Legal Blog

Leasehold

Generals apparently do not realise that a landlord’s land will not be subject to a general’s lien arising from a tenant’s failure to pay for leasehold improvements. The general has a right to lien against the tenant’s leasehold interest in the land, but not necessarily against the land itself. The lien against a leasehold interest is worthless if the lease goes into default and has no extrinsic value. Under the Construction Lien Act, the landlord may be liable for the general’s lien in the following circumstances:

1.   The landlord is an “owner” for purposes of the work (i.e. the work was done on the landlord’s credit or behalf or the work was done with the landlord’s privity or for its direct benefit).

2.   Under section 19(1) of the Act, the general has notified the landlord that the general is commencing the work and is looking to the landlord to be responsible for payment. The landlord has 15 days from the date of the notice to refuse responsibility for the improvement that the general is about to make on behalf of the tenant. If the landlord does not do so, it is liable; if the landlord does do so, the general either gets more security from the tenant or proceeds at its own risk.

We will not discuss the first possibility, save to suggest that it is very difficult to prove in a normal landlord-tenant situation. The case of 1276761 Ontario Ltd. v. 2748355 Canada Inc., a 2006 decision of the Ontario Divisional Court is instructive regarding the second possibility.

Notice 

The regulations to the Act provide that if the notice is sent in the prescribed form 2, then the notice is adequate. The form requires the following: the name of the landlord and the general, the address of the work, a description of the work, a description of the contract (including the contract price), and a warning that sets out the terms of section 19(1).

The problem is that no one uses the form, probably because generals are unaware that it exists. Accordingly, a court usually has to try to determine whether the correspondence between the general and the landlord, or other indicia of notice, constitutes sufficient notice under section 19(1).

Some judges have decided that there may be no formal notice, but that other notice events are sufficient. Other judges have stated that there must be a sufficient express notice, not just some events that might lead to a landlord’s liability.

The notice in the case above simply stated, “(the general) will be working on your premises doing the leasehold improvements and Buildout of the (tenant’s) bar & grill.” In addition, however, the following notice events were present:

a)   details of the work were set out in the tenant’s lease;

b)   the landlord and the general met;

c)   the landlord gave to the general its manual relating to tenant’s work;

d)   the landlord reviewed and approved the plans; and

e)   the landlord was aware of the construction costs.

Not Enough 

The court held that notice events, to be relevant, have to occur before the work begins. After all, the purpose of the notice is to ensure that the landlord knows it could be liable. To have a subsequent dawning on the landlord that it might be liable is not sufficient.

The court also held, quoting a previous Divisional Court decision, that “the notice in any particular case envisages something ‘arresting in the sense of attention getting’ and that it must be ‘sufficiently distinct and memorable to allow the landlord to know when the 15 day period, within which he may deny liability, commences'”.

The court decided the general’s notice was insufficient to meet this test; the notice was not a fair warning of liability.

Moral 

In every case that a general (and that means anyone who is contracting directly with an owner, be it a true general contractor or, for example, an electrical subcontractor) enters into a contract, the general should conduct a title search – the disbursement for which is approximately $20.00 – to determine exactly who owns the lands. If the person with whom the general is contracting is not the owner, find out why the owner is not a party to the contract. If the owner will not be a party to the contract because it is the landlord, send the proper notice. If the landlord denies liability, get security from the tenant.