Legal Blog

Ephemeral Lien

When is an otherwise valid lien not a lien? This question was answered in Winnen Construction Group Conditioning v. Oxford MRC Ltd., a 2002 decision of the construction lien Master of the Superior Court of Justice. We have previously warned against contractor complacency (see newsletter of March 1996). Construction liens do not necessarily give the security that many feel they give and are no substitute for good credit granting practices.

Convoluted Facts 

The landlord of a large mall wanted to increase its rental stream and, accordingly, persuaded a fast food tenant to build a stand alone building on the mall lands. As part of the agreement between the parties, the landlord had to provide specific work to ensure that there was a good site on which to build and services to the proposed building. The tenant would build the building and lease it from the landlord for 15 years. The landlord would own the land and the building upon the building’s completion and at the end of the lease would retain the building. The landlord agreed to pay the tenant a tenant’s allowance of $80 per foot, equivalent to approximately $380,000.

The tenant retained a general for a construction price of $1 million and the general constructed the building. The tenant subleased the premises to the actual operator of the restaurant.

The tenant suffered financial reversals and was unable to pay the general for its work. Consequently, the general registered a claim for lien for $379,000. Two subs also registered claims for lien.

The tenant was petitioned into bankruptcy and the trustee in bankruptcy disclaimed the lease under the Bankruptcy and Insolvency Act (the “BIA”). In essence, the disclaimer effectively terminated the lease.

In the short run, the landlord allowed the subtenant to pay the rent and, ultimately, the landlord re-leased the premises to another corporate entity that had taken over many of the tenant’s outlets.

Issues 

First, did the general have a valid lien against the landlord’s freehold interest in the land? If so, the landlord was liable to pay the general’s claim.

Second, if not, did the general have a valid lien against the tenant’s leasehold interest in the land? If so, the new tenant would have to pay the general’s claim or risk having the leasehold interest sold from under it.

Owner 

A lien claimant may register a claim for lien against the owner of the lands. An owner is defined under the Construction Lien Act (the “Act”) as any person “having an interest in a premises at whose request and,

(a) upon whose credit, or

(b) on whose behalf, or

(c) with whose privity or consent, or

(d) for whose direct benefit,

an improvement is made to the premises.”

Certainly, the tenant is an owner and the tenant’s leasehold interest can be liened. However, is the landlord, with whom the general never contracted, an owner for purposes of the lien or the Act?

Section 19(1) of the Act gives some guidance. It states: “Where the interest of the owner to which the lien attaches is leasehold, the interest of the landlord shall also be subject to the lien to the same extent as the interest of the owner if the contractor gives the landlord written notice of the improvement to be made, unless the landlord, within fifteen days of receiving the notice from the contractor, gives the contractor written notice that the landlord assumes no responsibility for the improvement to be made.”

In this case, the general never gave the appropriate notice, written or otherwise, to the landlord. Accordingly, the general had to argue that the landlord and the tenant were really joint venturers and that, accordingly, both the landlord and the tenant were the owners of the premises and that both had requested the work to be done.

The Master held that a benefit obtained by a landlord at the end of a lease is not a direct benefit, approval of plans is not consent, and granting a tenant’s allowance is not evidence of a landlord’s request for work to be done. Since the landlord never actually requested the general to do the work and since the general did not avail itself of the notice provisions under section 19(1) of the Act, the landlord was not an owner. Accordingly, the lien only bound the leasehold interest in the land and did not affect the landlord’s interest.

Disclaimer of lease 

Without something in the Act to protect the general, the trustee in bankruptcy’s disclaimer of the tenant’s lease effectively terminated the tenancy. Accordingly, the lien bound a leasehold interest that ceased to exist. A previously valid lien would have evaporated.

The Act does provide protection for a lien claimant. Under section 19(2) of the Act “no forfeiture of a lease to, or termination of a lease by, a landlord, except for non-payment of rent, deprives any person having a lien against the leasehold of the benefit of the person’s lien.” This section does not allow the landlord and tenant to terminate the lease, for issues other than non-payment of rent, and thereby prejudice a lien claimant.

If there is non-payment of rent, section 19(3) of the Act applies. In this situation, “the landlord shall give notice in writing of the intention to enforce forfeiture or terminate the lease and of the amount of the unpaid rent to each person who has registered a claim for lien against the premises.” The lien claimant then has a choice: pay the arrears of rent or lose the lien.

In the Winnen case, section 19(3) was inapplicable. There were never arrears of rent. Either the subtenant or the new tenant had paid the rent.

The only question was whether the trustee’s disclaimer fit within section 19(2). The Master held that it did not. That section deals with a situation in which the landlord was involved in actions that terminated the tenancy and thus prejudiced the lien claimant. In our situation, the trustee terminated the tenancy by its disclaimer under the BIA. The landlord just played the cards that the trustee and the BIA had dealt it.

Upshot  

The general’s lien bound nothing, not the owner’s interest and not the interest of the new tenant. The subs’ liens were dependent on the general’s lien and were similarly ineffectual.

Generals must ensure that they know the persons with whom they are dealing. If they are dealing with a tenant, they have to ensure that the owner of the land agrees to be bound or they have to obtain other security. A lien on leasehold land is often no lien at all because if the tenant cannot pay the general, the odds are good that the tenant cannot pay the landlord and that the leasehold interest will be of little value.

Subs should also enquire. Although they will have little say as to whether the landlord can be treated as an owner, they should at least satisfy themselves that the general is credit worthy.