Ontario Decision Suggests Priority of Lien Claimants Over Building Mortgages Limited to Statutory Holdback Amount

A recent decision at Ontario Superior Court (Commercial List) held that when a project owner is in receivership, lien claimants are limited to priority – to the extent of any deficiency in the owner’s holdback – over all building mortgages combined rather than each building mortgage separately. That is to say, the maximum priority in a lien claim over multiple building mortgages is 10 per cent of the price of the services or materials that the claimant actually supplied to the project under the contract or subcontract.

In BCIMC Construction Fund Corp et al. v. 33 Yorkville Residences Inc. et al.,[1] three lien claimants provided services to the owner  of a condominium development project, who became insolvent. The property was sold by the receiver and there was a dispute over the distribution of the proceeds. The three lien claimants were unpaid, and no holdback had been retained by the project owner. Under Ontario’s Construction Act,[2] the project owner is required to retain a 10 per cent holdback for each potential lien claimant. Section 22(1) provides:

• Each payer upon a contract or subcontract under which a lien may arise shall retain a holdback equal to 10 per cent of the price of the services or materials as they are actually supplied under the contract or subcontract until all liens that may be claimed against the holdback have expired or been satisfied, discharged or otherwise provided for under this Act.

There was therefore a “deficiency” in the owner’s holdback in the full amount of the holdback, namely 10 per cent of the price of services actually supplied by each lien claimant. Under s. 78(2) of the Construction Act, lien claimants have priority over “building mortgages” to the extent of any deficiency in the holdback. Section 78(2) provides:

• Where a mortgagee takes a mortgage with the intention to secure the financing of an improvement, the liens arising from the improvement have priority over that mortgage, and any mortgage taken out to repay that mortgage, to the extent of any deficiency in the holdbacks required to be retained by the owner under Part IV, irrespective of when that mortgage, or the mortgage taken out to repay it, is registered.

The three lien claimants brought a motion to determine the method for determining the amount of the deficiency to which the priority applies under s. 78(2) of the Construction Act. They argued that the reference in s. 78(2) to “a mortgage” in the singular meant that they were entitled to a priority of 10 per cent against each building mortgage. There were two building mortgages, so under their interpretation of s. 78(2), they would each be entitled, in effect, to 20 per cent, rather than the holdback of 10 per cent.

Justice Penny rejected their argument, citing the 1999 decision in GM Sernas & Associates Ltd. v. 846539 Ontario Ltd. (c.o.b. Grand Oak Group Ltd.).[3] That case also involved two mortgages: a “building mortgage” and a “subsequent mortgage,” which, per s. 78(5) of the Construction Act, is a mortgage “registered after the time when the first lien arose.” Justice Penny concluded as follows:

Section 78(2) provides priority to a mortgage taken with the intention to secure the financing of an improvement “to the extent of a deficiency” in the owner’s holdback. There is only one owner’s holdback and, if there is a deficiency, only one priority deficiency claim (Sernas, paras. 18 and 20). The lien claimants’ priority in respect of the deficiency took effect against the first mortgagee, because it is a building mortgage. Once effect was given to that priority, there was no more deficiency (Sernas, para. 23). The honouring of the lien claimants’ priority under s. 78(2) against the first building mortgage fully satisfied the deficiency and the situation was restored to what it would have been had the owner, as required by s. 22 of the Act, withheld the correct amount by way of holdback in the first place. This is not, as the lien claimants would have it, a “contest” between each priority claimant and each building mortgagee. There is one pot of money, one 10% holdback deficiency which is available for the priority payment. The lien claimants’ interpretation unreasonably seeks to expand “to the extent of any deficiency” to a multiple of that number.[4]

Justice Penny also noted that Ontario’s Legislation Act, 2006 provides that “words in the singular include the plural and words in the plural include the singular”,[5] and thus concluded that “not much weight can be placed on the use of the singular ‘mortgagee’ and ‘mortgage’” in s. 78(2) of the Construction Act.[6]

He went on to describe the purpose of the Construction Act:

• [C]ontrary to the lien claimants’ submission, there is no broad principle that the Act should be interpreted to favour lien claimants. Rather, it is well accepted that the Act is remedial legislation that provides a means for contractors and subcontractors to obtain payment for labour and material supplied to a property, while balancing the competing interests of owners, contractors, subcontractors, and mortgagees in the construction process. Indeed, the parties seem to agree that the true object and purpose of the Act is to balance the interests of the various parties in the construction process and to fairly allocate risk and benefit between those who fund construction and those who provide services and materials. Section 78(2) is an important element in that balancing done by the legislature.
• In rejecting an argument that the narrow purpose of the Act is to protect lien claimants, the Divisional Court in RSG Mechanical Incorporated v.1398796 Ontario Inc., 2015 ONSC 2070, held that when the Act is read as a whole, it reveals no underlying policy directed solely to protecting lien claimants. Further, there is no suggestion in the Act that the interests of lien claimants should be favoured above the interests of mortgagees “beyond the value of the holdbacks the legislation requires” (para. 29).[7]

This quote may be compared with Supreme Court of Canada’s comments in Clarkson Co. Ltd. v. Ace Lumber Ltd.,[8] with regard to The Mechanics’ Lien Act,[9] which was replaced by the Construction Lien Act, now the Construction Act. In an oft cited passage, the Supreme Court of Canada quoted with approval from the dissenting opinion at the Court of Appeal:

• The lien commonly known as the mechanics’ lien was unknown to the common law and owes its existence in Ontario to a series of statutes, the latest of which is R.S.O. 1960, c. 233. It constitutes an abrogation of the common law to the extent that it creates, in the specified circumstances, a charge upon the owner’s lands which would not exist but for the Act, and grants to one class of creditors a security or preference not enjoyed by all creditors of the same debtor; accordingly, while the statute may merit a liberal interpretation with respect to the rights it confers upon those to whom it applies, it must be given a strict interpretation in determining whether any lien-claimant is a person to whom a lien is given by it.[10] [Emphasis added]

However, in Ace Lumber, the Supreme Court of Canada was addressing the issue as to whether a lien could be created for the price of rented equipment, while in RSG Mechanical Incorporated v.1398796 Ontario Inc.,[11] the Divisional Court was addressing the interests of mortgagees with respect to funds beyond the statutory holdback[s]. In that case, the appellant suggested that the “overarching intention” of the then Construction Lien Act was “to favour lien claimants above the interests of mortgagees beyond the value of the holdbacks the legislation requires.”[12] The appellant cited the Report of the Attorney General’s Advisory Committee on the Draft Construction Lien Act, April 8, 1982. In rejecting the appellant’s view, the Divisional Court quoted from the same report, where it states:

• The priority [a lien has over a building mortgage to the extent of any deficiency in the holdbacks] applies irrespective of whether the mortgage was registered prior to or subsequent to the first work being done on the improvement. In the opinion of the Committee, subsection 2 [s. 80(2)] provides a reasonable balance between the interests of the mortgagees who finance the construction of the improvement and the lien claimants who do the actual work on the improvement.[13] [emphasis added]

The Divisional Court therefore concluded that the Construction Lien Act was intended to balance the competing interests of mortgagees and lien claimants, such that s. 78(2) of the Construction Lien Act (now the Construction Act) subordinates the interests of building mortgagees to those of lien claimants with respect to a deficiency in the statutory holdback[s], but only to the extent of the deficiency.

In light of BCIMC Construction Fund Corp et al. v. 33 Yorkville Residences Inc. et al., it is important for lien claimants to keep in mind that their statutory priority over building mortgages will be limited to a maximum of 10 per cent of the price of the services or materials actually supplied to the project.

[1] 2022 ONSC 2326 [BCIMC].

[2] R.S.O. 1990, c C.30.

[3] [1999] O.J. No. 3714, 48 C.L.R. (2d) 1, 91 A.C.W.S. (3d) 347 (Sup. Ct.) [Sernas].

[4] BCIMC, supra note 1 at para. 21.

[5] S.O. 2006, c. 21, Sched F., s. 67.

[6] BCIMC, supra note 1 at para. 24.

[7] Ibid at paras. 27–28.

[8] [1963] S.C.R. 110 [Ace Lumber].

[9] R.S.O. 1960, c. 233.

[10] Ace Lumber, supra note 8 at para. 11.

[11] 2015 ONSC 2070.

[12] Ibid at para. 29.

[13] Ibid at para. 28, citing the Report of the Attorney General’s Advisory Committee on the Draft Construction Lien Act, April 8, 1982 at 179.

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