This article was originally published on Aug. 23, 2022 and has been updated on Jan. 9, 2023 to reflect the Court of Appeal's decision.
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. In dismissing the lien claimants' appeal, the Ontario Court of Appeal in BCIMC Construction Fund Corp. et al. v 33 Yorkville Residences Inc. et al., 2023 ONCA 1 has affirmed that lien claimants are entitled to priority only to the extent of any deficiency in the project owner's holdback, regardless of the number of registered mortgages on the property improved.
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"), 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.
Superior Court decision
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" 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" 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.
Court of Appeal decision
The lien claimants appealed the Superior Court's decision on jurisdictional and substantive grounds. The lien claimants argued they retained a right to appeal under section 193(c) of the Bankruptcy and Insolvency Act, which provides that an appeal is available where the property involved in a dispute exceeds in the value ten thousand dollars.
In the alternative, the lien claimants submitted that this case be granted leave. The Court of Appeal found it unnecessary to rule on whether the lien claimants had a right of appeal. Rather, the Court of Appeal simply granted the appeal in noting that the lien claimants' position raises a matter of statutory interpretation of "some importance".
The Court of Appeal affirmed that the correct standard of review to apply is correctness, to which the parties agreed. The Court of Appeal succinctly stated that the motion judge "correctly identified and applied the modern purposive and contextual approach to statutory interpretation". The motion judge applied the relevant analytical factors and properly reviewed the relevant judicial authority. As such, the Court of Appeal found no basis to overturn the motion judge's decision and dismissed the appeal.
The Court of Appeal's decision provides a stronger judicial 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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 Ibid at section 78(2).