Canada: Ontario Court Of Appeal Affirms That Construction Liens' Priority Under The Construction Act Is Limited To Extent Of The Deficiency In The Owner's Holdback

BCIMC Construction Fund Corp. et al. v. 33 Yorkville Residences Inc. et al., 2023 ONCA 1 (CanLII)
The decision in BCIMC Construction Fund Corp. et al. v. 33 Yorkville Residences Inc. et al.¹, involved a number of lien claimants which had provided services and materials to the owner of a condominium development. The owner of the condominium had become insolvent and the property subject to the improvement had sold by a Receiver pursuant to a court order. At the time of sale, there were six mortgages registered against the property and two were building mortgages pursuant to Section 78(2) of the Construction Act.²The parties did not dispute that the lien claimants are entitled to a priority payment out of the proceeds of sale to the extent of any deficiency in the owner's holdback under Section 22(1) of the Construction Act. The issue in dispute was the distribution priority pursuant to Section 78(2) of the Construction Act, which outlines the method in determining the amount of the deficiency to which the priority applies. The lien claimants brought a motion to determine this issue.

The lien claimants took the position that because there were two building mortgages, they were entitled to priority with respect to the deficiency in holdback over each mortgage. In other words, where the deficiency in holdback was the 10% which the owner was required to retain under the Act, the lien claimants took the position that they were entitled to a 10% priority over each building mortgage such that the total amount for which their liens had priority amounted to 20% of the price of services and materials supplied.

In interpreting Section 78(2) of the Construction Act, the Ontario Superior Court held that lien claimants are limited to priority over all combined building mortgages, rather than each mortgage separately.³ As such, the lien claimants' motion was dismissed. The claimants appealed to the Ontario Court of Appeal. The Ontario Court of Appeal dismissed the lien claimants' appeal.

Background - The Construction Act
Under Section 22(1) of the Construction Act, each payor in a contract or subcontract where a lien arises must retain a 10% holdback of the price of the services or materials supplied until all liens have expired or are satisfied.⁴ Section 78 of the Construction Act provides additional rules concerning priority between mortgagees and lien claimants and provides that subject to exceptions, liens from an improvement have priority over all mortgages.⁵

The exception in this case appears in Section 78(2) which deals with building mortgages. Section 78(2) provides that the lien has priority to the extent of any deficiency in the holdbacks required to be retained, regardless of when that mortgage or the mortgage taken out to repay it is registered.⁶

The lien claimants submitted that the interpretation of Section 78(2) requires that each lien claimant has priority over each building mortgage to the extent of the deficiency in the holdback. Since there were two building mortgages registered on the property, the lien claimants argued that they were entitled to priority over each building mortgage to the extent of the deficiency in the holdback totalling a 20% holdback fund. The lien claimants further argued that the context and purpose of the Construction Act was to protect lien claimants as subsequent building mortgagees expect to assume more risk than prior mortgagees and should not be insulated from additional risk by limiting a lien claimant's priority to one 10% deficiency claim. Finally, the lien claimants submitted that the case of GM Sernas & Associates Ltd v. 846539 Ontario Ltd.⁷ should be distinguished from the present case. In Sernas, the Ontario Court of Justice held that the maximum priority of a claim for lien over two mortgages is 10%, saying that there is one holdback figure and that the deficiency is the full holdback figure.⁸ The lien claimants argued that the issue on whether priority is to measured against each mortgage separately was not addressed in Sernas and that as such, Sernas was not binding on the claimants.⁹

Ontario Superior Court's Decision
The Ontario Superior Court dismissed the lien claimants' motion as the lien claimants' interpretation of Section 78(2) of the Construction Act limited the meaning and effect of key words in the section, reads in additional language that is not present in the section, and produces a result that is inconsistent with the scheme and purpose of the Construction Act.¹⁰ Justice Penny held that Section 78(2) provided 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.¹¹ As such, there is only one holdback available for lien claimants regardless of the number of building mortgages registered on the property.

Furthermore, the Court emphasized that when read as a whole, the Construction Act does not have any underlying policy directed solely to protect lien claimants. Referencing RSG Mechanical Incorporated v. 1398796 Ontario Inc., the Court held that there was no suggestion that the interests of lien claimants should be favoured above the interests of mortgagees beyond the value of the holdbacks the legislation requires.¹²

Ontario Court of Appeal Decision
The lien claimants appealed the Ontario Superior Court's decision and argued that as the matter is one of statutory interpretation of the Construction Act, the lien claimants argued that the motion judge's decision and reasoning was incorrect.
In reviewing the lower court's decision, the Court of Appeal found that the motion judge correctly identified and applied the purposive and contextual approach to statutory interpretation and determined that there was no error in the motion judge's application of the rules of statutory interpretation.¹³ As such, the appeal is dismissed.

Conclusion
This case provides greater clarity for lenders engaged in construction financing with regards to the extent of holdback priority in situations with multiple building mortgages. As the cost of construction increases, especially following the COVID-19 pandemic, it is crucial for lenders to ensure that owners are continuing to maintain the appropriate holdback amount in accordance with the Construction Act. As it stands for now, lien claimants are only entitled to one holdback fund, irrespective of the number of building mortgages registered on the property.
If you have any questions about construction law in general, please contact Christopher Statham at 416-446-5839 or christopher.statham@devrylaw.ca.

"This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique, and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situations and needs."

This blog was co-authored by student-at-law, Abby Leung

footnotes

1 2023 ONCA 1 [BCIMC].

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

3 2022 ONSC 2326 [2022 ONSC 2326] at para 3.

4 Construction Act, supra note 2 at s.22(1).

5 Ibid at s.78(1).

6 Ibid at s. 78(2).

7 [1999] O.J. No. 3714 (S.C.).

8 2022 ONSC 2326 supra note 3 at para 16.

9 Ibid at paras 17-18.

10 Ibid at para 20.

11 Ibid at para 21.

12 Ibid at para 28.

13 BCIMC, supra note 1, at paras 13-14.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.