Legal Blog

Priority (2)

Some people never learn. Payment into court is a means by which construction financing and payments are allowed to flow down the construction ladder. They do not, and should not, suddenly make the payor liable to pay more money than would have been due had the money or security not been paid into court. The latest case to test this proposition is Basic Drywall inc. v. 1539304 Ontario Inc., a 2012 decision of the Ontario Superior Court of Justice.

Mortgage

A mortgagee paid money into court to vacate the liens of subs on the project. The owner was placed into receivership, the property was sold, and the sale proceeds were insufficient to fully pay the mortgagee and the subs.

The subs claimed that the mortgagee had to pay to the subs the amount that the owner owed to the general. Since the amount paid into court was less than that amount, the subs would get everything paid into court. The mortgagee submitted that it had to pay only the statutory holdback that the owner had been required to hold back from the general, not the amount that the owner owed to the general.

The mortgagee based its submission on section 78(2) of the Construction Lien Act, which states that construction liens have priority to the extent of the deficiency in the holdbacks required of the owner under Part IV of the Act.

The subs then argued that the mortgagee, by paying money into court, lost the priority that it otherwise would have had under section 78(2). The judge dealt with this submission, giving it the weight that it deserved, as follows: “The Plaintiff’s position does not make commercial sense, since the result would be to create a disincentive for funding lenders to pay money into court or post security in order to vacate liens, which would interfere with the continued flow of funding to building projects.”

The subs had also argued that holdback includes not only the 10% holdback, but also any money that a payor owes as at the date of the lien. The problem with that argument is that section 78(2) references Part IV of the Act (i.e. the basic 10% holdback) and the subs were referencing Part III of the Act to bring in the additional amount that the owner owed to the general.

Result

The subs received the 10% holdback; the mortgagee received everything else.