When a mortgagee attempts to sell a property under power of sale and there are construction liens registered against title to the property, the priorities between the mortgagee and lienholders must be determined. The situation is complicated further when there are numerous mortgagees as the liens may rank ahead of certain mortgages and certain mortgagee’s advances and not others. A purchaser will want assurance that outstanding lien claims have been resolved prior to completion of the sale.
The General Scheme of Section 78 of the Construction Lien Act in Ontario
In Ontario, the Construction Lien Act (the "Act") is intended to provide protection for lien claimants where value is added to property as a result of the lien claimant’s provision of services and/or materials to the property. The priorities as between construction lien claimants and mortgagees is primarily set out in Section 78 of the Act and, in general, this section attempts to strike a balance between the interests of mortgagees and construction lien claimants by reserving to the lien claimant, subject to the provisions contained therein, any value added to the property as a result of the lien claimant’s improvements. The six relevant subsections of Section 78 which delineate the priorities as between mortgagees and construction lien claimants are less clear than they appear at first glance. However, the chart below provides an overview of these priorities. The definitions that follow will assist in understanding the chart which summarizes the order of priority between prior mortgagees, subsequent mortgagees and lien claimants. While not given a particular order of priority in the chart below, deficiencies in the retention of Holdback Amounts will rank immediately prior to the highest ranking Building Mortgage or Subsequent Mortgage.
To view table click here.
Prior Mortgage: mortgage registered prior to the Time that the First Lien Arose in respect of an improvement
Subsequent Mortgage: mortgage registered after the Time that the First Lien Arose in respect of an improvement.
Time that the First Lien Arose: the moment the first lienable work is performed.
Holdback Amounts = 10% of the value of the services or materials supplied required to be withheld from payment under the Construction Lien Act.
Building Mortgage: mortgage intended by the mortgagee to secure the financing of an improvement.
Practical Solutions For Completing the Sale
There will be significant delay involved in resolving a construction lien dispute in court. Part VII of the Act may be of assistance where the parties under a power of sale wish to complete the transaction within a shorter timeframe. The following highlights some of the provisions of Part VII of the Act that should be considered:
(a) Section 41 – Discharge of Lien: A preserved or perfected lien may be discharged by the lien claimant by (i) registering a release in the prescribed form on title to the property where the lien attaches to the property; or (ii) delivering a release in the prescribed form to the owner where the lien does not attach to the property. This provision will not, of course, be useful where the lien claimant is not in agreement.
(b) Section 44 – Payment Into Court: A claim for lien (and any related certificate of action) may be vacated by court order where any person brings a motion (without notice) and pays into court or posts security in an amount equal to the full amount claimed in respect of the lien and security for costs as calculated in this section. This will allow for completion of the sale, free and clear of the lien claim, prior to resolution of the matter in court. Should the court later resolve the matter in favour of the mortgagee, the monies paid into court would be returned to the party who posted the security.
(c) Section 45 – Declaration of Expired Lien: Sections 31 and 36 of the Act provide for the timeframe within which a lien must be preserved and perfected. If the lien has not been preserved or perfected as required under the Act, any person may bring a motion (without notice) with proof that the lien has not been preserved or perfected within the required timeframe (along with the supporting documents listed in the section) and the court shall declare that the lien has expired and order that the claim for lien be vacated from title to the property. Thereafter, the property may be sold to the purchaser free and clear of the lien claim.
(d) Section 46 – Order dismissing Action: Where a perfected lien has expired because the matter has not been set for trial within two years of the commencement of the action that perfected the lien, any person may bring a motion (without notice, except as to costs) and the court shall declare that the lien has expired and make an order dismissing the action and vacating any claim for lien and certificate of action. Thereafter, the property may be sold to the purchaser free and clear of the lien claim.
In addition to the above, the court has a general power, under Section 47 of the Act, upon motion to the court, to: (i) make an order discharging a lien; (ii) make an order vacating a claim for lien or certificate of action (or both); (iii) declare, where notice of a lien has been given, that the lien has expired or that it is no longer binding; or (iv) dismiss an action, upon any proper ground and subject to any terms and conditions that the court considers appropriate in the circumstances.
It should also be noted that under Subsection 78(10) of Part XI of the Act, a purchaser taking title to property from a mortgagee does so free and clear of the priority of the lien in respect of Holdback Amounts (as per Subsections 78(2) and 78(5)) where a bond or letter of credit, in the prescribed form, is registered on title to the property. The registration of such security takes the place of the priority otherwise created by Subsections 78(2) and 78(5) and the lien claimant’s right of action would then be against the security posted.