Silaschi et al. v. 1054473 Ontario Ltd. et al. [Indexed as: Silaschi v. 1054473 Ontario Ltd.]

48 O.R (3d) 313

[2000] O.J. No. 1399

No. C32518

Court of Appeal for Ontario

Carthy, Doherty and Feldman JJ.A.

April 20, 2000

Mortgages -- Priorities -- Vendor's lien -- Purchaser granting first mortgage to finance construction of home on vacant lot and granting vendor second mortgage as part payment of purchase price -- First mortgage having priority over vendor's lien for unpaid purchase price -- Vendor's lien would give way to first mortgage when first mortgage and second purchase money mortgages placed on title on closing.

Real property -- Vendor's lien -- Vendor's lien not "existing claim to land" that is released by vendor signing transfer or deed under s. 5 of Land Registration Reform Act -- Land Registration Reform Act, R.S.O. 1990, c. L.4, s. 5.

Sale of land -- Claims against proceeds of sale -- Priorities -- Vendor's lien -- Mortgage -- Purchaser granting first mortgage to finance construction of home on vacant lot and granting vendor second mortgage as part payment of purchase price -- First mortgage having priority over vendor's lien for unpaid purchase price -- Vendor's lien will give way to first mortgage when first mortgage and second purchase money mortgages placed on title on closing.

RS entered into an agreement to purchase a vacant lot from JS. To the knowledge of the parties, it was RS's plan to borrow money on a first mortgage loan from CD, to build a home on the lot and to sell it for a profit. The sale agreement provided that a down payment would be made on closing and the balance of the purchase price would be secured by a second mortgage. The transaction closed. CD was given a first registered mortgage for $110,000, of which $55,000 was advanced on closing. JS was given a second registered mortgage for $23,624.73. RS did not succeed in his plans for the property and it was sold to meet the demands of his creditors. CD and JS both claimed priority to the proceeds of sale. On an application to determine priority, Mossip J. held that JS had a vendor's lien and where, as was the case here, the first mortgagee has notice of the unpaid purchase price, the vendor's lien has priority to the first mortgage. CD appealed.

Held, the appeal should be allowed.

A vendor's lien is a type of equitable lien, which is a species of equitable charge arising in a diversity of situations by operation of law independent of possession. The vendor's lien is founded on the principle of equity that a purchaser who has obtained possession of property under a contract for payment of its value will not be allowed to keep it without payment. This "natural equity" of the vendor, however, may be rebutted. The purchaser may show that in the circumstances the vendor's lien should not be retained. The purchaser may show that the vendor's lien has been waived in whole or for some purposes; however, waiver cannot be inferred simply from the fact that the vendor took back a purchase money mortgage. In the present case, there was no equity favouring JS, the second mortgagee. His security was to stand in a second position to a first mortgage, the initial funds from which were intended to support construction of a house and, thus, to increase the equity available to protect both mortgagees.

The only possible interpretation was that the vendor's lien would not be enforced as between the mortgagees. Otherwise, their agreed priorities -- agreed to by order of registration -- would be reversed and the business sense of the transaction would be reversed. As a general conclusion, and to provide some certainty to the practice of conveyancing, it will invariably be the case that a vendor's lien will give way to a first mortgage when the first mortgage and the second purchase money mortgage are placed on title on closing. The parties are together, they are proceeding in concert, and their intentions as to priority are indelibly engraved on the transaction.

Although, in light of the above result, it was not necessary to deal with the argument that the vendor's lien was lost by operation of s. 5 of the Land Registration Reform Act, this argument would not have succeeded. A vendor's lien is not an "existing claim to land" that is released by the vendor signing a transfer or deed. It is part of the consideration which the purchaser gives in place of payment and should not be diminished by reading into the transfer document a deemed proviso.

APPEAL from a judgment of Mossip J. (1998), 20 R.P.R. (3d) 320 (Gen. Div.) declaring a vendor's lien to have priority over a registered first mortgage.

Cases referred to Boulton v. Gillespie (1860), 8 Gr. 223; Capital Finance Co. Ltd. v. Stokes, [1969] 1 Ch. 261 (C.A.); Central Mortgage and Housing Corp. v. Co-operative College Residences Inc. (1974), 1974 (ON SC), 3 O.R. (2d) 142, 44 D.L.R. (3d) 662 (H.C.J.), affd (1975), 1975 (ON CA), 13 O.R. (2d) 394, 71 D.L.R. (3d) 183 (C.A.); Derry & Tomken Business Centre Inc. v. Canadian Imperial Bank of Commerce (1999), 1999 (ON CA), 116 O.A.C. 304 (C.A.); Freeborn v. Goodman, 1969 (SCC), [1969] S.C.R. 923, 6 D.L.R. (3d) 384, revg 1967 (ON CA), [1968] 1 O.R. 105, 65 D.L.R. (2d) 545, revg 1967 (ON SC), [1967] 1 O.R. 454, 61 D.L.R. (2d) 200 (H.C.J.); Galt v. Erie and Niagara Railroad Co., [1869] Ch. 637; Gordon v. Hipwell, 1952 (BC CA), [1952] 3 D.L.R. 173, 5 W.W.R. (N.S.) 433 (B.C.C.A.), affg 1951 (BC SC), [1951] 2 D.L.R. 733 (B.C.S.C.); Lang v. McMillan, 1958 (ON SC), [1958] O.W.N. 341, 13 D.L.R. (2d) 778 (H.C.J.) Statutes referred to Conveyancing and Law of Property Act, R.S.O. 1990, c. C.34 Land Registration Reform Act, R.S.O. 1990, c. L.4, s. 5 (am. 1992, c. 32, s. 17) Authorities referred to Halbury's Laws of England, Vol. 28, 4th ed. reissue (London: Butterworths, 1997)

Ross Murray and Ellie Choi, for appellant. Tim McGowan, for respondent, Joseph Silaschi and 737253 Ontario Ltd. Jonathan F. Lancaster and Craig R. Carter, for intervenor, CBAO.

The judgment of the court was delivered by

CARTHY J.A.:

[1] This is an appeal from a judgment of Mossip J. declaring that a vendor's lien for the unpaid purchase price of land has priority over a first mortgage registered against the land on closing of the sale. The decision created a sufficient stir among real estate practitioners that the Canadian Bar Association -- Ontario sought, and was granted, leave to intervene to support the appellant.

[2] The intervenor moved to introduce new evidence on the appeal, largely solicitors' affidavits directed to describing the impact of the decision upon conveyancing practice. I would admit that evidence and at the same time observe that its value is minimal. As understandable as the expressed concerns may be, the court must declare the rights of the parties to the litigation and conveyancing practices must adjust accordingly.

[3] The facts are straightforward and for simplicity in narrating them I will ignore the numbered companies and identify the parties as individuals. Joseph Silaschi owned a number of vacant lots and Richard Sharpe wished to purchase one, borrow money on a first mortgage from Carl DeGroot, build a home on the lot, and then sell it at a profit. The sale agreement provided that a down payment would be made on closing and the balance of the sale price, which turned out to be $23,624.73, would be secured by a second mortgage. DeGroot was given a first mortgage for $110,000 upon which he advanced $55,000 on closing. Sharpe did not succeed in his commercial venture and there was a sale of the property to meet the demands of creditors. The proceeds were insufficient to repay both DeGroot and Silaschi and thus this priority contest. Silaschi asserted that in addition to his mortgage security he had a vendor's lien for the unpaid purchase price which took priority over DeGroot's first mortgage.

[4] In her reasons for judgment, found at (1998), 20 R.P.R. (3d) 320, Mossip J. relies upon a series of authorities supporting the proposition that a vendor's lien is not waived by the mere act of taking other security. She concludes that where, as here, the first mortgagee has notice of the unpaid purchase price, his security stands behind the vendor's lien.

[5] However, none of the cases cited deal with a situation where a first and second mortgage are registered on closing and all parties are dealing with a common purpose. DeGroot was putting forward construction financing and clearly wanted his money out first. Silaschi was equally clear in deferring to DeGroot, at least to the extent of the advance. Then, after the fact, a vendor's lien claim is asserted against the first mortgage to turn the transaction on its head and create a business transaction that no one could have intended or would have entered on those terms.

[6] The authorities Mossip J. cites in support of her conclusion by and large illustrate sensible applications of the equitable claim to a vendor's lien. For instance, in Lang v. McMillan, 1958 (ON SC), [1958] O.W.N. 341 13 D.L.R. (2d) 778 (H.C.J.), the taking of a mortgage back did not affect the priority of the vendor's lien against an execution creditor. In Galt v. Erie and Niagara Railroad Co., [1869] Ch. 637, there was a mortgage back and the vendor's lien was held to protect the vendor against pre-existing rights of the railway company.

[7] The vendor's lien finds its origin prior to the 19th century when English common law did not permit execution against land. Equity stepped in to provide a form of relief to a vendor of property who had not received the full purchase price. This equitable lien was, in effect, a remedy to permit the vendor to sell the property to satisfy the sale price. In 1838, reform legislation was enacted enabling land to be sold under execution, introducing another application of the vendor's lien -- to protect the vendor against competing execution creditors.

[8] Halsbury's Laws of England offers a succinct description of the vendor's lien as one of the equitable liens at Vol. 28, 4th ed. reissue (1997), para. 704, p. 354:

704. Equitable lien. An equitable lien is a species of equitable charge arising by operation of law independent of possession. Although the vendor's and the purchaser's equitable liens arise in circumstances where there is a contract, a contract is not necessary for the creation of an equitable lien. Since it arises in equity it is subject to all the usual conditions affecting equitable rights. It is not possible to state a general principle which accounts for the diversity of situations in which an equitable lien arises. Apart from equitable liens arising from contractual dealings in property, equitable liens have been based upon general considerations of justice or upon the principle that he who seeks the aid of equity in enforcing some claim must admit the equitable rights of others associated with the subject matter. The vendor's lien is founded on the principle of equity that he who has obtained possession of property under a contract for payment of its value will not be allowed to keep it without paym ent.

[9] The principle to be followed in giving application to a vendor's lien was fully expressed by Spragge V.-C. in Boulton v. Gillespie (1860), 8 Gr. 223 at p. 228:

Prima facie, certainly the lien exists, and it lies upon the grantee to rebut it. It is the vendor's "natural equity," as it has been termed, to have a lien on his estate until he has been paid for it; but the vendee may show, I apprehend, that under the circumstances of the purchase it is not equitable that such a lien should be retained, and if he can shew that the retention of such lien would defeat or even materially interfere with the known object of the purchase, so as to clog it with difficulties which it is reasonable to conclude that the parties could not have intended that the purchase should be encumbered with; then I think he rebuts the vendor's prima facie equity and establishes a state of things under which the retention of a lien would be the reverse of equitable. It is sometimes put -- that the parties indicate an intention that the lien should not be preserved -- sometimes that the intention to retain a lien is negatived; but inasmuch as the right to a lien does not grow out of contract or intention, but out of the natural equity of the vendor, it seems to follow that wherever it can be shewn to be more equitable that the purchaser should have his land free from the lien, than that the vendor should retain it, no lien for unpaid purchase money can exist, for the equity against it outweighs the equity in favour of it . . .

[10] This statement of principle was specifically endorsed in Freeborn v. Goodman, 1969 (SCC), [1969] S.C.R. 923 at pp. 938-39, 6 D.L.R. (3d) 384, in support of a conclusion by the majority of that court that the equities prevailed against enforcement of a vendor's lien. In that case, the assignee of a second mortgagee vendor sought to enforce a vendor's lien against purchasers of exclusive occupancy rights in an apartment building in circumstances where the vendor had also obtained as additional security, an agreement to retain possession of unsold apartment units pending their sale. The court found that there was no intention to retain the lien, that the agreement to retain possession of unsold suites as additional security stood in substitution for the vendor's lien and that in all the circumstances the equities stood against the recognition of a lien. This authority is not referred to by Mossip J., presumably because it was not presented in argument. Although the facts are different, particularly in that in the present case there is no additional substituted security, the principle expressed is apposite and offers direction as to the appropriate test to be applied in the present case.

[11] This court applied Freeborn in Central Mortgage and Housing Corp. v. Co-operative College Residences Inc. (1975), 1975 (ON CA), 13 O.R. (2d) 394, 44 D.L.R. (3d) 662. Howland J.A., speaking for the court, observed at p. 413:

It was contended by counsel for Revenue that even if Revenue's purchase money second mortgage was subsequent in priority to the mortgage of CMHC, Revenue, as an unpaid vendor still had a vendor's lien, and this lien had priority over the mortgage of CMHC. A vendor's lien can be waived, but it has to be shown that the parties intended that there should be no lien. This cannot be inferred simply from the fact that the vendor took back a purchase money mortgage: Lang v. McMillan, 1958 (ON SC), [1958] O.W.N. 341, 13 D.L.R. (2d) 778. The parties may have intended that the purchase money mortgage be additional security to the vendor's lien.

Howland J.A. concluded at p. 414:

In this case a series of postponement agreements was executed by Revenue, whereby Revenue released its interest in the mortgaged lands, so that the interest of CMHC under its mortgage would be prior to that of Revenue under its purchase money mortgage. It was a condition of the CMHC mortgage that it be a first mortgage and CMHC would not have advanced the moneys under its mortgage unless such advances were to have priority over Revenue's purchase money mortgage. The advances were made largely to Revenue to finance the construction of the building. The parties clearly intended that the purchase money mortgage should be in lieu of the vendor's lien. It would not be equitable for Revenue to retain a vendor's lien in the circumstances. There is therefore no validity in the contention that Revenue retained a vendor's lien which had priority over the mortgage of CMHC.

[12] The court was obviously moved in Central Mortgage by the successive postponements, not present in this case, but again we find the emphasis upon the equities arising from the circumstances.

[13] It is interesting that the Court of Appeal in England has ruled that the mere taking of a purchase money mortgage is evidence that the vendor obtained all he bargained for and thus has no vendor's lien: see Capital Finance Co. Ltd. v. Stokes, [1969] 1 Ch. 261 (C.A.) at p. 279. That court has come closer than we have to recognizing the modern reality of reliance upon security documents, title searches and priority of registration to evidence claims upon title and priorities.

[14] In the present case, there was more to the circumstances than simply the "additional security" of a mortgage. There was the fact that the security was to stand in second position to a first mortgage, the initial funds from which were intended to support construction of a house and thus increase the equity available to protect the mortgagees. This was not a contest between an unpaid vendor and an execution creditor, requiring a consideration of the position of each and weighing of equities. There is no equity favouring the second mortgagee. The only possible interpretation of the intention of the first and second mortgagees was that the vendor's lien was not to be enforced as between them. Otherwise, their agreed priorities (agreed to by order of registration) would be reversed and the business sense of the transaction would be skewed. The first mortgagee's money would be going into construction of the building with no initial equity beyond the down payment and the second mortgagee would be the immediate recipient of the benefit of the improvements. The first mortgagee knew the vendor was partially unpaid, but they both knew and intended that the second mortgagee was prepared to be paid in second priority.

[15] In these reasons, I have avoided the label "waiver" used in some of the authorities. As I see it, whether a vendor's lien is termed a charge, encumbrance or interest in land, when it comes to asserting it as an equitable right, the equities may, as here, stand in the way of enforcement. However, the lien may survive to provide priority over another interest presented in different circumstances and, thus, would not be waived for all purposes.

[16] As a general conclusion, and to provide some certainty to the practice of conveyancing, I would say that it must invariably be the case that a vendor's lien gives way to a first mortgage when the first and a second purchase money mortgage are placed on title on closing. The parties are together, they are proceeding in concert, and their intentions as to priority are indelibly engraved on the transaction.

[17] The appellant also argued that the vendor's lien is lost upon signing a transfer or deed because of the provisions of the Land Registration Reform Act, R.S.O. 1990, c. L.4 or the Conveyancing and Law of Property Act, R.S.O. 1990, c. C.34. In light of my reasons to this point it is not necessary to deal with this issue, but because it was fully argued I will briefly express my reasoning and conclusion.

[18] It is only necessary to deal with one statute because for the purposes of this application they are essentially the same. Section 5 of the Land Registration Reform Act provides that a transfer shall be deemed to include a release of "all the transferor's existing claims on the land".

[19] In Derry & Tomken Business Centre Inc. v. Canadian Imperial Bank of Commerce (1999), 1999 (ON CA), 116 O.A.C. 304, this court gave a broad construction to the words "existing claims on the land" and brought within it a right of first refusal, which is not understood to be an interest in land.

[20] In my view, the vendor's lien is not "an existing claim on the land" and does not fall within the scope of s. 5. It is not a claim on the land emanating from the vendor as an existing right at the time of signing an agreement to sell or closing the transaction. The vendor's lien is part of the consideration which the purchaser gives in place of payment. The consideration should not be diminished by reading into the transfer document a deemed proviso.

[21] This was the reasoning of the British Columbia Court of Appeal in Gordon v. Hipwell, 1952 (BC CA), [1952] 3 D.L.R. 173 at p. 191:

In the conveyance, made pursuant to the Short Form of Deeds Act, R.S.B.C. 1936, c. 262, from the respondent to Hipwell the former released all his claims, both at law or in equity, upon the lands in question. It is submitted that he thereby abandoned his vendor's lien. I think this provision has no application to a lien arising between the parties to the deed, by reason of the failure of the appellant to pay the purchase-price. The covenant was made in consideration of this payment, which the respondent thought had been made, and should not operate against the respondent, who certainly had no intention of giving up any rights which he had against the appellant for failure to pay the consideration. Under these circumstances I think there was no "manifest intention" that the lien should not exist.

[22] The final issue concerns the priority of the second advance. Silaschi indicated he was unwilling to postpone his mortgage to accommodate a second advance under the first mortgage. He did sign a document recognizing the first mortgage, that it was a construction mortgage and that it was advanced to the extent of $55,000 with contemplation of a further advance of $30,000 to complete construction. The intended purpose of that document is uncertain, but it was clearly not a postponement to the advance, as conceded by the appellant. If it induced the advance, then DeGroot must bear responsibility for not obtaining proper documentation. I therefore agree with Mossip J. that the priority of the first mortgage is limited to the amount of the first advance.

[23] In passing, it may be noted that if confirmation is needed of the intent of the parties at the time of closing, it is clearly found in this note signed by Silaschi confirming the priorities and, on one reading, challenging DeGroot to make another advance without a postponement.

[24] The appeal should therefore be allowed with costs, the judgment below set aside and judgment to issue in accordance with these reasons.

Appeal allowed.