Construction owner receivership: Clarifying construction lien holdback priority when there are multiple building mortgages

6 minute read
23 August 2022

It is common for construction project owners to finance projects through multiple mortgages, especially in times of rising construction costs. However, when an insolvency situation arises, holdback priority claims from contractors and subcontractors are particularly complex when there are multiple building mortgages involved. The Ontario Superior Court (Commercial List) provided new clarity in this regard in its April 29, 2022 decision in BCIMC Construction Fund Corp. et al. v 33 Yorkville Residences Inc et al., 2022 ONSC 2326.[i]

This case involved three lien claimants who provided services/materials to the owner of a condominium development project at 33 Yorkville Ave. in Toronto, Ontario. The condominium development project owner subsequently became insolvent and subject to receivership. The condominium property was sold pursuant to an order of the Court and a dispute arose as to how the lien claimants were to receive the distribution proceeds.

The lien claimants were unpaid as the condominium development project owner did not retain the required statutory holdback. Under section 22(1) of Ontario's Construction Act (the "Act"),[ii] a construction project owner must retain a 10 per cent holdback for each (potential) lien claimant:

Each payer upon a contract or subcontract under which a lien may arise shall retain a holdback equal to 10 per cent of the price of the services or materials as they are actually supplied under the contract or subcontract until all liens that may be claimed against the holdback have expired or been satisfied, discharged or otherwise provided for under this Act.

Without the necessary statutory holdback, there was a "deficiency" in the project owner's holdback fund—to the full extent of the 10 per cent for each lien claimant's supplied services or materials. Coupled with this deficiency, there were six mortgages on the condominium project property, two of which were building mortgages, as of the date of receivership.

The three lien claimants therefore brought a motion seeking interpretative clarity on section 78(2) of the Act regarding a determination of priority payment from the proceeds of the sale of the condominium project property to the extent of the deficiency in the project owner's holdback. Section 78(2) reads as follows:

Where a mortgagee takes a mortgage with the intention to secure the financing of an improvement, the liens arising from the improvement have priority over that mortgage, and any mortgage taken out to repay that mortgage, to the extent of any deficiency in the holdbacks required to be retained by the owner under Part IV, irrespective of when that mortgage, or the mortgage taken out to repay it, is registered.

The lien claimants submitted that "a mortgage"[iii] as referenced under section 78(2) shall be interpreted to mean that they be entitled to a 10 per cent priority payment over each building mortgage. In turn, this would mean that the lien claimants be entitled to a 20 per cent priority payment resulting from the two building mortgages.

The Court rejected this approach, determining that the lien claimants' interpretation of section 78(2) is not consistent with the context and purpose of the Act. More specifically, the purpose of section 78(2) is not to create a "contest"[iv] between each lien claimant and each building mortgagee as the lien claimants had submitted. Rather, the lien claimants took priority over the first registered mortgage on the construction property, and as such, the holdback deficiency was resolved once the priority took effect over the first registered mortgage.

The Court therefore found that the lien claimants' interpretation of section 78(2) unreasonably sought to expand the extent of any "deficiency" as set out under the Act. The Court's decision provides clarity that there is no broad principle positing that the Act be interpreted in favour of lien claimants. Rather, the Act's purpose is remedial in nature as a means for contractors and subcontractors alike to obtain payment for their supplied services or materials, while balancing the interests of competing parties, like mortgagees, in the construction process.

Most importantly, the Court's decision is a reminder to lien claimants that their statutory priority over building mortgages is capped at 10 per cent of the services or materials they specifically contribute to the construction project. In other words, when a construction project owner is in receivership, lien claimants are limited in priority to all building mortgages congruently, and not to each building mortgage separately.

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