Mortgages and Construction Liens

The Construction Lien Act (Ontario) (the Act) is a complex statute designed to provide financial protection to persons supplying services or materials to a construction project in Ontario. Its provisions interact considerably – and in many cases surprisingly – with the financial protection afforded to lenders under mortgage security.

Over view of Construction Lien Act

The Act affords several levels of protection to persons supplying services or materials to a construction project, two of which are relevant for lenders.  

The first is a construction lien, or charge, on the premises that have been improved. This lien arises when a lien claimant, who may be a contractor or subcontractor or materials supplier, first supplies services or materials to an improvement. The lien is for the amount owing to the particular lien claimant, including its subcontractors, but is limited to the value of such work performed to the date of the registration of the claim for lien.  

Generally speaking, the lien must be preserved by registering a claim for lien against title to the project before the end of the 45-day period following the substantial performance of the general construction contract, failing which, the lien expires. Again, generally speaking, the lien must be perfected by initiating an action to enforce the lien and registering a certificate of action against title to the project before the end of the 45-day period following the last day on which the lien could have been preserved, failing which, the lien expires. There are many further details applicable to the foregoing, but this is the general scheme.

Secondly, the Act requires that a cascading series of holdbacks be retained for the protection of subcontractors that do not have privity of contract with the party making the payment. The holdback is 10% of the price of services or materials supplied and must be maintained by each payor in the construction pyramid at the time that any payment is made. In addition to a charge on the premises that have been improved, lien claimants also have a charge on these holdbacks. The holdbacks are of two types: a basic holdback for the benefit of persons supplying services or materials before the substantial performance of the general construction contract, and a separate finishing holdback – also 10% – for the benefit of persons supplying services or materials after substantial performance but before total completion. Generally speaking, the holdbacks may be released 45 days after the substantial performance of the general construction contract or, in the case of finishing holdbacks, 45 days after the date the general construction contract is fully completed.  

Impact upon Mortgage Lenders

The lien and holdback provisions of the Act have a significant impact upon lending practices and procedures and can dramatically affect the priority of a lender’s mortgage.

Overall Priority Scheme

The overall priority scheme as between construction liens and mortgages is set out in section 78 of the Act. Under section 78(1), the liens arising from an improvement are stated to have priority over all mortgages affecting the owner’s interest in the premises except as provided in section 78. Thus, in the first instance, a construction lien will have priority over a mortgage unless an exception is specifically set out in section 78. Fortunately for lenders, there are a number of exceptions. Each has its own nuances and special features, however, so close attention must be paid.  

Building Mortgages

The first thing to consider is whether a mortgage constitutes a “building mortgage” for the purposes of the Act. Special priority rules apply under section 78(2) of the Act if the mortgage is a building mortgage, which is a mortgage taken by the lender with the intention to secure the financing of an improvement – essentially, a mortgage securing a construction loan. Whose intention is relevant? It is the intention of the lender, not the borrower, that is determinative. The lender’s intention regarding the use of the mortgage proceeds is usually set out in the commitment letter or loan agreement.  

If the mortgage is a building mortgage – and therefore directly tied to the construction project – the Act imposes a special priority regime. A building mortgage, together with any mortgage taken out to repay a building mortgage, is subordinate to the liens arising from an improvement to the extent of any deficiency in the holdbacks required to be retained by the owner under the Act, regardless of when the mortgage is registered. As a result, the lender under a building mortgage, and any mortgage taken out to repay a building mortgage, has to be concerned with the activities of the owner/borrower in effecting and maintaining holdbacks.  

This is one of the reasons why construction lenders are particularly vigilant regarding the borrower’s construction activities. Construction lenders need to be concerned not just with whether a lien has arisen or been registered, but with whether the proper holdbacks have been retained by the owner under the Act. As a result, the lender is usually directly involved in the holdback process itself, either deducting 10% of each advance at source and holding it in an unadvanced “notional holdback” pool, or requiring the borrower to pay 10% of each advance into a separate escrow account as security to fund holdback obligations. On large construction projects, the lender may also appoint a monitor to ensure that holdback obligations are being observed.  

Because the building mortgage priority scheme also applies to mortgages taken out to repay a building mortgage, lenders under takeout financing that will replace a construction loan must also be concerned about deficiencies in the owner’s holdback obligations. Usually, construction is complete or at least substantially complete by the time takeout financing is advanced. Thus, the takeout lender’s usual due diligence is to ensure that a certificate of substantial performance has been published in accordance with the requirements of the Act and that the time for filing liens has expired, or that sufficient collateral security is taken.

If there are no deficiencies in the owner’s holdback obligations, however, then building mortgage lenders and takeout lenders will not be subject to any loss of priority as a result of the building mortgage special priority rules.  

Prior Mortgages, Prior Advances

Other than the special rules relating to building mortgages, the rest of the priority scheme set out in section 78 of the Act depends upon priority of registration and timing of advances. These rules also apply to building mortgages. Section 78(3) deals with prior mortgages and prior advances – specifically, mortgages that were registered and advanced “prior to the time when the first lien arose in respect of an improvement”. It is important to understand this timing, as the first liens in respect of an improvement arise at the time that the first work commences or the first materials are provided. In particular, it is not necessary for the first lien to have arisen that a claim for lien be registered.  

Accordingly, to qualify as the holder of a prior mortgage under section 78(3) of the Act, lenders need to establish whether any work has commenced at, or materials have been supplied to, the property to be charged. On conventional mortgage loans, this is the reason for the delivery of borrowers’ certificates or statutory declarations concerning the absence of any construction activity at the property.  

If the lender’s mortgage qualifies as a prior mortgage under section 78(3) of the Act, then the mortgage has priority over all of the liens arising from the improvement to the extent of all advances made under that mortgage prior to the time when the first lien arose. There is an important exception to this, however. If the actual value of the property at the time when the first lien arose is less than the amount of the mortgage advances, then the lender’s priority is limited to the value of the property at the time when the first lien arose. In theory, this preserves for the benefit of lien claimants any enhancement to the property’s value effected by the lien claimants. In practice, it means that lenders, particularly construction lenders, must be careful in determining the actual value – which the courts have interpreted to mean the market value – of the property at the time that advances are first made and not to over-advance on a multiple-advance loan.

A graphic example of the trouble that the “actual value” cap can cause for lenders is illustrated by a 1998 Ontario case called Park Contractors Inc. v. Royal Bank of Canada. In that case, a lender advanced money on the security of an environmentally contaminated property. A contractor who conducted environmental remediation work after the registration and advance of funds under the mortgage was able to claim full priority over the mortgage. Although the mortgage was a prior mortgage under section 78(3) of the Act as it had been registered and funds advanced under it prior to the time when the first lien arose, the court determined that the property had no actual value at the time when the first lien arose.

Subsequent Mortgages

If the lender’s mortgage is not registered prior to the time when the first lien arose in respect of an improvement, then section 78(5) of the Act applies and the mortgage is treated exactly like a building mortgage: it will be subordinate to the liens arising from an improvement to the extent of any deficiency in the holdbacks required to be retained by the owner under the Act. Accordingly, lenders under subsequent mortgages, like the lenders under building mortgages, need to be concerned with the activities of the owner/ borrower in effecting and maintaining holdbacks, as discussed above.  

Subsequent Advances

In addition to the special priority rule that arises with respect to subsequent mortgages under section 78(5) in connection with any deficiencies in the owner’s holdbacks, the priority of advances under subsequent mortgages is governed by section 78(6) of the Act. The same rules apply to subsequent advances (after the time when the first lien arose) under prior mortgages pursuant to section 78(4) of the Act.  

Both sections 78(4) and 78(6) of the Act provide that a subsequent advance made after the time that the first lien arose will have priority over any liens arising from the improvement unless, at the time when the advance was made, there was a preserved or perfected lien against the property or the lender had received written notice of a lien. This is where the existence of registered claims for lien becomes important and this is why it is necessary for lenders to conduct a subsearch at the time of any subsequent advance.  

If there is no registered claim for lien disclosed by the subsearch (and the lender has not received written notice of a lien), then the subsequent advance can proceed with full priority over all lien claims (subject to the priority rules relating to deficiencies in the owner’s holdbacks discussed above). Conversely, however – and this is one of the most startling provisions of the Act for lenders – if a subsequent advance proceeds in the face of a registered claim for lien, the subsequent advance loses priority not just over the registered claim for lien, but also over all subsequently registered liens on that improvement (see the 1995 decision in Boehmers v. 794561 Ontario Inc.).

Dealing with Registered Liens

As a result of the rule that advancing in the face of a lien could lead to the lender losing priority to all subsequently registered liens, it is not sufficient for lenders to hold back the amount of the lien from the mortgage advance or to rely on an undertaking of the borrower to remove it. If the lender advances $2-million, for example, while a relatively insignificant lien of $1,000 remains registered against title to the mortgaged property, the lender will lose priority not only to the $1,000 lien but also to a $1-million lien registered after the advance is made. Any registered lien must be removed from title or the lender runs a significant and unnecessary risk. How can a registered lien be removed from title? Can such removal be effected quickly so as not to hold up a significant mortgage advance?  

Fortunately, the Act provides for an expeditious procedure whereby registered construction liens can be removed from title by posting security with the court. The procedure is outlined in section 44 of the Act and requires that security equal to the face value of the lien, together with the lesser of 25% of the lien claim and $50,000 for costs, be paid into court. The security can be in the form of a lien bond, letter of credit or certified cheque. An attendance in court is required, often by an articling student or young lawyer, but the motion can be brought without formal notice to the lien claimant and can be completed in a single day.  

Alternatively, it is possible for a registered lien claimant to postpone its lien to the holder of a mortgage in order to permit a mortgage advance to proceed. This procedure is contemplated by section 43 of the Act and, if a registered lien is postponed to a mortgage, the mortgage holder will enjoy priority not just over the postponed lien but over any unpreserved lien in respect of which no written notice has been received by the mortgage lender. In other words, provided no written notice of another lien has been received by the lender, the ability of subsequent-ranking lien claimants to establish priority over mortgage advances effected in the face of a lien will not apply. A postponement, however, has no effect on the priority that liens may enjoy as a result of any deficiencies in the owner’s holdbacks.  

Lenders sometimes also encounter claims for lien that were registered long ago, but never perfected by the subsequent registration of a certificate of action. These registrations can usually be deleted without having to obtain a court order or to post security. Depending on the circumstances, it is usually possible to have such registrations removed by registering an application to amend the register under section 75 of the Land Titles Act (Ontario) citing the fact that the lien has expired.  

Summary

In summary, a lender needs to be concerned with a number of different issues in ensuring that its mortgage will have priority over construction liens. Is the mortgage a “building mortgage” taken with the intention to secure the financing of an improvement? Or is it a subsequent mortgage, registered after the time when the first work commenced or materials were supplied to the property? If so, the lender needs to ensure that the borrower adheres to its holdback obligations under the Act. If the mortgage is registered and advanced prior to the time when the first work commenced or materials were supplied to the property, the lender has to ensure that the aggregate amount of its loan advances does not exceed the market value of the property at the time when the first lien arose. Finally, for all mortgage advances effected after the time when the first lien arose, the lender must ensure that there are no registered construction liens and that the lender has not received written notice of a lien.

Intercreditor Agreements

A borrower today will often look to a wide variety of capital sources in order to finance its various operational and strategic needs. For example, a borrower may have an operating lender, a senior secured lender, a subordinate secured lender and any number of unsecured lenders, each with their own expectations and requirements. An intercreditor agreement between two or more of such lenders helps to set out the relative rights and priorities between these lenders. Such an agreement is critical in helping to achieve certainty as to the lenders’ relative rights in the various circumstances that may arise over the course of the financing.  

It is difficult to say that there is a “market” form of intercreditor agreement. Many of the same issues are dealt with in different intercreditor agreements, but the rights accorded to each of the lenders vary significantly and are often heavily negotiated. The final terms of such an agreement depend on a number of factors, including the nature of the debt and security held by the relevant lenders, the borrower’s financial condition and the lenders’ preferred exit strategies. A number of the matters typically addressed in an intercreditor agreement are set out below.  

Matters Addressed in an Intercreditor Agreement

Many intercreditor agreements deal with the following matters:

  • establishment of relative priorities (payment subordination and/or security subordination);
  • if and when a lender is entitled to receive payments from the borrower (payment blockages);
  • if and when a lender can enforce its rights against the borrower (standstill periods); and 
  • access to collateral.

Priority

Establishing relative priorities between lenders (with respect to rights to payment and security, for example) is a key component of an intercreditor agreement.  

Payment subordination involves an agreement between lenders (whether secured or unsecured) as to the order in which payment will be made to the creditors on account of the obligations of each creditor. From a senior lender’s perspective, one should consider what will constitute the senior ranking obligations. For example, will the senior obligations include prepayment premiums, default interest, protective advances, hedging obligations? A senior lender wants the broadest possible definition, and the junior lender wants a narrower definition so that it understands the maximum amount that ranks in priority to it.  

Security subordination involves an agreement between secured lenders as to the priority of ranking with respect to the security for their debt. In some cases, lenders have security over different assets (i.e., the split collateral deal). For example, the working capital lenders may take a first lien on working capital assets (i.e., cash, receivables, inventory) and the enterprise value lenders may take a first lien on everything else (i.e., fixed assets, such as equipment and real estate). The key issues in split collateral deals involve access to collateral and are set out below.

Payment Blockages

In most cases, a senior lender will want to restrict the ability of the borrower to make payments to the junior lender and possibly to prohibit them altogether. Consequently, one of the most heavily negotiated provisions of the intercreditor agreement is that relating to payment blockages.  

Generally, restrictions on the payment of principal prior to the repayment in full of the senior debt are not controversial. Restrictions on the payment of interest, however, vary significantly between agreements. The more equity-like the terms of the subordinate debt, the more restrictive the provisions.  

Discussions centre around a number of issues, including:

  • what is the triggering event for the payment blockage (e.g., a senior covenant default, a senior monetary default, demand, insolvency); and
  • the frequency and length of payment blockages.

Where there is a senior monetary default, the payment blockage period is potentially infinite in duration based on the theory that, unless and until the senior lender is brought current, the junior lender should not be receiving any payments whatsoever. Where there is a senior covenant default, the length of a covenant blockage period is negotiated, and generally ranges from 120 to 180 days. Some junior lenders insist on a limit upon the aggregate term of covenant blockage periods in any one year, and request that catch-up payments by the borrower to the junior lender be permitted once the senior default is cured.

Standstill

Another common feature of an intercreditor agreement is a standstill provision. The purpose of such a provision is to give the senior lender control over any enforcement process by ensuring that the junior lender cannot enforce its security after a junior event of default until the senior lender has been given some time to determine how it wishes to proceed.  

Typically, the standstill period will be 180 to 365 days for mezzanine debt, and 90 to 180 days for second-lien debt (less if the collateral is particularly vulnerable to accelerated depreciation). If the junior debt is high-yield debt or non-arm’s-length debt, the prohibition against any enforcement action should apply at all times.

Junior lenders will try to negotiate the ability to take the following steps during the standstill period:

  • accelerate the debt and demand payment;
  • issue statutorily required notices;
  • undertake collateral reviews and appraisals; and
  • file notices of claim in insolvency proceedings.

Access to Collateral

In realization proceedings, a lender may need access to collateral held by other lenders in order to operate the business or to conduct a sale of its collateral. For example, a fixed asset lender may grant access to an operating lender to occupy the real property and use the fixed assets for a specified period of time in order to sell the remaining inventory.  

The lender granting access will typically want to consider what compensation, if any, it should receive for granting such access. Such lender will also want to ensure that the operating lender is responsible for the payment of taxes, utilities, insurance and other operating costs during the latter’s occupancy period, together with the obligation to repair any damage caused to the fixed assets during such occupancy period.  

While the foregoing are often common issues dealt with in many intercreditor agreements, each intercreditor agreement is unique and transaction specific. Understanding a lender’s key concerns and requirements in any given deal is key so that appropriate protections can be negotiated in any such agreement.

Preserving Priorities: The Curious Case of Fixtures

Imagine a common situation where, as a lender, you have registered a mortgage against title to a piece of real property owned by your borrower. There is a second mortgage registered on title, and you believe there is plenty of equity in the property. Your borrower did some renovations, but that didn’t particularly concern you, given that no construction liens were registered and the renovations improved the overall value of the real property.  

Now for a pop quiz: assuming there is no intercreditor agreement with the subordinate lender, can you lose priority with respect to the real property to the subordinate lender? What about another lender whose security interest is not registered on title? If your answer to both of these questions was a qualified “yes”, you’re at the top of the class. If that answer surprises you, you should read on.  

The answer is “yes” due to a combination of two factors: first, the treatment of fixtures at law as being a part of the real property; and second, the often confusing interplay between real property and personal property security law.  

As a rule of thumb, fixtures are items of personal property that have become “affixed” (hence the name) or attached to the real property, and are not otherwise simply resting on the land. For example, equipment that is bolted to a floor is a fixture, while a piece of equipment that is simply difficult to move because of its weight, but is not otherwise affixed to the property, is not. Historically, at law, once an item became a fixture, it was considered to be part of the real property and was no longer the personal property of its owner. The result would be that the owner of the real property would be the owner of the fixture, absent some agreement to the contrary.  

The treatment of fixtures at law poses an issue both for lenders that finance a tenant’s fixtures as if they were personal property and the lenders who may have security in the landlord’s interest in the real property. To the personal property lender, the fixture is part of its collateral, owned by its borrower, the acquisition of which is often financed with funds from the personal property lender. To the real property lender, on the other hand, the fixture is an improvement to the real property and belongs to the owner of the real property, and is therefore properly the subject of its mortgage. So what happens when lenders start enforcing their competing security? Somewhat surprisingly, the battle of competing security interests over fixtures is governed not by real property law, but by the Personal Property Security Act (Ontario) (the PPSA).

Under section 34 of the PPSA, if the security interest of the personal property lender attaches to the fixture before the fixture attaches to the lands, that security interest will have precedence over the claim of any other person who has an interest in the real property. If the security interest attaches to the fixture after the fixture attaches to the lands, then that security interest will have precedence over the claim of any other person who has a subsequently acquired interest in the real property, but will be subordinate to any person who had a registered interest in the real property at the time the security interest in the goods attached (and who had not consented to the security interest in the fixture or disclaimed an interest in the fixture).

To a real property lender, this may seem like heresy. After all, it is first in priority on title and the fixture is part of the real property. However, it may help to think of the fixture financing as similar in nature to a purchase money security interest. It is generally understood that where a lender’s funds are used to finance the acquisition of certain goods, the perfected security interest in those goods has super-priority over other prior security interests in the same collateral (provided the interest was perfected properly and in the manner required by the PPSA). Similarly, where a personal property lender is lending money to finance the acquisition of a particular fixture, it makes sense that it should take priority over the security interest of other prior security interests. Otherwise, it might result in a windfall to those lenders who were prior in time.

However, for the real property lender, this means that in certain circumstances, it is possible for the lender to lose priority over a portion of the real property (i.e., the fixture) even where its security might be first in time. This is true not just vis-à-vis the lender financing the fixture, but also, strangely, against subordinate lenders.

This very situation arose in a case called G.M.S. Securities and Appraisals Limited v. Rich-Wood Kitchens Limited and The National Trust Company. In that case, the borrower took out a first mortgage from a conventional real property lender to finance the acquisition and construction of its property. The borrower then had cabinets installed, which were unpaid for and secured by an attached security interest in favour of the cabinet financer. The borrower then took out a second mortgage on the real property, and the second mortgagee had no notice of the cabinet financer’s interest because the cabinet financer had not yet registered its financing statement under the PPSA or in the Land Registry Office. When everything collapsed, the parties were left trying to sort out their order of entitlement to the property and the cabinets.  

Under real property law, things should have proceeded simply enough: the first mortgagee should have come first, followed by the second mortgagee and then the cabinet financer. However, under the PPSA, the cabinet financer could claim ahead of the first mortgage as to just the cabinets (since its security interest attached before the cabinets were installed). The second mortgagee, however, who had no notice of the cabinet financer’s interest, would rank ahead of the cabinet financer when it came to the cabinets.  

As a result, even though the first mortgagee was ahead of the second mortgagee under real property law, when it came to the cabinets, it ranked behind the second mortgagee! In the result, the court awarded the sale proceeds to the first mortgagee, after deducting the full amount for the cabinets due to the cabinet financer, with the balance to the second mortgagee. However, the court also recognized that there was a circular priority problem and that any resolution would be at odds with one statute or the other.  

The above situation can become even more complicated where one of the mortgages secures a revolving credit facility. Section 34(2) of the PPSA provides that the fixture financer’s security interest will be subordinate to a subsequent purchaser for value without notice of the fixture financer’s interest and the interest of a creditor with a prior recorded security interest who makes subsequent advances without notice of the interest in the fixtures. To complicate matters even more, in order to be effective, notice of the security interest in the fixtures needs to be registered in the appropriate Land Registry Office, rather than under the PPSA.  

In order to protect lenders from situations such as the above, lawyers will often pursue an intercreditor agreement, which agreement will set out the relative priorities of the lenders in respect of various pieces of collateral. Admittedly, the intercreditor agreement is only an effective solution if the lenders are aware of each other, but prudent lenders should nonetheless endeavour to obtain intercreditor agreements once they become aware of other lenders on the scene.  

For the fixture financer, obtaining an intercreditor agreement or some form of consent from prior registered secured parties is even more important, as it will not want to rely on proving time of attachment of its security interest in order to protect the priority of its interest in the fixture. Without such an agreement or consent, the fixture financer whose security interest attaches after the goods become affixed to the real property will be subordinate in priority to the prior registered secured parties. The fixture financer should also make sure to register notice of its interest in the appropriate Land Registry Office; otherwise it will not be protected against subsequent advances under revolving credit facilities or subsequent purchasers of the property. A waiver or estoppel letter from the other secured creditors (to the extent obtainable) will also help it to establish its priority.

New Licensing Requirements for Retirement Homes in Ontario: A Lender’s Perspective

The operation of a retirement home in Ontario will soon require a licence in accordance with the Retirement Homes Act, 2010 (the Act) and its regulations. Part III of the Act sets out the licensing requirements for retirement homes. Effective as of July 1, 2012, no person will be allowed to operate a retirement home in Ontario unless that person is licensed under the Act to operate the specific home. This will similarly have an impact on lending to borrowers that operate and grant security interests in respect of retirement homes.  

What is a Retirement Home?

The Act defines a “retirement home” as a residential complex or the part of a residential complex, (a) that is occupied primarily by persons who are 65 years of age or older, (b) that is occupied or intended to be occupied by at least the prescribed number of persons who are not related to the operator of the home, and (c) where the operator of the home makes at least two care services available, directly or indirectly, to the residents. There are specific exceptions from the definition for premises or parts of premises that are governed by or funded under other statutes (as, for example, nursing homes/long-term care facilities governed by the Long- Term Care Homes Act, 2007 and public or private hospitals governed by the Public Hospitals Act and Private Hospitals Act, respectively).

Applying for the Licence and Transition

Effective July 1, 2012, when the licensing requirements come into force, section 33(2) of the Act provides that any existing retirement home operators that have applied to the Registrar for a licence to operate the retirement home on or before that day, are deemed to be licensed under the Act until the Registrar issues a licence or a decision to refuse to issue a licence to the operator is final. (We understand from the Retirement Homes Regulatory Authority (RHRA) that the application for a licence to operate a retirement home in Ontario will be available commencing April 15, 2012, and must be submitted to the RHRA no later than 5 p.m. on July 3, 2012.) From a lender’s perspective, it should make sure to obtain within its loan documentation, covenants from a retirement home operating borrower to promptly apply for and diligently pursue a licence under the Act as soon as required. In addition, the lender should contractually require the borrower to deliver to the lender copies of the licence application and any correspondence that the borrower receives from the RHRA. These notices will initially be relevant to the lender for the purposes of monitoring the borrower’s application for a licence and thereafter, can serve as an early warning system to the lender for any defaults or other issues that may jeopardize the borrower’s licence. The lender should also ensure that the borrower’s failure to apply for, obtain and maintain the licence in good standing, are considered events of default under the loan documents.  

Taking/Enforcing a Security Interest Regarding the Licence

Until such time as licences are issued to retirement home operators, the lender will not be in a position to take specific security over the borrower’s licence. However, a lender should ensure that the charging language in its existing security documents for property subsequently acquired by its borrower is broad enough to include the licence, when obtained. The further assurance provisions should also enable the lender to obtain from the borrower such other security or comfort in respect of the licence as the lender may require.

Although section 45 of the Act provides that no person may transfer any interest in a licence, including a beneficial interest, section 46 of the Act specifically deals with security interests granted in a licence. Pursuant to section 46(2) of the Act, the exercise by a person of a security interest in a licence or in property of a licensee that includes a licence does not result in a transfer of the licence, if within 15 days after exercising the interest, the person who exercises the interest gives the Registrar a written notice of the exercise of the interest and a written plan specifying how the person intends to manage the operations of the retirement home. Following the lender’s delivery of such notice, the Registrar shall determine the time period (which can be extended by the Registrar) for which the person may act as if the person were the licensee. 

Section 46(6) of the Act provides that the rights accorded to a person exercising a security interest also apply, with necessary modifications, to a receiver appointed with respect to a licence or property of a licensee that includes a licence, as if the receiver were a person exercising a security interest. In the event of bankruptcy, the appointment of a trustee in bankruptcy for a licensee does not result in a transfer of the licence, but the Act applies with necessary modifications to the trustee in bankruptcy as if it were the licensee.  

Lenders contemplating the enforcement of a security interest in the property of a licensee should be aware that pursuant to section 46(5) of the Act, during such time period(s) as the Registrar permits a person exercising a security interest to act as if the person were the licensee, the Act applies with necessary modifications to such person as if the person were the licensee.  

A lender should carefully consider the potential consequences of the foregoing provision and be careful not to unknowingly assume additional liabilities when going into possession of a retirement home. For example, if the borrower has been unable to meet its obligations to the lender, such borrower may also be in default of its obligations under the Act (and more particularly the licence).

It remains to be seen whether a person exercising a security interest in respect of a licence under the Act will be required, by virtue of section 46(5), to rectify or cure any pre-existing issues or defaults caused by the borrower in order to bring the licence into good standing. This will very likely influence the manner in which a lender chooses to enforce its security, depending on the specific circumstances of each case.

Should the lender’s enforcement strategy involve the potential closure of the retirement home, particular attention should be paid to section 49 of the Act. Prior to ceasing the operation of a retirement home, the licensee (and presumably a person exercising a security interest in the licence) must, among other things, provide a transition plan to the Registrar, deliver written notices to the residents and their substitute decisionmakers, and if requested by a resident, take reasonable steps to find such resident appropriate alternate accommodation.  

When lending to a borrower on the security of a retirement home, a lender should remain cognizant of the special provisions and time periods contained in the Act in respect of taking and enforcing such security interests.