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Deconstructing Construction Liens

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Deconstructing Construction Liens Powered By Docstoc
					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
   1936: Prince Edward Island
   1999: Nunavut (adopting N.W.T. statute)
             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)
              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.”
              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
              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.
        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.”
         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.”
          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.”
          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.”
          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.”
                       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. ”
          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.
How does our Lien Act balance these
            interests?
                     Pre 1983

   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
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)
  Post 2002



Even better!
                   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)
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.
   Priorities
Complete statutory code
       Part XI
      ss. 72 – 85
    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
    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
    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
    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
          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
The Whole Prior/Subsequent Thing
                  First lien arises
Prior mortgages               Subsequent mortgages
Prior advances                Subsequent advances
Value of land determi-        Advances without
native                        notice determinative
Building mortgage             Building mortgage
exception                     exception
                              Special priority for defi-
                              ciency in holdback
Advance      Before 1st lien arose After 1st lien arose, but
Registration                       before registration of
                                   written notice of lien
Before 1st     s. 78(3), priority for   s. 78(4), priority for
lien arose     actual value of          everything in s. 78(3)
               premises at time         plus all advances before
               lien arose / total       registration or written
               value of all             notice of lien
               advances to that
               date
After 1st lien s. 78(6) priority        s. 78(6), priority for all
arose                                   advances before
                                        registration or written
                                        notice of lien, less any
                                        deficiency in holdbacks
                           Example

                         Lien # 1   Lien # 1        Lien # 2
                          Arises    Expires        Registered




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




Mortgage Advance   Advance    Advance Mortgage Advance Advance
A (Land)   A1        A2         A3 B (Building) B1       B2




1. Mortgagee B advanced in the face of a lien,
   so that advance B2 loses priority to all liens
                             Example
                      Lien # 1     Lien # 1       Lien # 2
                       Arises      Expires       Registered




Mortgage Advance   Advance    Advance Mortgage Advance Advance
A (Land)   A1        A2         A3 B (Building) B1       B2




2. Advance B1 is a good advance.
                             Example
                      Lien # 1     Lien # 1       Lien # 2
                       Arises      Expires       Registered




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




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




Mortgage Advance   Advance    Advance Mortgage Advance Advance
A (Land)   A1        A2         A3 B (Building) B1       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.
Questions & Answers
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.)
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.)
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.)
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.)
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.)
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.)
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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