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

2. Copyright Glaholt LLP, January 2003 The Hidden Lien Act Written Notice of Lien Written Notice of Lien Vendor’s Trusts – Who Cares? Vendor’s Trusts – Who Cares?

3. Copyright Glaholt LLP, January 2003 Written Notice of Lien Defined Term (Construction Lien Act, s. 1): Defined Term (Construction Lien Act, s. 1): “written notice of lien” includes a claim for lien and any written notice given by a person having a lien that (a) identifies the payer and identifies the premises, and (b) states the amount that the person has not been paid and is owed to the person by the payer.

4. Copyright Glaholt LLP, January 2003 Basics I written notice of lien ≠ registration of claim for lien

5. Copyright Glaholt LLP, January 2003 Basics II written notice of lien ≠ constructive notice to world at large

6. Copyright Glaholt LLP, January 2003 Basics III written notice of lien ≠equivocal

7. Copyright Glaholt LLP, January 2003 Four Ingredients of Valid Written Notice of Lien 1.An indication that the subcontractor is supplying material to the contractor 2.A clear statement that there is an account owed by the contractor to the subcontractor 3.A clear statement that the subcontractor is claiming a lien, and will register it unless payment is made; and 4.The amount of the lien that is claimed. (354628 Ontario Ltd. v. Mutic (1978), 20 O.R. (2d) 581 (Master))

8. Copyright Glaholt LLP, January 2003 Effect of Notice 1. Payer stops paying 2. Mortgagee stops advancing

9. Copyright Glaholt LLP, January 2003 If Notice is Served 1. Where lien period has expired and it is certain that there are no other subsisting or preserved liens, you might accept simple countermanding notice 2. If the job is ongoing and there are other liens, then procedure provided for in s. 47(1)(c) of the Act should be followed:

10. Copyright Glaholt LLP, January 2003 S. 47 (1)(c) Upon motion, the court may declare, where written notice of a lien has been given, that the lien has expired, or that the written notice of the lien shall no longer bind the person to whom it was given. Upon motion, the court may declare, where written notice of a lien has been given, that the lien has expired, or that the written notice of the lien shall no longer bind the person to whom it was given.

11. Copyright Glaholt LLP, January 2003 Vendor’s Trust

12. Copyright Glaholt LLP, January 2003 Construction Lien Act, s. 9(1) Vendor's trust, amounts received a trust 9.--(1) Where the owner's interest in a premises is sold by the owner, an amount equal to, 9.--(1) Where the owner's interest in a premises is sold by the owner, an amount equal to, (a) the value of the consideration received by the owner as a result of the sale, less, (b) the reasonable expenses arising from the sale and the amount, if any, paid by the vendor to discharge any existing mortgage indebtedness on the premises, constitutes a trust fund for the benefit of the contractor.

13. Copyright Glaholt LLP, January 2003 Construction Lien Act, s. 9(2) Obligations as trustee (2) The former owner is the trustee of the trust created by subsection (1), and shall not appropriate or convert any part of the trust property to the former owner's own use or to any use inconsistent with the trust until the contractor is paid all amounts owed to the contractor that relate to the improvement. (2) The former owner is the trustee of the trust created by subsection (1), and shall not appropriate or convert any part of the trust property to the former owner's own use or to any use inconsistent with the trust until the contractor is paid all amounts owed to the contractor that relate to the improvement.

14. Copyright Glaholt LLP, January 2003 Purpose Prevents the avoidance of lien claims by means of the sale of the premises by the original owner while there are subsisting but unpreserved lien rights. Particularly important in residential subdivision construction.

15. Copyright Glaholt LLP, January 2003 So Who Cares? Developers!

16. Copyright Glaholt LLP, January 2003 Co-Fo Concrete Forming Construction Ltd. v. 344602 Ontario Ltd. (1999), 50 C.L.R. (2d) 178 (Ont. Gen. Div.) Plaintiff contractor builds foundations for subdivision Plaintiff contractor builds foundations for subdivision Developer sells lots when money is still owing to contractor Developer sells lots when money is still owing to contractor Developer did not retain any funds in trust Developer did not retain any funds in trust Developer and its officers and directors liable for breach of trust Developer and its officers and directors liable for breach of trust

17. Copyright Glaholt LLP, January 2003 How Much Priority do Lien Claimants Have?

18. Copyright Glaholt LLP, January 2003 Priorities Complete statutory code Part XI ss. 72 – 85

19. Copyright Glaholt LLP, January 2003 Overall Priorities Scheme ss. 72 – 75: Administrative s. 72: Lien enforceable in spite of default s. 73: Lien Assignable s. 74: General Lien s. 75: OK to take other security

20. Copyright Glaholt LLP, January 2003 Overall Priorities Scheme 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

21. Copyright Glaholt LLP, January 2003 Overall Priorities Scheme ss. 72 – 75: Administrative ss. 76 – 77:Over-arching priority s. 78:Priorities over mortgages s. 79 – 80:Priorities among lien claimants s. 79: Persons who comprise class s. 80: Priority between and within class

22. Copyright Glaholt LLP, January 2003 Overall Priorities Scheme ss. 72 – 75: Administrative ss. 76 – 77:Over-arching priority s. 78:Priorities over mortgages ss. 79 – 80:Priorities among lien claimants ss. 81 – 85:Special priorities s. 81: Workers s. 82: General liens s. 83: Insurance proceeds s. 84: Proceeds of sale s. 85: Priorities on insolvency

23. Copyright Glaholt LLP, January 2003 Overall Mortgages Scheme 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

24. Copyright Glaholt LLP, January 2003 The Whole Prior/Subsequent Thing First lien arises mortgages Prior mortgages mortgages Subsequent mortgages Prior advances advances Subsequent advances of land determi- Value of land determi-native without Advances without notice determinative mortgage Building mortgageexception exception Special for defi- Special priority for defi- ciency in holdback

25. Copyright Glaholt LLP, January 2003 Advance Registration Before 1 st lien arose After 1 st lien arose, but before registration of written notice of lien Before 1 st lien arose s. 78(3), priority for actual value of premises at time lien arose / total value of all advances to that date s. 78(4), priority for everything in s. 78(3) plus all advances before registration or written notice of lien After 1 st lien arose s. 78(6) priority s. 78(6), priority for all advances before registration or written notice of lien, less any deficiency in holdbacks

26. Copyright Glaholt LLP, January 2003 Example Mortgage A (Land) AdvanceA1 AdvanceA2AdvanceA3Mortgage B (Building) AdvanceB1AdvanceB2 Lien # 1 Arises Expires Lien # 2 Registered

27. Copyright Glaholt LLP, January 2003ExampleMortgage A (Land) AdvanceA1 AdvanceA2AdvanceA3Mortgage B (Building) AdvanceB1AdvanceB2 Lien # 1 Arises Expires Lien # 2 Registered 1.Mortgagee B advanced in the face of a lien, so that advance B2 loses priority to all liens

28. Copyright Glaholt LLP, January 2003ExampleMortgage A (Land) AdvanceA1 AdvanceA2AdvanceA3Mortgage B (Building) AdvanceB1AdvanceB2 Lien # 1 Arises Expires Lien # 2 Registered 2. Advance B1 is a good advance.

29. Copyright Glaholt LLP, January 2003ExampleMortgage A (Land) AdvanceA1 AdvanceA2AdvanceA3Mortgage B (Building) AdvanceB1AdvanceB2 Lien # 1 Arises Expires Lien # 2 Registered 3.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 holdback

30. Copyright Glaholt LLP, January 2003ExampleMortgage A (Land) AdvanceA1 AdvanceA2AdvanceA3Mortgage B (Building) AdvanceB1AdvanceB2 Lien # 1 Arises Expires Lien # 2 Registered 4.Advance A3 is a subsequent advance (after Lien 1 arose). Therefore, unless Lien 1 was registered or notified, Advance A3 is additional priority for Mortgagee A

31. Copyright Glaholt LLP, January 2003ExampleMortgage A (Land) AdvanceA1 AdvanceA2AdvanceA3Mortgage B (Building) AdvanceB1AdvanceB2 Lien # 1 Arises Expires Lien # 2 Registered 5.Advances A1 and A2 are prior, so priority is lesser of actual value of land at the time the lien arose or total of A1 & A2.

32. Copyright Glaholt LLP, January 2003 Can lien claimants hold up my power of sale? What is the Financial Guarantee Bond I hear about? Does anyone ever use them?

33. Copyright Glaholt LLP, January 2003 Construction Lien Act, s. 78(10) Financial guarantee bond (10) A purchaser who takes title from a mortgagee takes title to the premises free of the priority of the liens created by subsections (2) and (5) where, (10) A purchaser who takes title from a mortgagee takes title to the premises free of the priority of the liens created by subsections (2) and (5) where, (a) a bond of an insurer licensed under the Insurance Act to write surety and fidelity insurance; or (b) a letter of credit or a guarantee from a bank listed in Schedule I or II to the Bank Act (Canada), in a form prescribed is registered on the title to the premises, and, upon registration, the security of the bond, letter of credit or the guarantee takes the place of the priority created by those subsections, and persons who have proved liens have a right of action against the surety on the bond or guarantee or the issuer of the letter of credit.

34. Copyright Glaholt LLP, January 2003 Purpose: Section 78(10) facilitates conveyance by power of sale contained in a mortgage. A purchaser takes title from a mortgagee free of liens where a financial guarantee bond in the prescribed form is registered against the title to the premises. The bond takes the place of the priorities created by s. 78 and the lien claimants have a claim against the bond surety.

35. Copyright Glaholt LLP, January 2003 Result: Where a mortgagee obtained a financial guarantee bond prior to a sale under a power of sale, the subsequent purchaser takes title free of the priority of the liens created by s. 78(2) with respect to holdback deficiencies. J. Sousa Contractor Ltd. v. Kinalea Development Corp. [1996] O.J. No. 1337 (Div. Ct.)

36. Copyright Glaholt LLP, January 2003 But: Section 78 does not provide for the vacating of liens (s. 44) and responds only to liens arising from an improvement which have a priority over the mortgage to the extent of any deficiency in the holdbacks required to be retained. Gilvesy Construction v. 810941 Ontario Ltd. (1994), 17 C.L.R. (2d) 187 (Ont. Gen. Div.)

37. Copyright Glaholt LLP, January 2003 The Liens are Vacated – Can I Get the Owner Out Altogether?

38. Copyright Glaholt LLP, January 2003 Benny Haulage Ltd. v. Hamilton-Wentworth Roman Catholic Separate School Board (1996), 33 C.L.R. (2d) 44 (Ont. Master) “Once the general [contractor] has posted security, an owner is no longer a required party at the suit of any lien claimant who’s lien has been bonded off. If an owner is so named it should immediately seek an order dismissing the claim against it so no further costs are incurred.”