ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: CV-10-400298
DATE: June 1, 2012

B E T W E E N:

ROSEDALE KITCHENS INC.

J. Rosenberg, fax: 416-531-3587, for the plaintiff

Plaintiff

• and -

2114281 ONTARIO INC. and MERLIN RESTORATION LTD. and BANANA MOON INC.

M. Reid, Fax: 416-23-8485, for the defendant Banana Moon Inc.

Defendants

HEARD: May 15 and 16, 2012

Master C. Albert

[ 1 ] This action involves a priority dispute between Banana Moon Inc. (“Banana”), the mortgagee, and Rosedale Kitchens Inc. (“Rosedale”), the cabinetry contractor. Rosedale registered a construction lien on February 5, 2010 claiming $68,722.50. The property in question is a custom home at 159 Parkhurst Blvd., Toronto (“159”). Rosedale supplied materials and services to build and install custom cabinetry and millwork in the kitchen, bathrooms, family room and other areas of the house. Banana is the only remaining defendant, default judgment having been issued against co-defendants 2114281 Ontario Inc. (“211”) and Merlin Restoration Ltd. (“Merlin”) [1] .

[ 2 ] The issues are:

a) What was the contract price and the price for extras?

b) Was 211’s $25,000.00 cheque dated March 27, 2009 a deposit for 159 or was it in payment of earlier jobs involving the same contractor and the principal of defendants 211 and Merlin?

c) Did Rosedale preserve and prefect its lien in time?

d) Does Rosedale’s lien have priority over Banana’s mortgage?

Background

[ 3 ] Michael Donaldson is in the business of buying residential property and either renovating or tearing down and rebuilding custom homes for sale in Toronto’s Leaside neighbourhood. He carries on business in the name of Merlin and has had several different businesses that included “Merlin” in the name. Rosedale, a small father and son business, designs and supplies custom cabinetry and millwork. Shawn Pinarreta, the son, is the sole officer and director. At the time of the events in issue Shawn’s father, Ernesto Pinarreta, took the lead role in the company. By 2009 Rosedale and Mr. Donaldson had enjoyed a five or six year business relationship, with Mr. Donaldson referring clients to Rosedale and also contracting with Rosedale directly through one of his Merlin entitles.

[ 4 ] Mr. Donaldson used a previously incorporated entity, 211, to hold title to 159. It was 211’s only asset. At the relevant time Mr. Donaldson was sole officer and director of both 211 and Merlin. It is not in issue that 211 and Merlin are related and that both are owners within the meaning of the Construction Lien Act.

[ 5 ] What is clear from this trial is that Merlin was indeed a wizard, having seduced Rosedale into supplying custom cabinetry without paying for it. Innocent victims Rosedale and Banana will ultimately pay for Merlin’s deceitful magic.

Issue #1: The contract

[ 6 ] Mr. Donaldson and Ernesto Pinarreta met in March 2009 to discuss Mr. Donaldson’s new project. He was tearing down an old Leaside home and building a new custom home in its place. Mr. Donaldson prepared a budget for the project, filed as exhibit “A” to the affidavit of David Burstein, spouse of Banana’s principal, but the budget as presented in evidence is illegible.

[ 7 ] The parties had a somewhat informal relationship, having worked together on several projects prior to 159. It was not their practice to formalize their agreements in writing nor did either of them keep paper records in the form of a site log or diary.

[ 8 ] Ernesto Pinarreta acknowledged that Mr. Donaldson told him in 2009 that his budget for cabinetry was $37,000.00 but he replied to Mr. Donaldson that Rosedale could not supply everything that he wanted for that price.

[ 9 ] Mr. Donaldson produced a purchase order on the letterhead of Merlin Family Homes, signed by a representative of Merlin. Mr. Donaldson testified that he sent it to Rosedale in or around March 25, 2009 but he could not provide any corroborating evidence of delivery and Rosedale denies having received it. The purchase order is “To supply and install kitchen, 3 vanities, 2 wall units, 1 laundry room, 1 mudroom” for the price of $37,000.00 plus GST for a total of $38,850.00. The scope of work carried out by Rosedale went well beyond the description in the purchase order.

[ 10 ] On April 28, 2009 Rosedale emailed drawings and a quote to Mr. Donaldson, who admits receiving them. The Rosedale quote describes the proposed work in detail, itemizing the project with prices attached to each item and adding up the price to $44,000.00 plus GST for a total of $46,620.00. The items and prices quoted are as follows:

Amount

Room/Project

$24,285.00

Kitchen and island

$6,500.00

Family room wall unit

$1,400.00

Mudroom

$3,325.00

Master ensuite vanity

$1,250.00

Shared bath vanity

$2,950.00

Laundry room

$690.00

Basement vanity

$4,000.00

Installation

$44,000.00

Subtotal

$2,220.00

Tax GST 5%

$46,620.00

Total

[ 11 ] Mr. Donaldson acknowledges receiving the Rosedale quote but denies that he agreed to the price.

[ 12 ] I have some concerns about the reliability of Mr. Donaldson`s evidence. In December 2009 he published a certificate of substantial completion as both owner and contractor. Such certificates are published for the purpose of putting contractors on notice that the 45 day period within which to register a lien claim has begun. By signing as both owner (211) and contractor (Merlin) Mr. Donaldson created a fiction to undermine contractors’ lien rights. I find that this deliberate attempt by Mr. Donaldson to certify completion without the real contractor's consent was misleading and undermines his credibility.

[ 13 ] Also undermining his credibility is his evidence that 211 was incorporated to hold title to 159 when in fact 211 was incorporated two years before he acquired 159.

[ 14 ] On the issue of credibility I also have concerns about the reliability of Shawn Pinarreta’s evidence. On several occasions Shawn did not remember important information and did not recall conversations. He admitted at trial that several paragraphs in his affidavit evidence in chief were wrong. Shawn testified in cross-examination that the first contract price quoted to Mr. Donaldson was $46,620.00 on April 28, 2009 but in the statement of claim Rosedale pleads that the contract price was $37,000.00.

[ 15 ] In May, 2009 there were several communications between Mr. Donaldson and the Pinarretas on matters of design. By email dated May 7, 2009 Mr. Donaldson asked Rosedale to have Ernesto Pinarreta call him about final pricing. I conclude from that email that the parties had moved beyond Mr. Donaldson’s proposed budget of $37,000.00 and were working from Rosedale’s April 28, 2009 quote of $44,000.00.

[ 16 ] Mr. Donaldson instructed Rosedale to proceed. Rosedale manufactured the cabinetry and when construction at 159 had reached the appropriate stage of completion Rosedale installed the cabinetry and millwork on site.

[ 17 ] I find that Rosedale’s April 28, 2009 quote forms the offer and Mr. Donaldson’s authorization and instruction to Rosedale to proceed constitutes acceptance by 211 and Merlin, forming a binding contract between the parties for Rosedale to supply and install the itemized cabinetry and millwork for the price quoted by Rosedale.

[ 18 ] As is often the case in custom home construction, as the work progressed the builder made modifications and additions. Some of the modifications were of no consequence, such as design changes made before the product was manufactured that require a product that is of similar size, materials and complexity. However there were also changes and additions that increased the scope of work required by Rosedale.

[ 19 ] Rosedale claims $20,002.50 for extras. The contract did not give Mr. Donaldson carte blanche to add items without paying for them. I find that when Mr. Donaldson requested additional items from Rosedale he impliedly agreed to pay for them. The court must determine which items claimed as extras are minor modifications and which items are additions or substantial changes to the original scope of work.

[ 20 ] Rosedale never sent its list of itemized extras to Mr. Donaldson. The extras claimed include items listed in the main contract but for which Rosedale seeks to charge higher prices for various reasons. The extras claimed also include items that were not required by the main contract. Rosedale’s list of extras is reproduced below:

Amount

Room/Project

$1,665.00

Kitchen custom hood

$2,300.00

Family room wall unit: upgraded paint (add: $960.00); crown moulding (add: $1,340.00)

$4,100.00

Mudroom add closet: $3,500.00; add back to bench: $600.00

$50.00

Master ensuite vanity: typo

$1,025.00

Shared bath : add mirror and frame: $400.00; add another cabinet with drawers: $625.00

$1,450.00

Laundry upgrade paint: $490.00

$210.00

Basement vanity add thicker end panel

$8,250.00

Basement wall unit: build unit where none previously ordered

$19,050.00

Subtotal

$952.50

Tax GST 5%

$20,002.50

Total for extras claimed

[ 21 ] The onus rests with Rosedale to prove that Mr. Donaldson requested and Rosedale supplied extras, either for an agreed upon price or, if Rosedale cannot prove an actual agreement as to price, then it must prove that the price charged was reasonable. For items on the list that charge an increased price for what was already included in the main contract. I find that Rosedale has not met its burden of proving that Mr. Donaldson, as representative of 211 and Merlin, agreed to pay these increased amounts. The items disallowed as extras are:

a) Kitchen: custom hood ($1,665.00): disallowed because the design included a hood. Millwork surrounding the hood was included in the main contract price;

b) Family room ($960.00) and laundry room ($490.00) upgraded paint: disallowed because the contract did not specify the paint grade included in the price;

c) Mudroom: back to bench, disallowed because the contract does not specify the work to be done in this room for $1,400.00 and I draw the inference that the bench back was included in the contract price;

d) Master ensuite: vanity typo ($50.00), disallowed because Rosedale did not correct or explain its error, if it was an error, in a timely manner;

e) Basement: vanity thicker end panel ($210.00), disallowed because the main contract is not sufficiently specific to prove this was an extra.

[ 22 ] Mr. Donaldson requested and Rosdedale supplied several additional items. Based on the longstanding relationship and history of the parties over several projects I find that their arrangement regarding extras was informal. When Mr. Donaldson required something different or extra he would ask Ernesto Pinarreta to provide it and he would pay what was reasonably invoiced for it. Rosedale acknowledges that Mr. Donaldson did not pay promptly but eventually he would pay. I find that the parties agreed that Mr. Donaldson would pay a reasonable price for the additional items ordered.

[ 23 ] The additional items that Mr. Donaldson ordered and impliedly agreed to pay for are the family room crown moulding, the mudroom closet, the basement wall unit and a mirror, frame and extra cabinet in the shared bathroom. Rosedale is entitled to be paid to supply and install these additional items. The amounts charged for these items are added to the contract price. The amounts allowed and my reasons are as follows:

a) The family room crown moulding is allowed because the main contract specified the rooms where crown moulding was included in the price (kitchen and laundry), so that requesting and supplying crown moulding in the family room is clearly extra. I allow $1,340.00 for this extra, being the amount charged. There was no evidence that the price charged exceeds the value of the work. Allow: $1,340.00 .

b) The mudroom closet is allowed because the main contract did not include a closet in the mudroom and it is not in dispute that Rosedale was asked to build one and did so. I find that a reasonable price for this extra is $2,500.00. The price Rosedale charged was inflated. The price allowed takes into account the scale and complexity of the closet ordered and supplied. Allow: $2,500.00 .

c) The basement wall unit is allowed because the main contract did not include it. Mr Donaldson ordered it and Rosedale supplied it. Rosedale charged $8,250.00, which is $1,750.00 more than the price for the wall unit in the family room. I find that the two wall units are similar. The $8,250.00 price attached to the basement wall unit as an extra is an inflated the price. A reasonable price for the basement wall unit is $6,500.00, being the same price as the family room wall unit. Allow: $6,500.00 .

d) The mirror, frame and additional cabinet in the shared bath is allowed as an extra because it was not included in the scope of work under the main contract. Mr. Donaldson requested these items and Rosedale supplied them. A reasonable price for these items is $1,000.00. Allow: $1,000.00 .

e) Installation costs are allowed because Rosedale is entitled to charge to install additional items that are extras to the contract. A reasonable amount for the additional installation is half of the additional amount charged. Allow: $1,000.00 .

[ 24 ] In making findings as to the contract price I must have regard to the pleadings. Rosedale pleaded and Banana admitted in its statement of defence that the contract price was $37,000.00. During cross-examination of the plaintiff’s second witness Rosedale’s counsel asked the court for leave to amend the contract price pleaded in its statement of claim. For reasons delivered orally I refused the motion.

[ 25 ] If the pleadings bind the parties to a contract price of $37,000.00 then I find that the scope of work in a contract priced at $37,000.00 is the scope set out in Mr. Donaldson’s March 25, 2009 purchase order. It does not include all of the items required by Rosedale’s April 28, 2009 quote. On that basis any item that was supplied over and above the items required by the $37,000.00 purchase order would be allowed as extras. In addition to the four extras already explained and allowed at the price of $12,340.00, I find that if the contract price was $37,000.00 then Rosedale would also be entitled to payment for the additional scope of work required and supplied based on the April 28, 2009 quote that was not included in the March 25, 2009 purchase order. These additional items include additional cabinetry, crown mouldings and upgraded hardware. I find that a reasonable price for all of these additional extras is $7,000.00.

[ 26 ] In any event the contract price was very much a live issue at trial. It was addressed in the affidavit evidence in chief exchanged before trial and it was the subject of questions on cross-examination and argument at the end of trial. The court is not precluded from making findings as to the total contract price (base price plus extras) based on the evidence.

[ 27 ] For these reasons I find that the total contract price including extras and GST is $59,157.00 made up of $44,000.00 for the base contract plus $12,340.00 for extras (or $37,000 for the base contract price plus $19,340.00 for extras) plus GST of $2,817.00.

Issue #2: Did 211 pay a deposit of $25,000 for 159?

[ 28 ] On March 27, 2009 211 provided a cheque payable to “Rosedale Kitchen” for $25,000.00. On the “re” line on the face of the cheque the payor wrote “159 Parkhurst kitchen”. Ernesto Pinarreta testified that he told Mr. Donaldson that he required payment of receivables for previous jobs Rosedale had done for Mr. Donaldson before he would take on the 159 job. He claims that he accepted the $25,0000.00 cheque as payment for those other jobs and not as a deposit for the 159 project.

[ 29 ] There is no indication on the face of the check that it is from the Merlin Group of companies. The check was delivered at the time that the parties were negotiating the 159 contract. On its face the check refers to “re 159 Parkhurst Kitchen”. Both Ernesto and Shawn Pinarreta testified that Rosedale requires deposits 75 percent of the time. Their evidence was contradictory as to their practice with Mr. Donaldson. There was evidence that Rosedale did not demand a deposit from Mr. Donaldson because he referred business to Rosedale and he was a repeat customer. Rosedale had experienced delinquency in payment from Mr. Donaldson and his entities in the past. If that is the case then Rosedale would have been more likely to require a deposit.

[ 30 ] Ernesto testified that he did not take a deposit for the 159 job because he was careless. He claims that he took deposits from all other clients but not from Mr. Donaldson.

[ 31 ] Shawn Pinarreta testified that he applied the $25,000.00 cheque to an outstanding balance owing for a job at what he called the “Florence project”. He also testified that the amount that Mr. Donaldson owed on that project was $16,000.00. Rosedale submitted no documents in evidence to corroborate the existence or quantum of outstanding receivables from Mr. Donaldson for the Florence project or any other Merlin jobs. The balance for Florence, if outstanding, was $9,000.00 less than the amount of the cheque.

[ 32 ] Mr. Donaldson denies that payment of outstanding accounts on other projects was a precondition imposed by Rosedale and, as principal of 211 and Merlin, he did not authorize Rosedale to apply the $25,00.00 cheque to a project other than 159.

[ 33 ] Where a debtor allocates the debt to which funds paid are to be applied a creditor cannot allocate the funds elsewhere without the consent of the debtor. 211, the payor, did not agreed to permit Rosedale to allocate the funds to another job. To the contrary, Ernesto Pinarreta testified that he picked up the cheque from Mr. Donaldson’s mailbox and without even looking at anything other than the payee and the amount of the cheque he deposited it and gave a copy of the cheque to his son to make the appropriate accounting entries in the company’s books.

[ 34 ] I find that Rosedale and Mr. Donaldson did not agree to allocate the funds to a project other than 159. The $25,000.00 cheque from 211 to Rosedale was a deposit for the 159 job and must be applied towards payment of that account.

Issue #3: Did Rosedale preserve its lien in time?

[ 35 ] Section 31 of the Construction Lien Act provides that a lien expires unless it is preserved within 45 days after the date the work is completed or abandoned. If Rosedale performed its last work within 45 days prior to February 5, 2010 then its lien was preserved in time. Last work must be real work and not rectification of deficiencies or minor items done for the purpose of reviving expired lien rights.

[ 36 ] Banana’s position is that Rosedale completed its work in November 2009 before the real estate open house and the lien was not preserved in time. If that is so then Rosedale would have no lien rights and could not succeed on a claim for priority over Banana’s mortgage advance and its holdback obligations.

[ 37 ] On Tuesday, November 17, 2009, Mr. Donaldson sent an email to Rosedale asking for the delivery dates for outstanding items, listing as outstanding the kitchen desk drawer front, island end gables, island sink drawer fronts, family room fireplace surround, family room wall unit interior shelves, laundry shelves and counter, basement vanity counter, basement wall unit interior shelves, mudroom shelves and rods. In his email he referred to an Agent Open House on Friday, presumably November 20, 2009. That was followed by an email on November 20, 2009 at 4:08 p.m. from Mr. Donaldson to Ernesto Pinarreta asking about the “last items” and listing several of the same items: island gable panels, desk drawer, kitchen sink drawer fronts, microwave surround.

[ 38 ] By email on November 24, 209 Mr. Donaldson asked Rosedale about when “all the stuff” would be completed.

[ 39 ] David Burstein, spouse of Jasmina Battaglino who is the principal of Banana, testified that he attended at the property in November 2009 and that he remembers that the only items not completed in the kitchen were a side wall in the island and a drawer. He took no notes of his visit. I find that his evidence of completion is less than reliable. He did not attend to examine the state of completion for purposes of the Construction Lien Act. His observations were not as detailed as they would have been had he been examining the work for that purpose.

[ 40 ] Rosedale's evidence of the date of last supply was contradictory. According to the two Pinarreta's the work was completed on either January 3, 2010, the date specified in the claim for lien, or “late January, 2010” as specified by Ernesto Pinarreta under cross-examination, or February 3, 2010, the date specified by Ernesto Pinarreta and Shawn Pinarreta in their affidavits of evidence in chief. The February 3, 2010 date coincides with the date of an email about a foyer bench for the purchaser. I am satisfied that the witnesses’ confusion over the February 3, 2010 date arose because that is the date additional work was requested for the purchaser, not for 211 or Merlin. I find that Rosedale’s reference to that date was not a deliberate intention to mislead nor does it discredit Rosedale’s evidence as to registration of the lien within 45 days of the date of last work. Rather, it is evidence that Rosedale was still carrying out work at 159 on February 3, 2010. The legal consequences of whether the February 3, 2010 work refers to work ordered by the purchaser or by 211 or Merlin is a matter of interpretation by the court.

[ 41 ] Ernesto Pinarreta attended at a lawyer’s office in late January or early February 2010 and provided the information required to register the lien. Based on the lien claim that was registered, I draw the inference that he advised the lawyer that the last day of work was January 3, 2010. He maintained no site log or calendar showing what jobs he worked on each day. He testified at trial that the February 3, 2010 date in his affidavit must be wrong.

[ 42 ] By email dated January 26, 2010 Mr. Donaldson asked when Ernesto Pinarreta would be on site to finish a “couple of things”.

[ 43 ] Whether the date of last work was January 3, 2010, late January 2010 or February 3, 2010 makes no legal difference for purposes of timeliness of the lien, which was preserved and perfected in time based on any of these dates. The real issue is whether the last real work was actually in November 2009, as Banana alleges, in which case the lien would have expired prior to registration.

[ 44 ] The significance of Mr. Pinarreta’s poor memory is that it reflects on his credibility He described the work that he and his worker carried out over two days in January 2010 included building and installing a missing drawer in the kitchen, installing a panel on the kitchen island, cutting a hole for an electrical outlet, and filling in holes in the crown moulding and baseboards, the holes having been caused by other trades installing the floor and other items after Rosedale had installed its cabinetry and trim. He also described the last work as including filling in the gaps between the crown moulding and the ceiling trim all the way around the open concept family room and kitchen, and repairing scratches and chipped corners to the kitchen island. The last work also included building and installing what he described as wood mantles for the fireplaces in the family room and basement. What he referred to as “mantles” in oral evidence are actually what is commonly called the fireplace “surround”. I note that English is not Ernesto Pinarreta’s first language. Despite his poor memory of dates I am satisfied that his recollection of the actual work that he carried out is accurate. He is a man who works with his hands. He remembers his work not by dates but rather by the physical product of his work.

[ 45 ] Patrick Rocca, the real estate agent who listed the property for sale for Mr. Donaldson and who conducted the open house in November 2009, testified that “Parkhurst was pretty much finished in November 2009”. He observed that the fireplace surround had not yet been installed but admitted that it had not been listed in the Agreement of Purchase and Sale as an item to be completed. Under cross-examination he elaborated but overall I find that he was not very observant. He did not examine the house for the purpose of determining technical completion under the Construction Lien Act . I find that the schedule of items to be completed that was attached to the sale agreement was not an exhaustive list.

[ 46 ] The items described by Mr. Pinarreta as his last work may not have been items that jumped out at Mr. Rocca as incomplete items for the purpose of showing the house, nor as items he would list in an agreement of purchase and sale as items to be completed before the closing date. They nevertheless include items that a cabinet and millwork contractor must complete after all the other trades have finished their work. That does not reduce such items to mere touch-ups or rectification of deficiencies. The latter would be relevant to Rosedale`s completion date only if it pertained to rectifying Rosedale’s work. In this case Rosedale was rectifying deficiencies caused by other trades, including repainting areas where other trades had caused scratches and chipped paint.

[ 47 ] Based on the totality of the evidence and despite the general efforts of witnesses for both litigating parties to spin the facts in their favour, I find that last work was completed for purposes of the Construction Lien Act in January 2010, most likely January 3, 2010, when Ernesto Pinarreta and his worker attended for a total of 14 hours to complete items that were completion items and rectification of deficiencies caused by other trades.

[ 48 ] Substantial completion is defined in the Act at section 2:

2(3) For the purposes of this Act, a contract shall be deemed to be completed and services or materials shall be deemed to be last supplied to the improvement when the price of completion, correction of a known defect or last supply is not more than the lesser of,

(a) 1 per cent of the contract price; and

(b) $1,000.

[ 49 ] The price of materials and services supplied was $59,157.00. One percent of the contract price is $591.57. Therefore if the work performed in January 2010 had a value of more than $591.57 then the contract would not have been substantially complete prior to the January 2010 work and the 45 day period within which Rosedale must register its lien claim began upon its completion in January 2010.

[ 50 ] Rosedale values of its work based on an hourly rate of $65.00. Banana provided no evidence to the contrary as to reasonableness of the hourly rate. I find that this hourly rate is reasonable for skilled cabinet makers. Mr. Panarreta testified that he and his worker provided 14 hours of labour over two days to complete the work, including two hours per day of travel time. I find that the value of the work completed in January 2010, after deducting travel time is $650.00. The last work performed in January 2010 meets the threshold for completion under the Act.

[ 51 ] The extent of the work performed in January 2010 was more than one percent of the contract price. I find that Rosedale preserved its construction lien in time by registering the lien on February 5, 2010. Rosedale issued its statement of claim on April 1, 2010, in time to properly perfect its lien claim.

Issue #4: Priorities as between Rosedale and Banana

[ 52 ] The Banana mortgage was a building mortgage. The property sold in or about March 2010 for $1,530,000.00. To clear title so that the sale could be completed, Banana paid $85,903.13 into court [2] to vacate the Rosedale lien. The issue is the extent to which Rosedale is entitled to any of the funds held in court.

[ 53 ] Priorities as between a lien claimant and a mortgagee advancing building funds are set out in.section 78 of the Construction Lien Act :

78. (1) Except as provided in this section, the liens arising from an improvement have priority over all conveyances, mortgages or other agreements affecting the owner’s interest in the premises.

(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, and any mortgage taken out to repay that mortgage, to the extent of any deficiency in the holdbacks required to be retained by the owner under Part IV, irrespective of when that mortgage, or the mortgage taken out to repay it, is registered.

(3) Subject to subsection (2), and without limiting the effect of subsection (4), all conveyances, mortgages or other agreements affecting the owner’s interest in the premises that were registered prior to the time when the first lien arose in respect of an improvement have priority over the liens arising from the improvement to the extent of the lesser of,

(a) the actual value of the premises at the time when the first lien arose; and

(b) the total of all amounts that prior to that time were,

i) advanced in the case of a mortgage, and

ii) advanced or secured in the case of a conveyance or other agreement.

(4) Subject to subsection (2), a conveyance, mortgage or other agreement affecting the owner’s interest in the premises that was registered prior to the time when the first lien arose in respect of an improvement, has priority, in addition to the priority to which it is entitled under subsection (3), over the liens arising from the improvement, to the extent of any advance made in respect of that conveyance, mortgage or other agreement after the time when the first lien arose, unless,

(a) at the time when the advance was made, there was a preserved or perfected lien against the premises; or

(b) prior to the time when the advance was made, the person making the advance had received written notice of a lien.

[ 54 ] In summary, a lien claimant has priority over a mortgagee who provides financing to build the improvement to the extent of:

(a) any deficiency in holdback funds under Part IV of the Act; and

(b) advances made after the first lien was registered on title.

[ 55 ] These two statutory priority entitlements do not offset each other. They are cumulative. The Construction Lien Act is remedial legislation designed to protect contractors who supply materials and services that become affixed to the property. As such the legislation must be interpreted broadly.

(a) Holdback Funds

[ 56 ] As a building mortgagee, Banana is liable for any deficiency in holdback that 211 was required to retain under Part IV of the Construction Lien Act . An owner is required to retained holdback of 10 percent of the price of any materials and services as they are supplied (see: Construction Lien Act , section 22(1)). Rosedale completed the contract. In doing so Rosedale supplied materials and services priced at $59,157.00 so that the holdback that 211 was required but failed to retain was $5,915.70. Banana is liable to Rosedale for the $5,915.70 for the holdback deficiency.

(b) Mortgage advance

[ 57 ] Rocket Lumber registered a lien on title on November 15, 2009. That lien has since been discharged but it is significant if mortgage funds were advanced after that date. In issue is whether Banana advanced $25,000.00 of the mortgage funds on November 12, 2009, in which case the advance would not be available to the lien claimant, or on November 19, 2009, in which case Rosedale’s lien claim would have priority over Banana’s mortgagee to the extent of the $25,000.00 advanced.

[ 58 ] Banana admits that mortgage funds of $25,000.00 were advanced by cheque dated November 12, 2009 and certified on November 19, 2009. Banana brought a motion at the opening of trial to withdraw its admission that funds were advanced on November 19, 2009 and sought to replace it with an admission that the advance occurred on November 12, 2009. For reasons delivered orally on May 15, 2012 I refused leave under the Construction Lien Act (section 67) to bring the motion and opined that had leave been granted I would nevertheless have found that leave to withdraw the admission would not have been granted. In any event, for reasons explained herein, funds paid by cheque written on November 12, 2009 but not certified until November 19, 2009 are advanced for purposes of the Construction Lien Act on November 19, 2009.

[ 59 ] Whether mortgage funds have been advanced is a question of fact. Funds are advanced when control shifts from mortgagee to mortgagor (see: Canadian Comstock Co. v 186 king Street (London) Inc. 1964 170 (ON CA) , 1964 CarswellOnt 134 at paragraphs 30 and 40 and Aldom Drain & concrete Ltd. v G.L.Hill Construction Co. 1979 CarswellOnt 237 at paragraph 7 ).

[ 60 ] In the more recent case of Marsil Mechanical v A Reissing-Reissing Enterprise Ltd. 1996 CarswellOnt 301 at paragraph 14 the court considered the meaning of “advance” as that term is used in the Construction Lien Act . Justice Klowak concluded that it must mean when the owner receiving the advance acquires actual control over the money.

[ 61 ] Banana takes the position that Mr. Donaldson had complete control over the $25,000.00 advance on November 12, 2009 when Banana gave him the uncertified cheque. Banana argues that the fact that Mr. Donaldson did not have the cheque certified until November 19, 2009 does not diminish that control. Rosedale’s position is that Banana retained control over the funds until the cheque was certified on November 19, 2009 because at any time between November 12 and 19, 2009 Banana could have stopped payment or cleared out the account.

[ 62 ] I agree with Rosedale. Banana retained control over the funds until the cheque was certified. That is the reason why the recipient of a cheque certifies funds: to remove control over the funds from the payor. A clear illustration is the frequent experience in the Toronto construction lien court where owners and mortgagees mover before the court ex parte to vacate liens from title. As a precondition to receiving the signed court order security must be paid into court in certified funds. If funds were not certified a payor would have control over the funds and after registering the court order and vacating the lien from title the payor could stop payment on the uncertified cheque. This example shows that control remains with the payor until funds are certified. Banana retained control over the funds advanced under the mortgage until the cheque was certified on November 19, 2009. On that basis the advance did not occur until that date.

[ 63 ] Rosedale is entitled to a priority over Banana to the extent of the $5,915.70 holdback obligation plus the $25,000.00 mortgage advance of November 19, 2009 for a total of $30,915.70.

[ 64 ] Having proven entitlement to a lien for $34,157.00, calculated as $59,157.00 as the price of services and materials supplied (the contract plus extras and GST) less the $25,000 paid by way of deposit, I find that Rosedale is entitled to realize $30,915.70 of its $34,157.00 construction lien as a priority over the Banana mortgage.

Conclusion

[ 65 ] In conclusion I find that Rosedale has proven a construction lien in the amount of $34,157.00. I further find that Rosedale’s construction lien enjoys priority over Banana Moon’s building mortgage to the extent of $30,915.70. These findings will be set out in a report as required by the Construction Lien Act after costs are fixed.

[ 66 ] The trial is adjourned to June 5, 2012 for submissions on costs and the report.

Master C. Albert .

Released: June 1, 2012

COURT FILE NO.: CV-10-400298

DATE: June 1, 2012

ONTARIO SUPERIOR COURT OF JUSTICE B E T W E E N: ROSEDALE KITCHENS INC. plaintiff - and – 2114281 ONTARIO INC. and MERLIN RESTORATION LTD. [3] and BANANA MOON INC. defendants REASONS FOR JUDGMENT Master C. Albert

Released: June 1, 2012

[1] On March 4, 2011 Justice Conway struck defences and ordered default judgment for $69,040.22 plus $7,500.00 for costs of the motion for judgment and the action against defendants 2114281 Ontario Inc. and Merlin Restoration Ltd..

[2] $68,722.50 for the lien plus $17,180.63 for costs paid by certified funds to account 514464 by order of Master Albert dated March 9, 2010.

[3] Defences were struck and default judgment was ordered by Justice Conway on ____ against defendants 2114281 Ontario Inc. and Merlin Restoration Ltd.