1. Deconstructing Construction Liens

2. What is a Lien? 1. A creature of provincial statute 1873: Ontario 1873: Ontario 1879: British Columbia & Nova Scotia 1879: British Columbia & Nova Scotia 1884: Northwest Territories 1884: Northwest Territories 1890: Newfoundland 1890: Newfoundland 1902: Manitoba 1902: Manitoba 1903: New Brunswick 1903: New Brunswick 1907: Saskatchewan 1907: Saskatchewan 1914: Yukon 1914: Yukon 1930: Alberta 1930: Alberta 1936: Prince Edward Island 1936: Prince Edward Island 1999: Nunavut (adopting N.W.T. statute) 1999: Nunavut (adopting N.W.T. statute)

3. What is a Lien?  1. A creature of provincial statute  2. With broad, overriding application  all “contracts” deemed amended to conform (s. 5)  lien claimant deemed purchaser pro tanto upon registration of a lien (s. 76)

4. What is a Lien? 1. A creature of provincial statute 2. With broad, overriding statutory application 3. That arises upon the mere doing of work  s. 15: “A person’s lien arises and takes effect when the person first supplies services or materials to the improvement.”

5. What is a Lien? 1. A creature of provincial statute 2. With broad, overriding statutory application 3. That arises upon the mere doing of work 4. And expires on the mere passage of time  45 days to preserve  45 more days to perfect  Expires after 2 years unless set down for trial

6. What is a Lien? 1. A creature of provincial statute 2. With broad, overriding statutory application 3. That arises upon the mere doing of work 4. And expires on the mere passage of time 5. And causes the most delightful mayhem in between.

7. Why are there liens? 1.Hickey v. Stalker (1923), 53 O.L.R. 414 (C.A.) Meredith C.J.C.P: “Speaking generally, the object of the Mechanics’ Lien Act is to prevent owners of land getting the benefit of buildings erected and work done at their instance without paying for them.”

8. Why are there liens? 2.Minneapolis-Honeywell Regulator Co. v. Empire Brass Mfg. Co. Ltd. [1955] 3 D.L.R. 561 (S.C.C.) Rand J: “The Act is designed to give security to persons doing work or furnishing materials in making an improvement on land.”

9. Why are there liens? 3.Teepee Excavation & Grading Ltd. Niran Construction Ltd. (2000), 49 O.R. (3d) 612 (Ont. C.A.) Carthy J.A.: “The Construction Lien Act serves a specialized purpose in a narrow field. A lien claimant may commence an action, provide shelter for other claimants, obtain a form of execution before judgment, and proceed to trial in summary fashion without production of documents, discovery or other interlocutory steps except by leave.”

10. Why are there liens? 4.Report of the Attorney General’s Advisory Committee on the Draft Construction Lien Act, 1982: “The need for the types of remedies provided by the Mechanics’ Lien Act […] emanate from the complicated nature of contractual relationships within the construction industry, and the credit-granting practices which are an integral part of that industry. Ordinary contractual remedies are believed to be inadequate in the face of such phenomena.”

11. Why are there liens? 5.D.N. Macklem, D.I. Bristow, Construction Builders’ and Mechanics’ Liens in Canada, 6 th ed., Vol. 1, (Toronto: Carswell, 1990) at p. 1-3 (citing Scratch v. Anderson, [1917] 1 W.W.R. 1340): “The land which receives the benefit shall bear the burden.”

12. But… Canada Law Journal, Vol. XIII, N.S., January 1877: “But as to the subject matter involved, probably the best thing to do would be to repeal the Mechanics’ Lien Act in toto. The enactment is in itself unnecessary and illogical, the wording is obscure, and its provisions unintelligible and contradictory. The Act has resulted in more harm than good to the honest and prudence mechanic. ”

13. Why are there liens? 1. Prevent unjust enrichment 2. Create a special class of creditors 3. Who enjoy special procedures 4. And ultimate recourse to the land improved 5. While doing as little violence as possible to established property rights and day to day commerce.

14. How does our Lien Act balance these interests? A lien claimant’s statute (substantial compliance) Titles often cluttered with extravagant liens Liens used to coerce owners /mortgagees to pay or lose their project Time periods ambiguous (subjective) Owners left defenseless Pre 1983

15. How does our Lien Act balance these interests? An owner’s statute (strict compliance, s. 6) Extensive statutory remedy scheme for slander of title (ss. 35, 86) Time periods clear (objective, concept of publication of certification of substantial performance) Procedures toughened up and expanded (ss. 39, 40 – noting in default) Post 1983

16. Post 2002 Even better!

17. Post 2002 Dominance of trust remedy (Part II) over lien remedy (Part III) Trust claim is not registered on title Trust has no time periods to observe Trust not limited to holdback Trust benefits from same summary procedure as liens (Villa Verde) Trust invokes mind-numbingly draconian personal liability section (s. 13)

18. Q:Where do all these concepts come together? A:Priorities: Where vested interests in real property collide head-on with special rights granted to lien claimants.

19. Priorities Complete statutory code Part XI ss. 72 – 85

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. Example Mortgage A (Land) AdvanceA1 AdvanceA2AdvanceA3Mortgage B (Building) AdvanceB1AdvanceB2 Lien # 1 Arises Expires Lien # 2 Registered

28. ExampleMortgage 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

29. ExampleMortgage A (Land) AdvanceA1 AdvanceA2AdvanceA3Mortgage B (Building) AdvanceB1AdvanceB2 Lien # 1 Arises Expires Lien # 2 Registered 2. Advance B1 is a good advance.

30. ExampleMortgage 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

31. ExampleMortgage 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

32. ExampleMortgage 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.

33. Questions & Answers

34. Q: What if a mortgagee has more than one intention? Is it still a building mortgage? A: Yes. A mortgage can be segmented for the purposes of determining priorities. Where first intention was the acquisition of land, the first advance was held not to be building mortgage. Royal Bank v. Lawton Developments Inc. (1994), 16 O.R. (3d) 450 (Ont. Gen. Div.)

35. Q: When is an advance actually “made”? When the mortgagee releases the money? A: No, when the mortgagor gets the money. An advance is made not when the mortgagee releases the funds, but only when the owner acquires actual control of the money advanced. Marsil Mechanical v. A. Reissing – Reissing Enterprise Ltd. (1996), 26 C.L.R. (2d) 148 (Ont. Gen. Div.)

36. Q: What if the land is worthless? What is the “actual value of the premises when the first lien arose” then? A: Zero, no priority for the mortgagee. Environmental contamination can render the premises’ value “nil” for the purposes of determining priorities between prior mortgagee and lien claimants. Park Contractors Inc. v. Royal Bank of Canada (1998), 38 O.R. (3d) 290 (Ont. Gen. Div.)

37. Q: Who gets the benefit of a single lien claimant’s priority? A: All lien claimants. All lien claimants have the benefit of that priority to all advances made subsequent to the registration of the first lien. Norwon Electric Sault Co. v. Ross (1984), 7 C.L.R. 1 (Ont. H.C.)

38. Q: What if a mortgagee makes an advance in the face of a lien? Does it lose priority for that advance against all liens or just the prior registered liens? A: All liens. Priority is lost against all liens, even if the preserved lien is later vacated from title. Boehmers v. 794561 Ontario Inc. (1995), 21 O.R. (3d) 771 (Ont. C.A.)

39. Q: Do advances include interest? A: Yes. Principal and interest are equally secured under a mortgage. Advances include interest. Interest payments on mortgages therefore have priority over lien. 830889 Ontario Inc. v. 607643 Ontario Inc. (1990), 43 C.L.R. 181 (Ont. Gen. Div.)

40. Q: What if a mortgagee advances negligently, to the prejudice of lien claimants? Can the lien claimants sue for negligence? A: No. No. In view of the sweeping benefits of s. 78, courts have held that even a mortgagee’s negligence will not avail lien claimants, as no independent duty of care exists. Con-Drain Co. (1983) Ltd. v. 846539 Ontario Ltd. (1997), 35 C.L.R. (2d) 230 (Ont. Gen. Div.), aff’d. [1998] O.J. No. 5041 (Ont. C.A.)