Legal Blog

Priority (2) Appeal

You will recall in the Wellington case, we stated that the amount of the bond was irrelevant to the ultimate liability of the mortgagee under the Construction Lien Act. This point had been made – not for the first time and, it seems, not for the last time – in Basic Drywall Inc. v. 1539304 Ontario Inc., which we discussed in our September 2012 newsletter.

We stated at that time, “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.”

Subs did not like the decision they received on a motion and appealed the decision to the Ontario Divisional Court.

Précis

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 mortgagee submitted that it had to pay the subs 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 argued that the mortgagee, by paying money into court, lost the priority that it otherwise would have had under section 78(2). The motions 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.”

Result

The subs had also argued that holdback included not only the 10% holdback, but also any money that an owner owed as at the date of the lien. It was this argument that they used at the Divisional Court and it fared no better there than before the motions judge. 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, as payor, owed to the general. The Divisional Court held that it was not prepared to expand the statutory definition of a payor to a mortgagee and dismissed the appeal.