

Developer and its officers and Developer and its officers and directors liable for breach of trust directors liable for breach of trust


How Much How Much Priority do Lien Priority do Lien Claimants Have?Claimants Have?


PrioritiesPrioritiesComplete statutory codeComplete statutory code

Part XIPart XI

ss. 72 – 85ss. 72 – 85


Overall Priorities SchemeOverall Priorities Scheme

ss. 72 – 75: Administrative

s. 72: Lien enforceable in spite of defaults. 73: Lien Assignables. 74: General Liens. 75: OK to take other security



ss. 72 – 75: Administrative ss. 76 – 77: Over-arching priority

s. 76: Purchaser pro tanto

s. 77: General priority over all executions, unless recovered upon



ss. 72 – 75: Administrative ss. 76 – 77: Over-arching prioritys. 78: Priorities over mortgagess. 79 – 80: Priorities among lien

claimantss. 79: Persons who comprise classs. 80: Priority between and within class


Overall Priorities SchemeOverall Priorities Schemess. 72 – 75: Administrative ss. 76 – 77: Over-arching prioritys. 78: Priorities over mortgagesss. 79 – 80: Priorities among lien claimantsss. 81 – 85: Special prioritiess. 81: Workerss. 82: General lienss. 83: Insurance proceedss. 84: Proceeds of sales. 85: Priorities on insolvency


Overall Mortgages Overall Mortgages SchemeScheme

s. 78(1): Over-arching priority of lien s. 78(2): Except: Building mortgage s. 78(3): Except: “Prior” mortgages (prior advance) s. 78(4): Except: “Prior” mortgages (subs. advance) s. 78(5): Except: Special priority against

subsequent mortgages S. 78(6): Except: General priority against subs.

mortgages s. 78(7): Except: Some trustees s. 78(11): Except: All home buyer mortgages s. 78(8): Postponement s. 78(9): (2) and (5) don’t apply to mortgages

before 1983 s. 78(10): Financial Guarantee Bond


The Whole Prior/Subsequent Thing

First lien arisesFirst lien arises

Prior mortgages mortgages Subsequent mortgages mortgages

Prior advancesPrior advances Subsequent advances advances

Value of land determi- of land determi-

nativenativeAdvances without without

notice determinativenotice determinative

Building mortgage mortgage

exceptionexception

Building mortgage mortgage

exceptionexception

Special Special priority for defi- for defi-

ciency in holdbackciency in holdback


AdvanceRegistration

Before 1Before 1stst lien lien arosearose

After 1After 1stst lien arose, lien arose, but before but before registration of registration of written notice of lienwritten notice of lien

Before 1Before 1stst lien aroselien arose

s. 78(3), priority s. 78(3), priority for actual value for actual value of premises at of premises at time lien arose / time lien arose / total value of all total value of all advances to that advances to that datedate

s. 78(4), priority for s. 78(4), priority for everything in s. 78(3) everything in s. 78(3) plus all advances plus all advances before registration before registration or written notice of or written notice of lienlien

After 1After 1stst lien aroselien arose

s. 78(6) prioritys. 78(6) priority s. 78(6), priority for s. 78(6), priority for all advances before all advances before registration or registration or written notice of written notice of lien, less any lien, less any deficiency in deficiency in holdbacksholdbacks


ExampleExample

MortgageMortgageA (Land)

Advance Advance

A1A1Advance Advance

A2A2AdvanceAdvance

A3A3MortgageMortgage

B (Building)B (Building)

AdvanceAdvance

B1B1AdvanceAdvance

B2B2

Lien # 1Lien # 1

ArisesArises

Lien # 1Lien # 1

ExpiresExpiresLien # 2Lien # 2

RegisteredRegistered


ExampleExample

MortgageMortgage

A (Land)A (Land)Advance Advance

A1A1Advance Advance

A2A2AdvanceAdvance



AdvanceAdvance

B1B1AdvanceAdvance

B2B2

Lien # 1Lien # 1

ArisesArisesLien # 1Lien # 1



1.1. Mortgagee B advanced in the face of a lien, Mortgagee B advanced in the face of a lien,

so that advance B2 loses priority to all liens so that advance B2 loses priority to all liens


ExampleExample

MortgageMortgage


A1A1Advance Advance

A2A2AdvanceAdvance



AdvanceAdvance

B1B1AdvanceAdvance

B2B2

Lien # 1Lien # 1




2. Advance B1 is a good advance. 2. Advance B1 is a good advance.


ExampleExample

MortgageMortgage


A1A1Advance Advance

A2A2AdvanceAdvance



AdvanceAdvance

B1B1AdvanceAdvance

B2B2

Lien # 1Lien # 1




3.3. Mortgage B is a building mortgage and a Mortgage B is a building mortgage and a

subsequent mortgage, so it loses priority to subsequent mortgage, so it loses priority to

the extent of any deficiency in the holdbackthe extent of any deficiency in the holdback


ExampleExample

MortgageMortgage


A1A1Advance Advance

A2A2AdvanceAdvance



AdvanceAdvance

B1B1AdvanceAdvance

B2B2

Lien # 1Lien # 1




4.4. Advance A3 is a subsequent advance (after Advance A3 is a subsequent advance (after

Lien 1 arose). Therefore, unless Lien 1 was Lien 1 arose). Therefore, unless Lien 1 was

registered or notified, Advance A3 is additionalregistered or notified, Advance A3 is additional

priority for Mortgagee Apriority for Mortgagee A


ExampleExample

MortgageMortgage


A1A1Advance Advance

A2A2AdvanceAdvance



AdvanceAdvance

B1B1AdvanceAdvance

B2B2

Lien # 1Lien # 1




5.5. Advances A1 and A2 are prior, so priority isAdvances A1 and A2 are prior, so priority is

lesser of actual value of land at the time the lesser of actual value of land at the time the

lien arose or total of A1 & A2.lien arose or total of A1 & A2.


Can lien claimants Can lien claimants hold up my power of hold up my power of

sale?sale?

What is the Financial What is the Financial Guarantee Bond I hear about? Guarantee Bond I hear about? Does anyone ever use them?Does anyone ever use them?


Construction Lien ActConstruction Lien Act, s. , s. 78(10)78(10)Financial guarantee bondFinancial guarantee bond

(10) A purchaser who takes title from a (10) A purchaser who takes title from a mortgagee takes title to the premises free of the mortgagee takes title to the premises free of the priority of the liens created by subsections (2) and priority of the liens created by subsections (2) and (5) where, (5) where, (a) a bond of an insurer licensed under the (a) a bond of an insurer licensed under the Insurance Act to write surety and fidelity Insurance Act to write surety and fidelity insurance; orinsurance; or(b) a letter of credit or a guarantee from a bank (b) a letter of credit or a guarantee from a bank listed in Schedule I or II to the Bank Act (Canada), listed in Schedule I or II to the Bank Act (Canada), in a form prescribed is registered on the title to in a form prescribed is registered on the title to the premises, and, upon registration, the security the premises, and, upon registration, the security of the bond, letter of credit or the guarantee takes of the bond, letter of credit or the guarantee takes the place of the priority created by those the place of the priority created by those subsections, and persons who have proved liens subsections, and persons who have proved liens have a right of action against the surety on the have a right of action against the surety on the bond or guarantee or the issuer of the letter of bond or guarantee or the issuer of the letter of credit. credit.


Purpose:Purpose:

Section 78(10) facilitates conveyance Section 78(10) facilitates conveyance by power of sale contained in a by power of sale contained in a mortgage. A purchaser takes title from mortgage. A purchaser takes title from a mortgagee free of liens where a a mortgagee free of liens where a financial guarantee bond in the financial guarantee bond in the prescribed form is registered against prescribed form is registered against the title to the premises. The bond the title to the premises. The bond takes the place of the priorities created takes the place of the priorities created by s. 78 and the lien claimants have a by s. 78 and the lien claimants have a claim against the bond surety.claim against the bond surety.


Result:Result:

Where a mortgagee obtained a Where a mortgagee obtained a financial guarantee bond prior to a sale financial guarantee bond prior to a sale under a power of sale, the subsequent under a power of sale, the subsequent purchaser takes title free of the purchaser takes title free of the priority of the liens created by s. 78(2) priority of the liens created by s. 78(2) with respect to holdback deficiencies. with respect to holdback deficiencies.

J. Sousa Contractor Ltd. v. Kinalea J. Sousa Contractor Ltd. v. Kinalea Development CorpDevelopment Corp. [1996] O.J. No. . [1996] O.J. No. 1337 (Div. Ct.)1337 (Div. Ct.)


But:But:

Section 78 does not provide for the Section 78 does not provide for the vacating of liens (s. 44) and responds vacating of liens (s. 44) and responds only to liens arising from an improvement only to liens arising from an improvement which have a priority over the mortgage which have a priority over the mortgage to the extent of any deficiency in the to the extent of any deficiency in the holdbacks required to be retained.holdbacks required to be retained.

Gilvesy Construction v. 810941 Ontario Gilvesy Construction v. 810941 Ontario LtdLtd. .

(1994), 17 C.L.R. (2d) 187 (Ont. Gen. (1994), 17 C.L.R. (2d) 187 (Ont. Gen. Div.)Div.)


The Liens are The Liens are Vacated – Can I Get Vacated – Can I Get

the Owner Out the Owner Out Altogether?Altogether?


Benny Haulage Ltd. v. Hamilton-Benny Haulage Ltd. v. Hamilton-Wentworth Roman Catholic Wentworth Roman Catholic

Separate School BoardSeparate School Board (1996), 33 C.L.R. (2d) 44 (Ont. (1996), 33 C.L.R. (2d) 44 (Ont.

Master)Master)

““Once the general [contractor] has posted Once the general [contractor] has posted security, an owner is no longer a required security, an owner is no longer a required party at the suit of any lien claimant who’s party at the suit of any lien claimant who’s lien has been bonded off. If an owner is so lien has been bonded off. If an owner is so named it should immediately seek an named it should immediately seek an order dismissing the claim against it so no order dismissing the claim against it so no further costs are incurred.”further costs are incurred.”

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