SUPERIOR COURT OF JUSTICE - ONTARIO
COURT FILE NO.: CV-12-45051
MOTION HEARD: August 19, 2013 and September 6, 2013
Parties
RE: J.B. Aluminium Products Limited c.o.b. J.B. Aluminum Products Ltd. (Plaintiff) v. CL Commercial Inc., 2207054 Ontario Inc. (“220”), Aracelis Holdings Inc. (“Aracelis”), Continental Investment Group Ltd. (“Continental”), Gedasa Investments Inc. (“Gedasa”), Giuseppe Correale, Lina Correale and Rosa Lecce (Defendants);
BEFORE: Master C. Wiebe;
COUNSEL:
Greg Hemsworth for 220, Aracelis, Continental, Gedasa, Giuseppe Correale, Lina Correale and Rosa Lecce (the “Mortgagees”);
Fernando Souza for the lien claimants, Extreme Electrical Services Limited (“Extreme”) and E-M Air Systems Inc. (“E-M Air”);
Damon Stoddard for the lien claimant, J.B. Aluminum Products Limited (“J.B. Aluminum”);
Rob Moubarak for the lien claimant, Tony Battista Paving Inc. (“Battista”);
Adam Wainstock for lien claimant, 2164705 Ontario Inc. (“216”).
REASONS FOR DECISION
[1] The Mortgagees bring this motion pursuant to section 44(2) and section 78 of the Construction Lien Act (“the Act”) to have the five claims for lien registered in relation to the subject improvement vacated from title upon the posting by the Mortgagees of what they allege is reasonable alternative security to what is required by section 44(1) of the Act. The subject improvement is a commercial strip mall that was recently declared to be a 26 unit condominium. Counsel for the Mortgagees advised the court, and it was not disputed, that 19 of these units have been sold with an average sale price of about $340,000 per unit (total of $6,484,274.50), that 2 of the units have been sold conditional upon financing, and that the remaining 5 units have not been sold.
[2] There are presently 3 mortgages on title to all of the units in the following amounts: a first mortgage to Aracelis, Continental, Gedasa, the Correales and Lecce in the amount of $6 million, the first $2 million of which, according to Mr. Hemsworth, was for the purchase of the property and the remainder was for the construction; a second mortgage to 220 in the amount of $750,000; and a third mortgage to 220 in the amount of $530,000. Whether and to what extent these last two mortgages were building mortgages was not made clear. The first mortgage is in default. The first mortgagee has obtained a judgment of possession and has initiated power of sale proceedings. Interest and other charges are accumulating quickly on these mortgages. Mr. Hemsworth advised that the interest alone was about $60,000 per month. As of the date of the Notice of Sale, there appears to have been in excess of $8 million owing by the owner/developer under these three mortgages.
[3] Several claims for lien were registered on title in 2012 and early 2013. The ones that remain on title to all of the units are the following five: J. B. Aluminium in the amount of $381,006 (total contract price: $432,790); 212 in the amount of $95,500.47 (total contract price: $95,500.47); Extreme in the amount of $145,166.28 (total contract price: 213,451.35); E-M Air in the amount of $120,884 (total contract price: $158,200); and Battista in the amount of $42,258.61 (total contract price: $42,258.61). The total of these claims for lien is $784,815.36, and the total amount of the contract prices for these lien claimants is $942,199.83. All raise claims for priority to the Mortgagees.
[4] In their motion material, the Mortgagees claimed that a reasonable amount of alternative security was security in the amount of 20% of the above noted total of the contract prices (namely $188,439.96), as the lien claimants have no reasonable prospect of recovering more than the deficiencies in the basic 10% holdbacks for their respective contracts (as all contracted directly with the owner/develop, CL Commercial Inc.) and as the proposed 20% security on the total contract prices is what the Mortgagees could alternatively post with the Land Registrar in the form of a financial guarantee bond under the Act section 78(10) to secure the lien claimants’ claim for priority to the deficiencies in the holdbacks.
[5] The motion came originally before me on August 19, 2013. At this time Mr. Hemsworth advised that the Mortgagees had decided to propose that, in addition to the above noted security, the said claims for lien would remain on the title to the 5 unsold units until further order of the court, with the above noted $188,439.96 cash security being used to vacate the claims for lien from only the 21 sold units in order to facilitate the closing of those sales. Their argument was that this would give the 5 lien claimants more than sufficient security for any further priority claims they could prove. The argument was that, based on its present apparent market value of between $300,000 to $340,000 per unit, the 5 unsold units would give the lien claimants security of over twice the amount of their claims for lien (namely between $1,500,000 and $1,700,000) in addition to the above noted $188,439.96 of cash security.
[6] The lien claimants did not have sufficient time to get instructions at that time, and the motion was adjourned to September 6, 2013.
[7] At the return of the motion, Mr. Hemsworth advised that the Mortgagees were contemplating, as a “Plan B,” using the section 78(10) financial guarantee bond if they were unsuccessful in their present motion. Whether this could be done before the present closing dates for the sales (stated to be October 7, 2013), Mr. Hemsworth advised, was very much up in the air, as all of the purchasers would have to agree and the bonds obtained.
[8] At this time, the lien claimants stated that they agree that the land must be sold in order to pay down the mortgage debt and the accumulating interest charges and to secure the claims for lien. They acknowledged that the mortgage debt and interest had potential priority to their claims. They also stated that they agree with the $188,439.96 of proposed cash security from the sale of the 21 sold units for their holdback priority claims.
[9] They, however, argued for different security for their other priority claims. Messrs. Sousa and Wainstock argued that the Mortgagees should be required under section 44 to post 100% of the amount of the claims for lien by way of cash paid proportionally from the sale proceeds for each of the 26 units. They argued for $20,000 from the sale proceeds of each of the 21 sold units and $30,000 from the future sale proceeds of each of the 5 unsold units. Combined with the $188,439.96, this would give the lien claimants eventual cash security of $758,439.96, namely close to the full amount of the 5 lien claims. Mr. Stoddard agreed with this proposal but advised that his client was prepared to accept half of the said amount for this additional security. None of lien claimants required the security for costs mandated by section 44(1).
[10] The lien claimants argued that there was not enough evidence to make any other order. They argued that they had real additional priority claims as the real estate agent commissions and the legal costs shown by the Mortgagees appear to have been incurred after the claims for lien were preserved and perfected. Furthermore, there was no evidence as to whether the advances made under the mortgages exceeded the value of the land at the time when the first lien arose, which, if so, would give the lien claimants a further priority claim in that amount under section 78(3). The lien claimants argued that, based on the evidence presented by the Mortgagees, there was also a real potential for equity in the land for their claims. Until their priority claims were proven, the lien claimants therefore argued that the security should be maximized.
[11] The lien claimants then seemed to argue that cash security was better than land security, although they acknowledged that by posting cash security under section 44 the Mortgagees would still be able to make the same claim for priority under section 78 of the Act to the cash security that they would to the land security; see Gilvesy Construction v. 810941 Ontario Ltd., (1994) 17 C.L. R. (2d), p.187. They then seemed to argue that cash security would have none of the inconvenience and expense of a land sale to satisfy a judgment.
[12] I reviewed these arguments, and in light of the urgency of the matter, convened a conference call with counsel on September 10, 2013 to hear further argument. At that time, I reached the conclusion that the Mortgagees proposal was the most reasonable in the circumstances, for the following reasons:
The Mortgagees’ proposal provides the lien claimants with cash and land security that is more than double the amounts of their claims, whereas the lien claimants’ proposals would provide cash security of less than the amounts of their claims. With the cash and land security proposed by the Mortgagees, the lien claimants would be fully secured for any priority claim they can prove. Furthermore, I am mindful that cash security is subject to the same priority claim of the Mortgagees as is the land security.
The Mortgagees’ proposal maximizes the reduction of the mortgage debt and the associated interest charges, thereby maximizing any residual equity claim the lien claimants may have. The lien claimants’ proposal would have more of the sale proceeds paid into court, thereby leaving more of the mortgage debt unpaid and subject to the interest charges. That is not in the interest of the lien claimants.
Furthermore, leaving the 5 claims for lien on the titles to the 5 unsold units would also give the lien claimants the potential to recover greater residual equity in the event of a rise in value of the units. This can all be sorted out later by court order when those units are sold.
Finally, should insufficient steps be taken by the Mortgagees to realize the value of the 5 unsold units, the lien claimants can make the appropriate application to the court for appropriate remedies, including the remedy of a trustee under section 68 of the Act.
[13] Therefore, I ordered on September 10, 2013 that the said claims for lien were to be vacated from the title to the 21 sold units upon the Mortgagees posting with the Accountant of the Ontario Superior Court of Justice cash or bond security in the amount of $188,439.96, and that the said claims for lien were to remain on the title to the 5 unsold units until further court order. I instructed Mr. Hemsworth to prepare the appropriate order and submit it to me for signature after getting all counsel to agree to the form and content of same. I advised that written reasons would follow, which they now have.
[14] If the parties are unable to agree on costs of this motion, brief written submissions of no more than two pages may be served and filed by the Mortgagees by September 23, 2013, and by the lien claimants by September 30, 2013. The Mortgagees may file a brief reply by October 3, 2013.
[15] If costs must be addressed and given the urgency of the matter, I am prepared to sign an order that deals entirely with the substance of the motion other than costs as soon as possible while reserving the issue of costs to a separate order.
MASTER C. WIEBE
DATE: September 16, 2013