Basic Drywall Inc. v. 1539304 Ontario Inc., by its Interim Receiver and Receiver and Manager Smith Trustee & Receiver Inc., et al.

[Indexed as: Basic Drywall Inc. v. 1539304 Ontario Inc. (Receiver of)]

114 O.R. (3d) 219

2012 ONSC 6391

Ontario Superior Court of Justice,

Divisional Court,

Matlow, Aston and Swinton JJ.

December 19, 2012

Construction law -- Security -- Mortgagee vacating subcontractors' liens by posting security -- Property sold and proceeds of sale insufficient to pay off mortgages -- Amount available for distribution to lien [page220] claimants being amount of statutory holdback under s. 22 of Construction Lien Act and not total amount owed by owner to general contractor in relation to project -- Mortgagee having priority under s. 78(2) of Act over all but statutory holdback -- Construction Lien Act, R.S.O. 1990, c. C.30, ss. 22, 78(2).

ICICI provided mortgage financing for a construction project. It posted security to vacate subcontractors' liens and certificates of action. The property was ultimately sold, and the proceeds of sale were not sufficient to pay off the mortgages. Basic, a subcontractor which had registered a construction lien, asked the court to determine whether the amount available for distribution to lien claimants was the minimum amount owed by the owner to the general contractor in relation to the project or the amount of the statutory holdback required under s. 22 of the Construction Lien Act. The motion judge characterized the issue in dispute as a priority dispute between ICICI and Basic, and ruled in favour of ICICI, holding that Basic was only entitled to its proportionate share of the basic holdback. Basic appealed.

Held, the appeal should be dismissed.

The motion judge did not err in characterizing the issue as a priority dispute and in finding that under s. 78(2) of the Act, ICICI, as mortgagee, had priority over all but the 10 per cent holdback. Moreover, the specific language of s. 44(6) of the Act restricts an owner's "notice holdback" obligations from being extended to the posted security.

APPEAL from an order on a motion for determination of a question of law.

Cases referred to Reliance Electric Ltd. v. G.N.S. Contractors Inc. (1989), 1989 4110 (ON SC), 70 O.R. (2d) 364, [1989] O.J. No. 1815, 35 C.L.R. 310, 17 A.C.W.S. (3d) 859 (S.C.); Sloot Construction-Design Ltd. v. North Maple Mall Ltd., [1999] O.J. No. 4927, 50 C.L.R. (2d) 145, 93 A.C.W.S. (3d) 952 (S.C.J.); Urbacon Buildings Group Corp. v. Guelph (City), [2009] O.J. No. 5531, 91 C.L.R. (3d) 145 (S.C.J.)

Statutes referred to Construction Lien Act, R.S.O. 1990, c. C.30, ss. 1 [as am.], 21, 22, 23, 24, 44(6), Part XI [as am.], s. 78(2)

Rules and regulations referred to Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rule 21.01

John Lefurgey, for appellant. Neil Abbott and Natasha Carew, for respondent ICICI Bank.

ASTON J.: -- Overview

[1] This is an appeal from the order of Lococo J. dated April 3, 2012. The order arose from a motion under rule 21.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 on an agreed statement of facts. [page221]

[2] Basic Drywall Inc. ("Basic") sought "the determination of a question of law, namely, where a bank has posted security to vacate a lien, whether a subcontractor is only entitled to its proportionate share of basic holdback or whether it is entitled to a proportionate share of the money owed by the owner to the general contractor".

[3] The motion judge characterized the dispute between Basic and ICICI Bank Canada ("ICICI") as a priority dispute. He ruled in favour of the respondent bank. For the reasons which follow, the appeal is dismissed.

Factual Background

[4] Basic was a subcontractor on a substantial construction project for which building mortgage financing had been provided by ICICI. Basic was not paid and registered a construction lien on the owner's property for $312,859.74. Other liens were also registered. There is no dispute about the timeliness of Basic's lien or the quantum.

[5] ICICI had been providing mortgage financing for the construction project. It posted letters of credit to vacate the liens and certificates of action. The amount posted is in excess of any amount in dispute on this motion.

[6] At the time Basic's lien was registered, the owner of the property owed the general contractor a minimum of $276,072.42 for work which had been certified as complete but for which payment had not been made. This money was never paid to the general contractor.

[7] In the agreed statement of facts on this motion, Basic and ICICI agree that the amount for work certified as complete is $506,969.80 and that, based on this, the basic 10 per cent holdback under the Construction Lien Act, R.S.O. 1990, c. C.30 (the "Act") amounts to $50,696.98. Eventually, the owner was placed in receivership and the property was sold. When the property was sold, not enough money was obtained to pay off the mortgages.

The Issue

[8] The issue between Basic and ICICI as framed in the motion and on this appeal is whether the amount available for distribution to lien claimants is $50,696.98 or $276,072.42.

[9] At the heart of this dispute is s. 44(6) of the Construction Lien Act, which provides that when a lien is vacated by the posting of security "the lien ceases to attach to the premises and ceases to attach to the holdbacks and other amounts subject to a charge under s. 21 and becomes instead a charge upon the [page222] amount paid into court or security posted, and the owner or payer shall, in respect of the operations of sections 21, 23 and 24, be in the same position as if the lien had not been preserved or written notice of the lien had not been given".

Standard of Review

[10] We agree with counsel that the standard of review on this question of law is correctness.

Positions of the Parties

[11] The bank characterizes the issue as a priority dispute between a lender under a building mortgage and a lien claimant. It asserts that rights to the posted security are determined solely under Part XI of the Act"Priorities", and more particularly by s. 78(2), which reads as follows:

78(2) 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 . . . to the extent of any deficiency in the holdbacks required to be retained by the owner under Part IV[.]

[12] In his oral submissions, counsel for ICICI acknowledged that his interpretation of the Act would read in the word "only" so that s. 78(2) would effectively say "the liens arising from the improvement only have priority . . .".

[13] The plaintiff, a subcontractor with a valid lien, relies on s. 21 of the Act in asserting that its lien is a charge upon the entire amount owed by the owner to the contractor in relation to the improvement -- in this case, $276,072.42.

[14] Section 21 reads in part as follows:

26. The lien of a person is a charge upon the holdbacks required to be retained by Part IV, and . . . any additional amount owed in relation to the improvement by a payer to the contractor . . . whose contract . . . was in whole or in part performed by the supply of services or materials giving rise to the lien.

[15] The "additional amount owed in relation to the improvement by a payer to the contractor" in s. 21 is interconnected to s. 24 and often referred to as "notice hold- back". By written notice to an owner under s. 24, a lien claimant can extend its security to money over and above the basic 10 per cent holdback the owner is required to withhold under s. 22 of the Act. Section 24 reads, in part:

24(1) A payer may, without jeopardy, make payments on a contract . . . up to 90 per cent of the price of the services or materials that have been supplied under that contract . . . unless, prior to making payment, the payer has received written notice of a lien. [page223]

[16] In his oral submissions, counsel for Basic acknowledged that the agreed statement of facts does not include any reference to the owner having been put on written notice of any construction lien claim by a subcontractor.

[17] ICICI submits that the 10 per cent basic holdback in s. 22 (in this case, $50,696.98) represents the full extent of the security for lien claimants. It submits that at all material times, the interests of the owner, general contractor and lien claimants in the land (or the substituted security, through bonding off) are subject to its prior interest as mortgagee. ICICI submits there is no evidence of a "notice holdback" and therefore no extended security for the lien claimants beyond the basic 10 per cent holdback. Alternatively, even if the lien claimant had claims against the owner for an amount in excess of the basic 10 per cent holdback (by virtue of notice of its claim for lien under s. 24 of the Act), ICICI submits that s. 24 only provides additional holdback obligations for a "payer". Section 1 of the Act defines "payer" as "the owner, contractor or subcontractor who is liable to pay for the materials or services supplied to an improvement under a contract or subcontract". This statutory definition does not include ICICI as mortgagee.

[18] The motion judge characterized the issue as a priority dispute between the parties over the posted security. Basic submits that this is a mischaracterization of the dispute, which amounts to an error in law.

[19] Part XI of the Act, which includes s. 78(2), deals with priority disputes. Counsel for Basic concedes that if the issue before the court is properly characterized as a priority dispute, s. 78(2) governs the outcome and its security is limited to the 10 per cent holdback of $50,696.98. However, Basic contends this case is not about a priority dispute because of the simple fact that ICICI cannot assert any claim to the posted security. The posted security does not secure ICICI's mortgage. It only secures the valid claims of the lien claimants.

[20] The issue to be decided according to the notice of motion and agreed statement of facts is whether the amount available for distribution to the construction lien claimants is $50,696.98 or $276,072.42. Basic contends that if this is not a "priority dispute", s. 78(2) of the Act is not relevant to the determination of that issue.

Analysis

[21] When a lender or other person posts security to vacate liens pursuant to s. 44(6) of the Act, the security is simply a substitute for the land. The posting of security cannot enlarge the [page224] rights of a lien claimant. See, for example, Reliance Electric Ltd. v. G.N.S. Contractors Inc. (1989), 1989 4110 (ON SC), 70 O.R. (2d) 364, [1989] O.J. No. 1815 (S.C.), at paras. 2-5. The posted bond does not become security for the full amount claimed as owing by the lien claimant, but only for the lien itself -- that portion of the full amount which an owner (or a contractor) was required to hold back. Heeney J. succinctly summed it up in Sloot Construction-Design Ltd. v. North Maple Mall Ltd., [1999] O.J. No. 4927, 50 C.L.R. (2d) 145 (S.C.J.), at para. 42:

Security posted under s. 44 simply stands in the place of the land, and can be looked to to satisfy liens as defined and limited by the provisions of the Act. Posting security does not enlarge the rights of the lienholders and give them a right of recovery that they never had against the land itself.

[22] The fact which distinguishes this case from all prior precedents cited to us is that the owner's holdback obligation in this case is not necessarily limited to the basic 10 per cent basic holdback. It owed much more than that to the contractor and never made payment to the contractor. Under s. 24 of the Act, lien claimants can look to this additional unpaid amount as further security for their liens by giving written notice to the owner.

[23] Once an owner has notice of the claim for lien, the lien claimant has security against the owner's interest in the land to the full extent of the amount the owner, as payer, owes to the general contractor. See, for example, Urbacon Buildings Group Corp. v. Guelph (City), [2009] O.J. No. 5531, 91 C.L.R. (3d) 145 (S.C.J.), at para. 26.

[24] It is unnecessary to examine whether the owner in this case had actual notice of Basic's lien, or that of any of the other lien claimants. The owner did not pay the contractor the $276,072.42 it owed at the time Basic's lien was registered. Under s. 21 of the Act, the lien attaches to that full amount in the hands of the owner. There is no time limit in the Act for giving written notice of a lien to an owner, so any notice before actual payment would suffice to create security against the full unpaid amount vis-à-vis the owner. However, it is important to keep in mind that s. 24 only governs the obligations of an owner as a "payer". To extend that obligation to a mortgagee would effectively enlarge the statutory definition of "payer".

[25] Posting security to vacate construction liens cannot enlarge the security of the lien claimant. Neither should it shrink or diminish that security, unless there is a provision in the Act which clearly leads to that result. ICICI asserts that s. 78(2) is just such a provision.

[26] It is true the posted security does not secure ICICI's mortgage. On the other hand, ICICI has an interest in that [page225] security because whatever surplus there is after payment of secured lien claims is either refunded, in the case of a payment into court, or does not have to be paid, in the case of a bond or letter of credit. This is the assumption underlying the motion judge's characterization of the issue as a priority dispute.

[27] Sections 44(6) and 78(2) are harmonious. Section 44(6) removes the lien claimant's security against the owner's unpaid amount by its very terms. The subsection specifically provides that when the security is posted the lien "ceases to attach to the holdbacks and other amounts subject to a charge under s. 21" (emphasis added). The "other amounts subject to a charge under s. 21" are the amounts in excess of the 10 per cent holdback for which "the payer has received written notice", the so-called notice holdback.

[28] More importantly, s. 44(6) also specifies that the owner "shall be in the same position as if the lien had not been preserved or written notice of the lien had not been given" (emphasis added). Before liens are discharged by the process of posting security, a notice holdback requires the owner, as a "payer", to withhold money from the contractor in addition to the 10 per cent holdback. However, in this case posting security removes "notice holdbacks" as security for lien claimants by the specific language of s. 44(6).

[29] The motion judge did not err in characterizing the issue as a priority dispute and finding that under s. 78(2) of the Act, ICICI, as mortgagee, has priority over all but the 10 per cent holdback of $50,696.98. Moreover, the specific language of s. 44(6) restricts an owner's "notice holdback" obligation from being extended to the posted security.

Conclusion

[30] The appeal is therefore dismissed. If counsel are unable to agree upon costs, brief written submissions may be exchanged and submitted within the next 30 days through the Divisional Court office in Toronto.

Appeal dismissed.