Commercial landlords: When are you deemed an “owner” under the PPCLA and liable for leasehold improvements contracted by your tenant?

In Xemex Contracting Inc v Koor Energy Ltd,^[1] the Alberta Court of King’s Bench evaluated whether an unpaid contractor retained by a tenant could maintain a builders’ lien against the landlord’s fee simple interest.

Under the Prompt Payment and Construction Act (PPCLA),^[2] an unpaid contractor may register a lien against an “owner” of an interest in the land. An “owner” is a person having an estate or interest in the land at whose express or implied request the work is performed, and on whose credit, behalf, consent, or for whose benefit the work is performed.

In other words, the test to determine whether a landlord is an “owner” under the PPCLA is twofold: First, active participation establishes whether a landlord, either expressly or implied, requested the work through active participation. Second, whether the landlord received a direct benefit.

This recent decision sheds light on this test and when a landlord who holds fee simple title, will be an “owner” under the PPCLA and subsequently vulnerable, through the filing of a valid lien, to paying for leasehold improvements the tenant contracted for.

Background

Under a commercial lease, Aspen Properties (Northland Place) Ltd. (Aspen) was the owner and Koor Energy Ltd. (Koor) was a tenant. The lease permitted Koor to renovate its space, of which Koor hired Xemex. Koor failed to pay Xemex for its work and vacated the space. Xemex was unsuccessful in collecting payment for its unpaid work from Koor and sought to register a builder’s lien against Aspen. There was no contract between Aspen and Xemex. However, Xemex argued that Aspen was an “owner” whose fee simple interest was liable for the unpaid work.

To be liable for a lien, a landlord must, firstly, expressly or impliedly request the work. Courts have held that this requires active participation, not merely knowledge that the work is ongoing.

In the original decision, the Court of King’s Bench (ABKB) found that Aspen’s participation “went beyond that of a mere knowledge of the project and became one of active participation.”^[3] Active participation was shown by (i) Aspen’s implicit request, through the leasehold improvement inducement, for Xemex to perform the renovation in accordance with its protocols and procedures and (ii)., Aspen’s monitoring of Xemex’s work constituted.^[4] However, the ABKB determined that the it was unclear whether Aspen obtained a direct benefit from Xemex’s work. The ABKB held that for a “direct benefit” to exist, “there must be some immediate benefit”^[5] that makes it clear that the construction is for the imputed owner. In this instance, Xemex’s work was “left in a state of disarray,” of which “Aspen’s residual interest in the demised premises was indirect, and of uncertain value.”^[6] Consequently, the ABKB found that Aspen was not an “owner,” and a lien could not be claimed against Aspen’s fee simple interest.

At the Court of Appeal,^[7] Xemex argued that:

1. Aspen received a direct benefit from its improvements, particularly considering the leasehold improvement inducements; and
2. In the alternative, Xemex completed the work with Aspen’s privity and consent.

The Court found that commercial leasehold improvement allowances are common, and that it is normal for the landlord to actively participate (to some extent) in the construction to ensure that construction does not unduly disrupt other tenants or jeopardize the integrity of the building. This normal participation by the landlord cannot result in a blanket assumption that leasehold improvements are for a landlord’s direct benefit.^[8]

Whether leasehold improvements accrued as a direct benefit depended on various factors, including (a) whether the improvement benefitted the landlord or tenant, or both,^[9] (b) the intent of the construction project,^[10] or (c) whether the landlord will acquire participation rent or shared gross revenues.^[11] In this case, the landlord did not receive a direct benefit because the lease stated that the landlord could require the tenant to remove improvements and trade fixtures, meaning that Xemex’s work was not necessarily going to be a benefit to the landlord. Further, the work in question was in complete disarray, incomplete, reflected an office layout what would be attractive to prospective tenants, and would make the landlord’s marketing more difficult. Thus, this specific work was not a direct benefit to the landlord.  

The Court upheld the ABKB’s judgement and dismissed the appeal. In so doing, it reaffirmed that because Aspen was not an “owner,” the contractor could not register a lien against its fee simple interest.

Takeaways

• When is there not likely a direct benefit to the landlord?
  • Mere legal ownership of leasehold improvements on expiry or termination of a lease will not constitute a direct benefit to the landlord for the purposes of the PPCLA.
  • Active participation by a landlord that demonstrates risk and responsibility as opposed to direct dealing will be viewed as part of a landlord’s responsibilities to ensure that a construction project does not unduly disrupt other tenants or jeopardize the integrity of the building structure.
  • A direct benefit is unlikely to be found where an owner (or landlord) has to spend money to either complete the improvements or retrofit the premises for suitable future use.
• When may there be a direct benefit to the landlord?
  • A direct benefit of a landlord could still be found in circumstances where the benefit to the landlord is not immediate (in the sense of crystallizing at the moment the work is done). Owners (or landlords) should be cautious conducting inspections, giving specific direction to a contractor, or approving construction plans that do not pertain to work that could impact the building itself.
  • Increased revenues obtained by landlords, either from the demised premises, or improvements of areas beyond those leased, may result in a finding of a direct benefit.