Many contractors assume that their work on leasehold improvements automatically gives them a right to lien the landlord’s interest as well as the tenant’s interest in the improved property. In many cases, however, the landlord’s interest in the leasehold premises that has been improved by the contractor’s work, cannot properly be the subject of a construction lien, even where that landlord has provided a “leasehold improvement allowance” absent facts that support a finding that the landlord is the statutory “Owner” as defined under the Construction Lien Act, R.S.O. 1990 c. C.30. (the “Act”).
Under many retail/commercial leases, the landlord has the power to pay liens and add the amount to rent. The presence of a lien on a leasehold interest can therefore be a strong incentive to facilitating early settlement. However, in cases where the lien claimant has done work for a commercial tenant who has abandoned the premises, the presence of a lien on the leasehold interest of the tenant will be unlikely to secure payment to the unpaid contractor. Unless the tenant can pursue the landlord as Owner under the Act due to its degree of involvement in the tenant’s improvements or unless the tenant has provided notice to the landlord under section 19 of the Act (which is rarely done) the lien claimant’s options as against an insolvent commercial tenant are likely limited.
There are only two ways to lien the landlord’s interest in circumstances where a contractor has done work on leasehold improvements. One way is to provide the landlord with notice up front before the work is done pursuant to section 19(1) of the Act. Another method is to argue before the Court that the landlord falls under the definition of “Owner” under the Act. Under section 19(1) of the Act, where the Owner is a tenant, the interest of the landlord will also be subject to the lien if: (a) the contractor gives the landlord written notice of the improvement before it is made; and (b) the landlord fails within fifteen (15) days of receipt of that notice, to provide notice to the contractor that the landlord assumes no responsibility for the improvement. The notice to be given pursuant to this provision has to be “sufficiently distinct and memorable” to allow a landlord to know when the fifteen (15) day period in which it would deny liability has begun. In this regard, the Courts have interpreted such events as the landlord attending meetings, reviewing plans or a simple awareness of the work being done as not being enough to constitute notice under this provision of the Act. In this regard, any notice must clearly signify the potential liability to the landlord.1
The definition of Owner, under the Act includes individuals other than the registered owner. The statutory definition of “Owner” under the Act is comprised of three essential elements: (i) that the owner has an interest in the premises; (ii) that the owner makes a request for the work (including requests that can be implied from all of the circumstances); and (iii) that the work be supplied on the credit or on behalf or with the privity or consent of or for the direct benefit of the Owner.2
In the decision of Lincoln Mechanical Contractors, a division of Lincoln Plumbing and Heating Ltd. v. Cardillo3 the defendant was the owner of a commercial plaza whose tenant was a numbered company operating as Premier Fitness (“Premier”). There were provisions in the lease agreement with respect to improvements that were to be made to the leased premises by each of RioCan, the landlord, and Premier, as tenant. RioCan was generally responsible for the work regarding the shell of the premises, and Premier was generally responsible for the interior work and the work required to make the premises ready for business. RioCan agreed to pay Premier a leasehold improvement allowance of approximately $2.2 million to subsidize the cost of renovations. Premier hired the plaintiff mechanical contractors, Lincoln, to do HVAC work but did not pay them in full. Lincoln filed a claim for lien against both the landlord and the tenant claiming that it was owed $271,000 and claiming that RioCan was an Owner as defined in the Act. The plaintiff further alleged that the landlord had held back approximately $234,000 of the leasehold improvement allowance funds and claimed that the balance of these funds would be impressed with a trust pursuant to section 7 of the Act and should have been supplied to the lien claimant’s outstanding account. The balance of the leasehold improvement allowance was paid by RioCan to Premier or set‐off against monies owed by Premier to RioCan.
The question before the Court was whether or not an implied request to do the work could be inferred on the part of the landlord from the totality of the circumstances. The Court noted that so long as there was a reasonable possibility of such an inference being drawn, the plaintiff’s claim against the defendant RioCan would be allowed to proceed to trial. The Court also noted that the absence of direct dealings between the registered owner and the contractor is not necessarily fatal to the contractor’s assertion that the registered owner falls within the statutory definition of “owner” under the Act. The tenant argued that the lease provided that Premier would deliver to RioCan a contractor’s quote outlining the scope and cost of the work as well as a complete set of drawings and specifications. The work, drawings and specifications would then be subject to RioCan’s approval. The lease also set out conditions regarding the payment of the leasehold improvement allowance including the provision that the work would be completed to RioCan’s satisfaction. The tenant also relied on the fact that the leasehold improvement allowance of $2.2 million represented approximately one‐half of the cost of the improvements to be made by Premier. The landlord argued that there was no direct contract between the lien claimant and the landlord nor were there any direct dealings. There was also no evidence that RioCan had ever received a quotation, drawing or specification in respect of the HVAC contractor’s work nor was it ever asked to approve the HVAC contractor’s work. In addition, there was no evidence that any RioCan representative ever inspected its work. The Court also noted that the HVAC contractor was not even aware that RioCan was making payments to the tenant Premier until the end of the contract. The court ruled that even though the landlord had certain rights under its contract with the tenant, without evidence that the rights were exercised, this fact did not support an inference that a request was made by the landlord for the work to be done. The court determined that there was no significant element of direct dealing on the facts of the case to support a finding that the landlord was a statutory Owner under the Act. The court found that for the work to be done for RioCan’s benefit, there must be more than “the benefit to landlord as a reversioner and in the present case any benefit to RioCan would be the benefit as a reversioner”.
In Haas Homes Ltd. v. March Road Gym and Health Club Inc.4 the Court held that the landlord’s agreement to contribute to the cost of the tenant’s fit‐up was an insufficient ground for a finding that the landlord was the statutory Owner. The Court held that the request had to be accompanied by one or more other elements set out in the definition of Owner under the Act. In this case, the offer to lease set out the respective scope of the landlord’s and tenant’s work required to renovate the upper floor of the property as a health club. The lien claimant delivered a quotation to the tenant, and dealt with the tenant only for payment and claims for extras. During the performance of the contract, representatives of the landlord were on the scene in addition to those of the contractor and the tenant who was exercising a general supervisory function over all contractors engaged in the work, including the landlord’s own general contractor and subtrades as well as contractors for new tenants who are fitting‐up their own premises. The court determined that there was not sufficient proof of significant direct dealing between the landlord and the lien claimant to establish that improvements were made to the property with the landlord’s “privity and consent”.
In short, the fact that a landlord has a right to approve or oversee work under a lease will not render the landlord an owner where those rights are not exercised. Also, a landlord may provide its tenants with an improvement allowance without attracting liability as a statutory Owner under the Act provided that advances on the landlord improvement allowance were not designed to flow through to the contractor. In Lincoln, the contractor submitted its invoices to the tenant not the landlord. While the request does not have to be direct and may be inferred, the courts look at the substance and not merely the form of the relationship between the parties in determining whether or not a landlord falls within the statutory definition of Owner under the Act.
So what can an unpaid contractor do in the situation where the tenant in a commercial lease abandons the leased premises? The ultimate remedy of a lien claimant against a leasehold interest is to sell the remaining term for which the tenant holds the land and its interest in the building, if any. Such remedy is rarely exercised, however, and is of little appeal to the unpaid contractor. Another option might be to analyze the financing of tenant improvements as trust funds and use section 13 of the Construction Lien Act to hold anyone liable who might have diverted such funding for tenant improvements to other start‐up costs of the commercial tenant at that location.5 In reality the options of a contractor caught in this situation are limited. The easiest way for a contractor to ensure that the landlord is subject to the obligations imposed upon “Owners” under the Act is to provide notice to the landlord in accordance with section 19(1) of the Act, before the work starts. In the event that the landlord gives the contractor written notice within 15 days of receiving the notice from the contractor, that the landlord assumes no responsibility for the improvement to be made, the contractor can then decide whether or not it wants to proceed with the work for the tenant, without some additional form of security that it will get paid for the improvements to be made to the leased premises.