COURT FILE NO.: 12-55254R
DATE: December 27th, 2013
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: X-L-AIR ENERGY SYSTEMS LTD, Plaintiff
AND:
HYDE PARK RESIDENCES INC, et. al. , Defendants
BEFORE: MASTER MACLEOD
COUNSEL: Heather L. Acton, for the Plaintiff
Robert J. De Toni, for the Defendants Hyde Park Residences Inc. and Stephen Hyde personally (“the Hyde Parties”)
Andrew McKenna for Computershare Trust Company of Canada as custodian for Frontenac Mortgage Investment Corp. (“Pillar”)
HEARD: November 5th, 2013 & November 29th, 2013
ENDORSEMENT
[1] I am the referee under a judgment of reference pursuant to the Construction Lien Act granted on February 1st, 2013. As set out in my endorsement of April 8th, 2013 there was an agreement between the parties to resolve the lien claims. It was contemplated that in the event of default under that agreement, the plaintiff could bring a motion for judgment.
[2] Default has occurred and a motion for judgment was brought. Counsel for the Hyde Parties resisted the motion but for the reasons that follow it must be granted. Counsel for Pillar, the first mortgagee, also appeared to make submissions. While Pillar took no position on judgment against the defendants it did lay claim to trust funds held by counsel for the Plaintiff. Thus there were two intertwined motions which proceeded on different days.
Background
[3] By way of background, the defendants were the developers of a project in Richmond, Ontario known as Hyde Park Richmond. It was intended that this development proceed in three phases. The first phase which has been completed and occupied consisted of 92 townhouses and a communal waterplant that was to serve the entire development. The second phase was to include a three storey building with 35 residential units (referred to as “Apartment A”) and a five storey building with 105 units (referred to as “Immanuel House”) along with recreational facilities and commercial space. A third phase was to be built later and would have included upwards of 100 additional apartments.
[4] Hyde Park Richmond was conceived as a life lease development. That is the purchasers would acquire a lease to occupy the units for their lifetime. Though there are also monthly occupancy fees, each purchaser pays the entire life lease up front on closing. There are 91 such leases registered on title representing the purchasers of Phase 1 who are now in occupation.
[5] Financial problems arose in Phase II. Because there were a number of trades unpaid, liens totaling almost $7 million were registered against the property and work on the project came to a halt. The agreement presented to the court on April 8th was designed to permit work to continue. The terms of that agreement included the following:
a. The first mortgagee (Pillar) would advance $5 million towards the project.
b. The Hyde parties were to arrange the balance of the funding necessary to complete the project within 9 months of execution of the agreement.
c. The sum of $4.355 million (less a deduction for the mortgagee’s legal fees) was to be paid to counsel for the plaintiff to be held in trust.
d. Out of the advance $2 million would be paid pro-rata to each of the lien claimants and a second charge would be registered against the property to secure the unpaid balance of the liens which would be approximately $4.737 million.
e. The balance of the advance held in trust plus certain advances to be paid by the Hyde parties would be used to fund additional work on the project. Essentially all additional work would be prepaid by the Hyde parties and held in trust by counsel for the plaintiff pending payment certification.
f. Consent to judgment for the balance of the original lien claims was signed by the Hyde parties to be held in escrow and used in the event of default.
[6] The Hyde parties were unable to come up with the full amount of financing required to fund the project and they defaulted in making the advance payments. In an effort to avoid default the parties extended the times and agreed to pay some trades in advance of payment certification. On May 23, 2013 however notice of default was delivered.
Entitlement to Judgment
[7] There really is no issue about the entitlement of the lien claimants to judgment. By virtue of the agreement, the Hyde parties gave up their rights to challenge the lien claims. The lien claimants agreed to take partial payment, to defer the balance of their claims for the time being, to lift the liens in exchange for a second mortgage and to return to work on the basis that funds to pay them for that additional work would be deposited in trust in advance of performance. In the event of default, the lien claimants were to be entitled to judgment and to enforce their remedies.
[8] There is no evidence that the lien claimants caused the Hyde parties to default. Certainly once work was halted it made it impossible to draw further funds but it was the inability of the defendant to advance the funds when required that caused the work to halt. The deal was clear. All further work on the project was to be prepaid.
[9] On the evidence before me the agreement was unequivocal. Amongst its terms the defendant had admitted the validity of the lien claims, promised to pay them and secured the balance against the land by means of a collateral charge in place of the registered liens. The lien claimants had in return agreed to hold off on enforcement providing the developer could obtain sufficient funding to complete the project and to prepay for all further work. Once the funds stopped flowing, the lien claimants were entitled to leave the job and to enforce their pre-existing liens by signing judgment.
Entitlement to the Remaining Trust Funds
[10] The position of the first mortgagee is interesting. Pillar was not a signatory to the agreement but was very much involved in the negotiations. Counsel for the first mortgagee was kept apprised of the state of the negotiations and furnished with a draft of the agreement. Thus Pillar was fully aware that if the Hyde parties could not fund completion of the project, the settlement would fall apart and the lien claimants would be entitled to enforce the judgment.
[11] Pillar does not contest the right of the lien claimants to judgment. What it seeks is the return of the funds held in trust by Rasmussen Starr Ruddy, LLP. Pillar’s argument is that those funds were earmarked to pay for work packages that are not now proceeding. It also argues that to permit the lien claimants to realize against borrowed funds defeats its priority claim as first mortgagee. It is of course true that if those funds are released to the lien claimants the amount owing on the collateral charge (which stands in second priority to the first charge of Pillar) will be reduced. This is not a tenable argument to permit Pillar to claw back the funds already advanced. Firstly Pillar was fully aware of the terms of the agreement and therefore knew of this possibility when it agreed to advance the funds on behalf of the Hyde parties. Secondly the lien claimants had served notice of default under the agreement and claimed the funds before the first mortgagee had itself declared default under its mortgage. Unless the funds had been advanced subject to some understanding that they remained the property of the mortgagee then the fund is an asset available for the benefit of the lien claimants. Indeed this appears to be precisely what the agreement contemplates would occur if the Hyde parties defaulted.
[12] The evidence does not support any assumption of responsibility by Rasmussen Starr Ruddy towards the first mortgagee. The lien claimants agreed with the Hyde parties to lift their liens and replace them with the second collateral charge but at no time did they make any agreement with Pillar. I can discern no basis for an understanding that funds which had been advanced under the agreement were to be returned to the Hyde parties or to Pillar in the event the Hyde parties defaulted. To the contrary, the agreement to accept only $2 million on account and to secure the balance by the second charge was contingent on the initial advance of funds and then on additional funds to be secured by Hyde to allow work to continue. The agreement between the lien claimants and the Hyde parties was to be partially funded by Pillar but Pillar was not a contracting party. The agreement is clear that judgment will issue and be enforceable if the Hyde parties default. Accordingly I would dismiss the motion by Pillar to secure the funds. These funds were fully advanced to support the settlement and were not subject to any kind of escrow agreement in favour of Pillar.
Interim Report
[13] It is important to be clear in what capacity I am hearing these motions. Though I could hear a motion for summary judgment under Rule 20 in my regular capacity as a master, in this case I am constituted as referee to determine all matters in issue in the lien proceedings. Within the reference I have all of the authority of the court to determine all questions necessary to decide the rights of the parties. My role then is to issue a report which becomes a judgment on confirmation. One of the responsibilities of the referee is to devise the procedure to be followed on the reference. The directions issued on April 8th contemplated a motion for judgment in the event of default. I believe these motions come within my mandate as referee to determine all issues in the lien proceeding and accordingly the result should be a report.
[14] I find that the issues directed to me on the reference have been partially resolved by the parties pursuant to the agreement of October 29th, 2012. That agreement provided for judgment to issue in the event of default. I find that default has occurred and the judgment may issue. Having heard submissions on behalf of the first mortgagee I find no basis for a claim that the funds held in trust are not available to satisfy the judgment.
[15] Judgment should therefore be granted for the lien claims detailed at Schedule A of the draft judgment at page 166 of the motion record subject to appropriate adjustment for the $2 million already distributed. The net judgment will be enforceable against the Hyde parties and may be realized in part by the funds held in trust by Rasmussen Starr Ruddy.
[16] There will not however be a judgment for sale of the land at this point. This is for two reasons. Firstly there are no longer liens attaching to the land and instead there is a collateral charge standing as security for the lien rights. Though the lien claimants may be entitled to a judgment for sale this will technically be a sale to enforce mortgage security rather than a sale to enforce a lien right. Secondly, as noted in April there are numerous other parties who have an interest in the land who were not put on notice or made parties to the reference. If it is necessary to sell the land, the rights of the life tenants and other encumbrancers will require that they be made parties to the reference.
[17] In summary an interim report may issue which upon confirmation will grant judgment to the lien claimants for the balances owing under their liens. The judgment will be enforceable against the trust funds and other assets of the defendants.
[18] If the plaintiffs wish to obtain a judgment for sale of the land then they will have to schedule a further hearing for directions and serve all interested parties with notice of trial. They should of course also comply with their obligations under the Mortgages Act or other applicable legislation.
[19] I may be spoken to further in regard to the form of the interim report and on the question of costs.
Master MacLeod
December 27th, 2013