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Deconstructing Construction Liens

Deconstructing Construction Liens. What is a Lien?. 1. A creature of provincial statute 1873: Ontario 1879: British Columbia & Nova Scotia 1884: Northwest Territories 1890: Newfoundland 1902: Manitoba 1903: New Brunswick 1907: Saskatchewan 1914: Yukon 1930: Alberta

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Deconstructing Construction Liens

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  1. Deconstructing Construction Liens

  2. What is a Lien? 1. A creature of provincial statute • 1873: Ontario • 1879: British Columbia & Nova Scotia • 1884: Northwest Territories • 1890: Newfoundland • 1902: Manitoba • 1903: New Brunswick • 1907: Saskatchewan • 1914: Yukon • 1930: Alberta • 1936: Prince Edward Island • 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, 6th 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 Actin 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 Pre1983

  15. How does our Lien Act balance these interests? Post 1983 • 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)

  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 Prior mortgages Subsequent mortgages Prior advances Subsequent advances Advances without notice determinative Value of land determi- native Building mortgage exception Building mortgage exception Special priority for defi- ciency in holdback

  26. Example Lien # 1 Arises Lien # 1 Expires Lien # 2 Registered Advance A1 Mortgage A (Land) Advance A2 Advance A3 Mortgage B (Building) Advance B1 Advance B2

  27. Example Lien # 1 Arises Lien # 1 Expires Lien # 2 Registered Mortgage A (Land) Advance A1 Advance A2 Advance A3 Mortgage B (Building) Advance B1 Advance B2 1. Mortgagee B advanced in the face of a lien, so that advance B2 loses priority to all liens

  28. Example Lien # 1 Arises Lien # 1 Expires Lien # 2 Registered Mortgage A (Land) Advance A1 Advance A2 Advance A3 Mortgage B (Building) Advance B1 Advance B2 2. Advance B1 is a good advance.

  29. Example Lien # 1 Arises Lien # 1 Expires Lien # 2 Registered Mortgage A (Land) Advance A1 Advance A2 Advance A3 Mortgage B (Building) Advance B1 Advance B2 3. Mortgage B is a building mortgage and a subsequent mortgage, so it loses priority to the extent of any deficiency in the holdback

  30. Example Lien # 1 Arises Lien # 1 Expires Lien # 2 Registered Mortgage A (Land) Advance A1 Advance A2 Advance A3 Mortgage B (Building) Advance B1 Advance B2 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. Example Lien # 1 Arises Lien # 1 Expires Lien # 2 Registered Mortgage A (Land) Advance A1 Advance A2 Advance A3 Mortgage B (Building) Advance B1 Advance B2 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. Questions & Answers

  33. 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.)

  34. 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.)

  35. 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.)

  36. 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.)

  37. 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.)

  38. 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.)

  39. 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.)

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