2018 ONSC 3126
COURT FILE NO.: CV-13-494453 and CV-14-496630
DATE: May 17, 2018
ONTARIO
SUPERIOR COURT OF JUSTICE
3126
BETWEEN:
Cam Moulding & Plastering Ltd.
A. Conte for plaintiff Fax: 866-543-3165
Plaintiff
- and -
Dupont Developments Ltd., The Rose and Thistle Group Ltd., Florence Leaseholds Limited, Beatrice Leaseholds Limited and ADA Leaseholds Limited
M. Handler for defendants Florence, Beatrice and Ada Fax: 905-265-2235
Defendant
Gentry Environmental Systems Ltd.
A. Conte for plaintiff Fax: 866-543-3165
Plaintiff
- and -
Dupont Developments Ltd., The Rose and Thistle Group Ltd., Florence Leaseholds Limited, Beatrice Leaseholds Limited and ADA Leaseholds Limited
M. Handler for defendants Florence, Beatrice and Ada Fax: 905-265-2235
Defendant
Heard: January 11, 2018, April 10, 11, 12 and 13, 2018
Master C. Albert
[1] Who has priority: two unpaid lien claimants or the mortgagee? For the lien claimants to succeed, the court must find that the actual value of the premises on September 11, 2012[^1], being the date when the first lien arose, was less than the amount advanced under the mortgage prior to that date. For the mortgagee to succeed the mortgagee must prove that the value of the land was at least $6.5 million on September 11, 2012 and that the entire first mortgage was advanced prior to that date.
[2] The mortgagee’s position is that the mortgagee advanced $6.5 million on September 10, 2012 pursuant to a vendor take back first mortgage (the “VTB mortgage”), and on that date the value of the lands exceeded $6.5 million. They rely on multiple offers to purchase to establish the value of the property as of that date.
[3] The lien claimants’ position is that they have priority over the first mortgagee because:
a) the property had no value on September 11, 2012 due to contamination;
b) alternatively the value of the property on September 11, 2012 was between $5,650,000 and $6 million, or
c) in the further alternative, no funds were advanced under the VTB mortgage because, unlike an institutional mortgage, no funds changed hands.
[4] For the reasons that follow this court finds that the mortgagee’s interest has priority over the lien claimants’ interests and that the mortgagee is entitled to the funds held in court.
I. Relevant facts
[5] Defendants Florence Leaseholds Limited, ADA Leaseholds Limited and Beatrice Leaseholds Limited (“FAB”) acquired 1485 Dupont Street (the “Property” or “1485 Dupont”) in the Junction Triangle area of the City of Toronto on December 12, 1963. They held the Property for almost 50 years until 2012, when they agreed to sell it for $8 million to The Rose and Thistle Group Ltd., (“RAT”). The parties executed an agreement of purchase and sale (“APS”) on June 15, 2012. RAT assigned the APS to a company incorporated for the specific purpose of taking title, Dupont Developments Ltd. (“Dupont”). The transaction closed on September 10, 2012 with the purchase price made up of $1.5 million in cash and the VTB mortgage in favour of FAB for $6.5 million, being the balance of the purchase price, registered on title[^2] immediately after registration of the transfer of title.
[6] Throughout FAB’s ownership the premises had been used for commercial purposes, with light industrial and commercial uses. There is a 90,000 square foot, two storey building on the one acre site. From 1995 until 2011 the premises had been leased and used as a dry cleaning operation known as Creeds Dry Cleaning. When Creeds gave notice of its intention to vacate the premises FAB decided to sell the property.
[7] Jack Brudner, a retired lawyer, managed the property through his company Millwood Management Limited (“Millwood”). Mr. Brudner was the main witness for FAB, providing evidence of the background and history of the site and the events surrounding the sale of the property in 2011 to 2012 (the “First Sale”) and again in 2014 to 2015 (the “Second Sale”).
[8] As a dry cleaners Creed’s used chemicals that contaminated the property. Adjacent to the property are other properties used for purposes that caused groundwater contamination. It is not in dispute that the property that is the subject of this litigation was contaminated.
[9] Leading up to the sale to RAT, FAB marketed the property privately. It was not actively marketed through a listing but nevertheless several offers were presented to Mr. Brudner from September 2011 through June 2012. Mr. Brudner obtained opinions from three realtors for the purpose of ascertaining an appropriate sale price for the property. He took these opinions into account in negotiating the First Sale.
[10] The realtors that he approached and their recommendations as to sale price as set out int heir reports are:
a) John Morrison of Morrison Royal LePage Real Estate Services Ltd.: $4.5 to $4.8 million;
b) Ryan Thomson of Colliers International: between $5 and $6.5 million; and
c) Tim Novak of Avison Young: $8.9 to $9.5 million.
[11] It is significant that the recommended sale prices vary widely, with a $5 million swing between the lowest and the highest.
[12] None of the three opinions provided to Mr. Brudner in 2011 as to sale price were based on professional appraisals. The realtors approached their recommendations from multiple perspectives taking into account factors such as the intended use by a prospective purchaser, the commercial income generated by the property at the time, and other factors.
[13] The authors of these three reports did not testify at trial and their recommendations as to sale price are of no probative value on the issue of the actual value of the property. However, the opinions that they provided to Mr. Brudner are relevant to his conduct in negotiating the sale. Armed with this information and the vast disparity in opinions as to an appropriate sale price, Mr Brudner went to the market to see what price he could achieve for the property.
[14] FAB also owned the property across the street at 299 Campbell Avenue. Initially FAB proposed to sell the two properties together as a package, with separate APS but conditional on the purchaser buying both properties. Ultimately FAB decided to sell the two properties separately.
[15] Without FAB actively listing the properties for sale, Mr. Novak of Avison Young presented several APS to Mr. Brudner during the period from September 2011 to May 20, 2012. The proposed sale prices in these offers ranged from $7.7 million to $8.4 million. Each APS was unique and contained different conditions and financing options.
[16] The APS presented to FAB in 2011 and 2012 are summarized as follows:
[17] Offer #1: The first APS was dated September 26, 2011 for $8 million for 1485 Dupont from 2164599 Ontario Inc. Ultimately it did not proceed. According to Mr. Brudner the purchaser could not afford to purchase both properties.
[18] Offer #2: The second APS was dated November 29, 2011 for $7.7 million for 1485 Dupont from 2086361 Ontario Inc., in trust. This is referred to by the parties as the “TAS” offer. Because Mr. Brudner was negotiating the first APS at the time, he had not responded to an earlier offer from TAS but when Offer #1 fell through, TAS presented its offer of $7.7 million for 1485 Dupont and $2.8 million for 299 Campbell. The offers were linked and conditional for a due diligence period. FAB accepted the offers in November 2011. The parties extended the due diligence period and TAS remained hesitant regarding 1485 Dupont. By email dated March 15, 2012 Mr. Brudner notified TAS that FAB would release TAS from the 1485 Dupont property. TAS closed the 299 Campbell APS in April 2012.
[19] Offer #3: The third APS was dated March 12, 2012 for $7.7 million for 1485 Dupont from 1782604 Ontario Limited. This is also referred to as the “Pearl offer”, wherein Mr. Pearl was seeking to tie up the property so that he could find an interested buyer and act as agent for the ultimate purchaser who would actually close the transaction. In fact, it was Mr. Pearl who introduced RAT to the property. At trial both parties offered guesses as to why the third APS did not result in a firm deal and closing. The lien claimants guessed that it was due to contamination. FAB guessed that it was due to financing. Neither guess is admissible or of any probative value.
[20] Offer #4: The fourth APS was dated May 1, 2012 from Ehrlich Samuel Properties Inc. for $8.4 million for 1485 Dupont. There were conditions attached to the APS and FAB did not sign it back because just prior doing so FAB received an unconditional offer from RAT.
[21] Offer #5: The fifth APS dated June 8, 2012 was from RAT for $8 million for 1485 Dupont. The parties negotiated back and forth regarding structure, financing terms, and price. Ultimately, after Mr. Brudner asserted to Norma Jean Walton, principal of RAT, that he had received competing offers and if she wanted the property she had to present a strong offer, RAT submitted an unconditional offer to purchase the property “as is where is”, with a VTB of $6.5 million and the balance in cash on closing. FAB formally signed back the APS on June 15, 2012.
[22] RAT closed on the transaction on September 10, 2012, taking title through Dupont Developments Ltd. The transfer to Dupont was registered as instrument AT313490 on September 10, 2012 at 10:20 a.m.
[23] Immediately thereafter, also at 10:20 a.m. on September 10, 2012, the first mortgage in favour of FAB was registered as instrument AT313491, specifying principal of $6.5 million and a five year term to September 5, 2017 with a 4.5% interest rate. The full amount of the VTB mortgage had been applied to the purchase price on closing.
[24] After closing RAT retained OHE Consultants to perform Phase One and Phase Two environmental assessments, including the drilling of bore holes beginning September 11, 2012. RAT also undertook repairs and renovations with a view to achieving higher commercial rents. Cam and Gentry are two suppliers of services and materials during this period of repairs and renovations.
[25] According to Mr. Brudner, all of the offerors had been advised of the contamination issue. The lien claimants’ experts, engineer Michael Grayhurst and geologist Albert Maddalena, and FAB’s expert appraiser Robert Robson, all testified that so long as the purchaser maintained the existing commercial uses there would be no requirement to remediate the contamination, other than venting to address air quality issues[^3]. The lands could not be redeveloped for residential uses without a rezoning and, in that event, an environmental Record of Site Condition (“RSC”) would be required. Remediation would be necessary to obtain an RSC.
[26] Ms Walton testified that RAT was in the business of buying and rehabilitating distressed or, in her words, “broken” properties and rehabilitating them. RAT was particularly interested in “brownfield” properties, that term referring to properties with environmental contamination issues. Ms Walton was straightforward and forthright in her testimony, including evidence about her personal financial and professional failures. I find that she is a credible witness and her evidence is reliable.
[27] RAT had purchased over 30 distressed or broken properties in the Greater Toronto Area (“GTA”) in the five or so years leading up to this APS with a view to rehabilitating them. She testified that when she considered 1485 Dupont she anticipated contamination because of the dry cleaning use, and then when she moved forward with her research on the property she obtained copies of various reports[^4] and items of information that confirmed contamination. She was fully aware of the contamination issue when, on behalf of RAT, she prepared and submitted the APS for $8 million.
[28] RAT was in business with Dr. Bernstein, known as the “diet doctor” and also an investor in real estate. Their relationship began with Dr. Bernstein advancing funds for RAT’s purchases of distressed properties in the GTA initially as a mortgagee. Subsequently their relationship morphed into a partnership on multiple properties with both parties investing funds to acquire the properties.
[29] In or about November 2013 a group of 29 companies owned or controlled by Dr. Bernstein and known as “Dr. Bernstein Diet Clinics Ltd.” or “DBDC Investment (property identifier) Ltd.” applied for a receivership order, resulting in the order of November 13, 2013 of Justice Newbould (the “Receivership Order “) appointing Schonfeld Inc. Receivers + Trustees to manage a number of properties, including 1485 Dupont. The Receivership Order stayed the mortgagee rights of FAB. The receiver authorized Mr. Brudner’s management company, Millwood, to act as day-to-day manager of 1485 Dupont.
[30] RAT, owner of approximately 30 properties at the time of the Receivership Order, was a sophisticated purchaser of commercial property in the GTA with a special focus on brownfield properties. It is clear that RAT is knowledgeable about contaminated commercial properties and the impact of contamination on property value.
[31] At the time of the Receivership Order renovations that RAT had initiated after closing were ongoing. Suppliers of services and materials had not been paid and six of them registered construction liens (“CL”), as follows:
a) CL#1: Gentry Environmental Systems Ltd. (“Gentry”) registered a CL on November 15, 2013 for $269,967.16 as instrument AT3455085;
b) CL#2: Cam Moulding & Plastering Ltd. (“Cam”) registered a CL on November 18, 2013 for $73,800.00 as instrument AT3456333;
c) CL#3: Norel Electric Ltd. registered a CL on November 22, 2013 for $248,631.00 as instrument AT3460372;
d) CL#4: Abaco Glass Inc. registered a CL on December 4, 2013 for $139,000.00 as instrument AT3470428;
e) CL#5: Titan Plumbing Ltd. registered a CL on December 6, 2013 for $89,899.39 as instrument AT3472102; and
f) CL#6: Ground Force Environmental Inc. registered a CL on December 19, 2013 for $242,551.74 as instrument AT3483969.
[32] Four of the six lien claims were settled by the receiver, leaving only the Cam and Gentry lien claims as challenging FAB for priority. On May 31, 2017 Gentry filed for bankruptcy with Scott, Pichelli & Easter Limited appointed as bankruptcy trustees. On August 10, 2017 the registrar in bankruptcy granted an order for Gentry to continue this action.
[33] The Cam lien claim: Cam registered a construction lien for $73,800.00 on November 18, 2013 as instrument AT3456333 and registered a certificate of action as instrument AT3476270 on December 11, 2013. Timeliness of the Cam lien claim is not in issue.
[34] Cam admits receiving payment on April 12, 2017 of $3,141.15 from the receiver in the distribution following the sale of the property. That payment is a payment on account of the principal of the lien claim and is applied to reduce the lien claim amount to $70,658.85.
[35] The Gentry lien claim: Gentry registered a construction lien for $269,967.16 on November 15, 2013 as instrument AT3455085 and registered a certificate of action as instrument AT3509428 on January 30, 2014. Timeliness of the Gentry lien claim is not in issue.
[36] Gentry admits receiving payment on April 27, 2017 of $11,490.58 from the receiver in the distribution following the sale of the property. That payment is a payment on account of the principal of the lien claim and is applied to reduce the lien claim amount to $258,476.58. The receiver also paid Gentry $50,000.00 to start the HVAC system. That payment is discussed in these reasons under the heading “calculation issues”.
[37] The receiver maintained the VTB mortgage in good standing through to February 4, 2014 but thereafter the mortgage went into default and the receiver took steps to sell the property under the receivership beginning in May 2014, listing it with CBRE Limited. According to CBRE’s reporting letter of December 9, 2014 addressed to Mr. Brudner and describing activity during the listing period of May 9, 2014 to November 9, 2014, CBRE received four offers:
a) Offer #1: $9 million, conditional;
b) Offer #2: $9 million;
c) Offer #3: $8.75 million from Firm Capital Corporation Limited;
d) Offer #4: $6.75 million.
[38] CBRE reported that it did not follow up on the second, third and fourth offers because the receiver “lost control” of the property, referring to the October 9, 2014 order of Justice Patillo lifting the stay imposed by the Receivership Order in respect of 1485 Dupont and granting leave for mortgagee FAB to sell the property. FAB initiated power of sale proceedings.
[39] Mr. Brudner testified that in August 2014, prior to the order of Justice Patillo, and after Firm Capital had made the offer listed above as Offer #3, Firm Capital approached Mr. Brudner to buy FAB’s $6.5 million VTB mortgage for $6.3 million. According to Mr. Brudner, as corroborated by emails, FAB had disclosed and Firm Capital was aware of the contamination issues on the property. The sale of the mortgage did not close because of the unresolved priority issue, presumably the issue as between the mortgagee and the lien claimants that is the subject of the present litigation.
[40] On March 9, 2015 FAB initiated power of sale proceedings under the VTB that the receiver had let lapse into default. The notice of sale provides that the amounts owing under the mortgage as of March 2, 2015 total $6,932,463.44 with additional interest accruing at the per diem rate of $845.69 thereafter. The notice of sale was served on Dupont, RAT, all lien claimants and the receiver.
[41] FAB received five offers pursuant to the power of sale proceedings as follows[^5]:
[42] APS #1: October 31, 2014 for $6.8 million from Thombar Property Management Inc. in trust for a corporation to be formed (“Thombar”);
[43] APS #2: February 23, 2015 for $7 million from Thombar;
[44] Aps #3: February 24, 2015 for $6.7 million from Epicurus Capital in trust for a corporation to be formed;
[45] APS #4: February 24, 2015 for $7.5 million from Sancus Properties Limited in trust for a corporation to be formed. Ms Walton is a principal of Sancus and by this offer she was attempting to re-acquire the property. This fact suggests that despite the contamination issues the property was worth the price offered; and
[46] APS #5: March 5, 2015 for $7.5 million from Thombar in trust for a corporation to be formed and ultimately incorporated as 1485 Dupont Inc., unconditional and including a VTB first mortgage (the “2015 VTB”) in favour of FAB for $5.5 million. By vesting order of Justice Newbould dated May 11, 2015 in file CV-13-10280-00CL (the “Vesting Order”) the court approved the sale, including all calculations, and the sale closed on May 20, 2015 with Thombar assigning the agreement and the owner taking title as 1485 Dupont Inc.
[47] I note that Thombar, ultimately the successful purchaser, had submitted three offers, increasing the price each time. FAB accepted Thombar’s third offer. A principal of Thombar, Andrew Thomson, testified at trial that Thombar purchased the property knowing about the contamination issues and prepared to initiate clean-up remediation. Thombar carried out renovations and improvements and continues to operate the property as a successful, fully leased-up commercial property, reporting to the Ministry of the Environment (“MOE”) annually as to the ongoing steps taken (particularly as to venting) to maintain the property as a safe property for environmental purposes for its continued and current commercial uses. Mr. Thomson presented as a credible and forthright witness and I find that his evidence is reliable.
[48] Mr. Thomson further testified that on August 3, 2017 Thombar fully paid out the 2015 VTB first mortgage that had been taken out to finance the Second Sale and replaced it with an institutional first mortgage from the Bank of Montreal for $10 million. Mr. Thomson testified that the 2015 power of sale proceedings allowed him to buy the property at a reduced, distressed sale price and Thombar got a “real bargain” on the property.
[49] Both Mr. Thomson and Ms Walton testified that in their experience in purchasing real estate, receivership and power of sale proceedings stigmatize a property and allow a purchaser to acquire a property at a bargain or reduced price. Ms Walton speaks from her personal experience regarding the receivership sale of RAT’s many properties.
[50] Mr. Thomson further testified that in 2017 Thombar received an unsolicited offer to purchase 1485 Dupont for $25 million. Thombar rejected the offer because the property is a solid, income producing property and the partners were not prepared to sell it.
[51] In April 2015, prior to the Second Sale, FAB had obtained an appraisal report from Lebow, Hicks Appraisal Inc. Pursuant to Mr. Brudner’s instructions the appraisal reflects the market value of the property as of March 2015 as if it were not affected by contamination. The appraisal reports the market value as of that date and subject to those limitations as $7.8 million. No one from Lebow, Hicks Appraisal Inc. testified at trial. Thereafter, Justice Newbould approved the sale for $7.5 million.
[52] FAB asks the court to draw the inference that the $300,000.00 difference between the appraised value of $7.8 million for uncontaminated property and the approved sale price of $7.5 million accounts for the contamination factor. FAB further asserts that the resulting $7.5 million sale price is not the actual market value as of May 2015 because the power of sale proceedings, the unfinished renovations, the construction liens and other factors depressed the price. FAB asserts that the actual value as of the date of the court approved sale (May 11, 2015) was greater than $7.5 million. Given my analysis and findings the factual issue of the actual value of the property in May 2015 need not be decided. Had that issue required determination I would have agreed with FAB on this issue.
II. Analysis
(a) Environmental contamination and use of property
[53] Much of the evidence at trial concerned contamination on the property. The source of the contamination was twofold: contamination from the uses on site, particularly the dry cleaning use, and contamination migrating to the site from neighbouring or nearby sites.
[54] All of the witnesses other than the lien claimants testified that it is common knowledge to anyone familiar with real estate that dry cleaners use chemicals and that a dry cleaning use will likely give rise to contamination and the need to remediate a property. Knowing that a property has been used as a dry cleaners will alert any prospective purchaser to the issue.
[55] Robert Robson, an appraiser and holder of a Diploma in Civil Engineering Technology from Ryserson Polytechnical Institute in 1970, was retained by FAB as an expert witness. He prepared a report and testified at trial. He opined that “it is common knowledge that properties occupied by dry cleaning operations often experience contamination of the underlying soil and groundwater. Purchasers of industrial/commercial properties in Toronto are typically well informed …” He cited an article published in The Globe and Mail on February 14, 2011 titled “Toxic Dry-Cleaning Chemical is Canada’s Top Eco-Villain”. He considered all of the prospective purchasers of 1485 Dundas to have been well-informed or well advised, acting in what they considered to be their best interests.
[56] Mr. Robson is of the opinion that the presence of contamination does not necessarily mean that there is unacceptable risk or that remediation is required. Whether remediation is required, in his words, “is based on the intended use of the property. Generally, when a property is used wholly or partly for an industrial or commercial use, a Record of Site Condition[^6] (“RSC”) is required only before the use is changed.”
[57] The unequivocal and corroborated evidence at trial is that an RSC, which would not be available for this property without remediation, was not required for the subject property to continue to be used for commercial and light industrial uses. Both RAT in 2012 and Thombar in 2015 intended to continue the commercial and light industrial uses.
[58] Ms Walton and Mr. Thomson both testified that the quantum of the offers submitted by RAT and Thombar is based on continuing the current uses for the property. Thombar has continued the commercial uses of the property through to the present day.
[59] As part of its due diligence, TAS (2011 – 2012 Offer #2) retained Toronto Inspection Limited (“TIL”) to conduct environmental testing, including bore holes for soil and groundwater samples on site. TIL prepared a report dated February 9, 2012 identifying contamination on both of FAB’s properties (1485 Dupont and 299 Campbell) and recommending further investigation. FAB’s environmental engineer Tony Missiuma of Golder Associates received a copy of the TIL report in February 2012 and Mr. Brudner received it from Golder in March 2012. No one from TIL, TAS or Golder testified at trial.
[60] After closing on September 10, 2012 RAT retained OHE Consultants to perform a Phase One environmental assessment. OHE issued a report on October 19, 2912, recommending a Phase Two environmental assessment. OHE conducted a Phase Two environmental assessment and issued its report on June 6, 2013.
[61] The lien claimants called Michael Grayhurst of OHE as a witness at trial, relying on his expert opinion as a “participant expert”. That term was coined in the decision of the Court of Appeal in Westerhof v Estate of William Gee 2015 ONCA 206, wherein an expert who provided a report in a context other than for the purpose of the litigation before the court was characterized as a participant expert and allowed to proffer opinions without complying with rule 53.03.
[62] OHE determined in its 2012 and 2013 reports that there were soil impacts on the property under the building footprint, and groundwater impacts throughout the property including trichloroethylene. Ms Walton testified that when she submitted RAT’s APS she had expected trichloroethylene contamination from the dry cleaning operation. She had prior experience with acquiring lands that had been used by dry cleaners. She factored that issue into the price that RAT offered for the property.
[63] OHE, in its Phase Two report, noted that “the level of environmental contamination identified in the Phase Two ESA would not preclude the continued commercial use of the property in any way. Ongoing attention should be paid to the issue of building air quality with respect to the identified presence of subsurface contamination”. In other words, so long as the property continued to be used for commercial purposes, contamination was not an issue. That the property could be used successfully as a commercial property is borne out by the evidence of trial witness Mr. Thomson, a principal of the current owner of the property. Following receipt of the OHE Phase Two report RAT initiated remediation efforts. Thombar subsequently addressed air quality issues with venting and ongoing monitoring.
(b) Offers and other evidence of value
[64] The parties agree that the onus is on FAB to establish the value of the property on the date the first lien claim arose. The parties also agree that RAT closed its purchase on September 10, 2012 and hired contractor OHE to begin Phase Two ESA work the day after closing, on September 11, 2012. On that basis the relevant date is September 11, 2012.
[65] FAB’s position is that the multiple offers to purchase the property in 2011 to 2012 and again in 2014 to 2015, and Firm Capital’s offer to purchase the mortgage in 2014, provide sufficient evidence of the value of the property for the court to make a finding that the value of the property for purposes of section 78(3) of the Act was at least $6.5 million on September 11, 2012.
[66] The offers and first mortgages, described in detail earlier in these reasons, are summarized in the following chart:
Date
Amount
Notes
1
September 26, 2011
$8 million
Cash
2
November 29, 2011
$8 million
VTB
3
March 12, 2012
$7.7 million
VTB
4
May 1, 2012
$8.4 million
VTB
5
June 8, 2012
$8 million
RAT APS Closed September 10, 2012 Title: Dupont Developments Ltd. VTB 1st to FAB
6
2014
$9 million
CBRE
7
2014
$9 million
CBRE
8
2014
$8.75 million
CBRE
9
2014
$6.75 million
CBRE
10
August 2014
$6.3 million
Firm Capital offer to buy VTB
11
October 31, 2014
$6.8 million
Thombar APS #1
12
February 23, 2015
$7 million
Thombar APS #2
13
February 24, 2015
$6.7 million
Epicurus Capital
14
February 24, 2015
$7.5 million
Sancus Properties Limited (Ms Walton’s new company)
15
March 5, 2015
$7.5 million
Thombar APS #3 Closed May 20, 2015 May 11, 2015 Vesting Order Title: 1485 Dupont Inc. VTB $5.5 million 1st to FAB
16
August 3, 2017
$10 million
Bank of Montreal 1st mortgage
17
2017
$25 million
Unsolicited offer to purchase
RAT’s APS is evidence of actual value
[67] Mr. Brudner, in an effort to maximize the sale price in 2012, played the offers against each other. This practice is not uncommon when marketing real estate. Regarding RAT’s initial APS, in his negotiations with Ms Walton Mr. Brudner told Ms Walton that if she did not sweeten RAT’s offer, RAT would not succeed in acquiring the property. Whether Ms Walton knew that the other offers were conditional was not elicited in evidence at trial. Concerned that she might lose the deal Ms Walton presented an unconditional offer of $8 million on behalf of RAT.
[68] Ms Walton testified clearly and unequivocally that in structuring RAT’s 2012 APS she was aware of the contamination issue and factored it into the purchase price. Ms Walton submitted an “as is” offer with full knowledge that the property was a “broken” or distressed property with contamination issues. RAT was in the business of dealing with such properties.
[69] Ms Walton, educated as a lawyer and businessperson with an LLB and an MBA, performed an analysis prior to presenting RAT’s APS. Ms Walton projected significant profits even in the face of a purchase price of $8 million and the need for some remediation. Her projections were based on retaining the historic and ongoing uses commercial and light industrial uses for the property. Unfortunately RAT lost the property, not because RAT had paid too much but rather because the property was swept up in the group of approximately 30 properties that went into the receivership triggered by RAT’s real estate partner, Stanley Bernstein, who had financed RAT’s real estate acquisitions initially as mortgagor and subsequently as a partner. RAT was in default on other properties and Dr. Bernstein caused a receivership that swept into the proceedings all of the properties owned by RAT and its related companies, including 1485 Dupont.
[70] There is no evidence of any collusion or fraud as between RAT and FAB, or any of their principals, in arriving at the $8 million purchase price. Nor is there any evidence that RAT and FAB are in any way related. They are not. RAT’s $8 million offer was an arm’s length offer made by a willing purchaser who had researched the property and was experienced in dealing with brownfield properties.
(c) Expert evidence of value of the property when the first lien arose
[71] The Construction Lien Act is framed in terms of “actual value” at the time the first lien arose. The relevant date is September 11, 2012.
[72] The court has held that actual value and market value are equivalent (See: W.A. Baker Surveying Inc. v Hassan 1993 CarswellOnt 850 at para 16). In W.A. Baker the court applied section 78(3) of the Act and defined actual value as “the price that would likely result from negotiations between a willing vendor and a willing purchaser”. Applying that definition to the case before me, I must consider whether FAB was a willing vendor and whether RAT was a willing purchaser. I find that they were, and that they negotiated a price, with more than one proposed price and structure forming part of their negotiations, in an environment where FAB was entertaining other offers in the same price range at and around the same time. Applying that definition, the actual value of the property would be the price agreed upon as between FAB and RAT in June 2012 and the price for which they closed the transaction on September 10, 2012. There is no evidence to suggest that the actual value or the market value changed between the date of the offer and the date of closing.
[73] Justice Burnyeat in Burnaby/New Westminster Assessor, Area 10 v Haggerty 1997 CarswellBC 1453 at para 8, citing authorities set out in that paragraph, defined actual value and market value as “the value a willing buyer would pay and a willing vendor would accept”. In that case, concerning tax assessment, the Appeal Board below had only taken into account what a prudent purchaser would pay and had ignored consideration of the price at which a willing vendor would sell. The court determined that by ignoring this significant factor the Appeal Board had erred in law. The court further determined that the Appeal Board had factored in a reduction for remediating contamination without any evidence that there was a risk associated with the contamination and a demand to reduce the price to factor in the cost of remediation.
[74] The lien claimants in the present case ask the court to discount the value of the property to account for the cost of remediation. The evidence regarding 1485 Dupont is that the property could continue its commercial and light industrial uses without remediation. As in the Burnaby/New Westminster case, there is no evidence that RAT and the other potential purchasers in 2011 and 2012 were unaware of the contamination and failed to take the cost of remediation into account, or that remediation was in fact required. The evidence is to the contrary: (i) Mr. Brudner had disclosed to potential purchasers the information available to him regarding contamination and (ii) remediation was not required to continue commercial and light industrial uses.
[75] Despite the lien claimants’ repeated reliance on the test as one of what a “prudent” purchaser would do, I am not persuaded that this is the applicable test. Rather, the test is as stated in the Burnaby/New Westminster decision: what is the price at which a willing buyer would buy and a willing seller would sell a property.
[76] Multiple definitions of market value are set out in the Canadian Uniform Standards of Professional Appraisal Practice (“CUSPAP”) at sections 16.14.3, suggesting that market value has many variables.
[77] The lien claimants rely on opinion evidence of Grant Uba of Altus Group, a real estate appraiser, retained for the purpose of quantifying what a reasonable sale price would have been in 2012 for a “prudent purchaser” to pay.
[78] One problem with Mr. Uba’s approach is that he did not ascertain the appraised value of the property. Rather, his retainer was confined to providing an opinion of the “reasonable sale price”. He specifically states in his report that his opinion cannot be relied upon as an appraised value of the property. The lien claimants did not obtain a full appraisal report because of cost: an appraisal would been far more costly than an opinion of sale price. The problem with taking the less costly route is that the expert’s opinion is unhelpful to the court in determining the actual value of the property for purposes of section 78(3) of the Act.
[79] In arriving at his opinion of sale price Mr. Uba made many assumptions, including extraordinary assumptions, and relied on information provided to him by others. He admitted that he did not test the assumptions and information he relied on to ascertain its veracity.
a) Mr. Uba did not contact and interview the parties who had signed APS between October 2012 and June 2013. Had he done so he could have ascertained the reason each prospective purchaser had not completed the purchase. Instead, he assumed that they did not close the transaction because of contamination. He had no basis for this assumption. Mr. Uba admitted that there are many reasons why a purchaser may walk away from a transaction during the conditional period. Examples include financing, finding a better property elsewhere and not finding the right investment partners.
b) Mr. Uba did not obtain and review the 2009 TIL environmental report.
c) Mr. Uba assumed that RAT did not know about the contamination and did not take it into account in the purchase price offered, notwithstanding that he knew that RAT had purchased other properties including contaminated brownfield sites. He did not take into account that RAT had factored contamination into the price it offered. Instead, he assumed that RAT’s price should have been lower to account for remediation costs.
d) Mr. Uba used as his starting point the actual 2015 sale price paid pursuant to a distress sale (the power of sale) and then deducted what he assumed as the cost to remediate (without testing his assumptions for veracity) and further deducting four years of increases in the Toronto real estate market (which he assumed to be between 16% and 24%). He relied on the five APS submitted in 2014 and 2015, ignoring a significant market factor: it was a power of sale proceeding. He concluded that the 2012 price paid by RAT was inflated because the 2014 to 2015 power of sale offers were lower.
e) Mr. Uba estimated that the sale price should have been between $5,650,000 and $6,000,000 but he repeatedly qualified that his opinion was not an opinion of the property’s value.
[80] Mr. Uba admitted that if he had been retained to appraise the value of the property he would have done a far more extensive analysis. In the case of the report he prepared and the conclusions he reached for purposes of this trial, he did not abide by the voluminous, extensive and detailed CUSPAB guidelines and standards that must be followed when appraising property value.
[81] Mr. Uba admitted that he did not follow CUSPAP standards for appraising property because he had not been retained by the lien claimants to appraise the property and therefore CUSPAP did not apply. Nevertheless, the lien claimants seek to rely on his opinion of sale price as if it were the appraised value of the property. It is not.
[82] According to CUSPAP at section 2.26, reliance on extraordinary assumptions, if inaccurate, could materially impact opinions and conclusions. Mr. Uba admitted that he made multiple extraordinary assumptions that he failed to disclose in his report and that his conclusions could be flawed if the extraordinary assumptions he relied on are not correct.
[83] Included in the extraordinary assumptions is reliance on information provided to him by way of memo from the lien claimants’ counsel and not independently verified by him as to accuracy. Mr. Uba relied on untested hearsay evidence that he improperly accepted as fact. In Mr. Uba’s words “I accepted and relied on (the memo) at face value. I assumed all facts were correct”. Mr. Uba admitted under cross-examination that it was a mistake to rely on the memo.
[84] Another extraordinary assumption relied on by Mr. Uba was opinions of others as to the cost of remediation: he accepted these opinions at face value without independent verification.
[85] Mr. Uba assumed that no institutional lender would finance a contaminated property yet the evidence[^7] shows that in 2017 the Bank of Montreal financed the subject property for $10 million. Had Mr. Uba taken the simple step of searching title he would have discovered the Bank of Montreal mortgage.
[86] Another basis for rejecting Mr. Uba’s opinion of sale price is his erroneous assumption that the price should be based on converting the property to a residential condominium use, requiring a rezoning and an RSC, which would require remediation. Mr. Uba made a wrong assumption. RAT was renovating the property to continue its commercial uses, not to convert it to residential use. The subsequent purchaser, Thombar, continued the commercial use of the property successfully, increasing the rent revenues significantly without changing the use of the property.
[87] Section 7.6.3 of the CUSPAP[^8] provides that in respect of retrospective opinions of value “data subsequent to the effective date may be considered as confirmation of trends evident at that date.” Mr. Thomson testified that in continuing the commercial uses he has taken steps to maintain venting to preserve air quality, with annual environmental inspections. Remediation steps have been minimal and contamination did not prevent the Bank of Montreal from advancing a $10 million institutional first mortgage in 2017.
[88] In summary, Mr. Uba relied on multiple untested and unproven assumptions, many of which were incorrect. His report and his opinions are of no probative value to the court. He did not follow the standards required by CUSPAP to appraise the value of a property. Mr. Uba’s opinion is not an opinion of the value of the property. His evidence is unhelpful to the court in determining the value of the property for purposes of applying section 78(3) of the Act.
[89] FAB relies on the expert report of Robert Robson, principal of the appraisal firm Robson Associates Inc. He did not provide an appraised value for the property. Rather, he critiqued Mr. Uba’s report. The courts have cautioned against the utility of an expert report tendered solely for the purpose of critiquing the report of another party’s expert.
[90] Mr. Robson, in his report, outlines the intrinsic components of determining whether a sale is for market value, relying on the definitions set out in the CUSPAP at section 16.14.3 (iv).
[91] Mr. Robson reviewed the APS and concluded that the value of the property between September 2011 and June 2012 was within the range of prices offered in the five APS, placing the value of the property between $7.7 million at the low end and $8.4 million at the high end. All of the offers were made by willing buyers to FAB, a willing seller.
[92] Mr. Robson challenges Mr. Uba’s findings on several grounds. Firstly, he compares Mr. Uba’s analysis and report with the requirements under CUSPAP and opines that what Mr. Uba has done is provide an opinion of value but called it an opinion of sale price without performing the requisite steps required to appraise the market value of the property. The court does not need Mr. Robson’s opinion to reach the same conclusion.
[93] Secondly, Mr. Robson opines that Mr. Uba has completely ignored the impact of power of sale proceedings on market price. According to Mr. Robson property sold under distress power of sale conditions will sell at a depressed price, below market price. Also, when Thombar purchased the property in 2015 it was in a state of demolition requiring substantial renovation work, since the prior purchaser had been in the middle of renovations when placed into receivership. Mr. Uba relied on the 2015 sale price to Thombar as his starting point. Mr. Robson opines that Mr. Uba’s approach is predicated on the assumption that the 2015 power of sale price was at market value in 2015. That assumption is not proven. Consequently Mr. Uba’s calculation, based upon a false assumption, is flawed. Again, the court does not need Mr. Robson’s opinion to reach the same conclusion.
[94] The lien claimants argue that a large VTB is evidence of an inflated sale price. There is no evidence to support that assertion. Vendor take-back financing is a typical and frequently used vehicle for financing a sale. Trial evidence corroborates that VTB financing is typical in lands affected by contamination. Once remediation is either underway or complete a VTB can be replaced by institutional financing, as was the case for this property in 2017.
[95] I accept as more reliable evidence of the value for the property in 2012 the actual APS prices in 2012 by prospective purchasers and the actual APS tendered by a willing buyer and accepted by a willing seller in 2012. The range of prices in those APS is from $7.7 million to $8.4 million. The range of prices offered in the period from 2014 to 2015 is from $6.75 million to $9 million in circumstances of a distress sale arising from receivership and power of sale proceedings.
[96] Taking the actual offers made by willing buyers and the two offers accepted on the First Sale and on the Second Sale by FAB as a willing seller, I find that the value of the property was more than the $6.5 million VTB on September 11, 2012. The best evidence of value is the RAT APS for $8 million.
(i) Priorities: Applying the test
[97] Section 78(1) of the Construction Lien Act provides:
(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.
[98] Subsection 78(3) of the Act provides:
(3) Subject to subsection (2)[^9], and without limiting the effect of subsection (4)[^10], 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.
[99] Subsections 78(1) and (3), read together, create a priority in favour of lien claimants over the interests of mortgage lenders for all purposes unless one of the exceptions applies.
[100] Mortgages registered prior to a lien claim are an exception. A lien claimant does not have priority over a prior registered mortgage where the amount advanced under the mortgage was not more than the value of the property when the first lien arose.
[101] A lien claimant’s priority rights are a creature of statute. Lien claimants are entitled to be protected and to be paid for their supply of services and materials in priority to lenders who advance money to fund the improvement. The mischief that subsection 78(3) of the Construction Lien Act was designed to address in the case of competing priorities was the over-financing of a property to defeat a lien claimant’s priority rights. In other words, if a lender finances the property for more than its value, the lender is only protected up to the value of the property.
[102] The parties agree that the relevant date is September 11, 2012 when RAT’s first workers began their supply of services and materials. According to the Phase Two ESA report[^11] OHE drilled bore holes on September 11 and 12, 2012.
[103] If the value of the property on September 11, 2012 was less than the $6.5 million VTB, then the lien claimants have a priority to the extent of the difference between the actual value of the property on that date and $6.5 million. If the value of the property on September 11, 2012 was at least $6.5 million then the mortgage takes priority over the lien claims.
[104] The burden of proof rests with FAB to prove that they fall within the exception. (See: Boehmers v 794561 Ontario Inc., 1995 CanLII 660 (Ont.C.A.) affirming the trial decision at (1993) 14 O.R. (3d) 781; followed in Re Jade-Kennedy Development Corporation 2016 ONSC 7125 at para. 54).
[105] To fall within the exception FAB must prove that:
a) the $6.5 million VTB was “advanced” on September 10, 2012, and
b) the value of the property on September 11, 2012 was at least $6.5 million.
Did FAB advance $6.5 million under the VTB?
[106] The Construction Lien Act is remedial legislation, changing the common law to allow suppliers of services and materials priorities that would not otherwise exist. As remedial legislation, the Act must be strictly construed for the purposes of determining whether the lien claimant qualifies for its protection, but once qualified the Act should be liberally construed to confer the benefits to which lien claimant is entitled (See: Macklem and Bristow, Mechanics Liens Acts in Canada, at pp. 8-9, as cited by the Divisional Court in Ken Gordon Excavating Ltd. v Edstan Construction Ltd. 1981 CanLII 1750 at page 7). It is not in dispute that Cam and Gentry registered and preserved their liens in accordance with the requirements of the Act and that there lien claims are valid.
[107] The issue in the Ken Gordon case at the Divisional Court level was largely concerned with the first test: whether the lien claimant had taken the proper steps to qualify as a lien claimant for the protection of what was then the Mechanics Lien Act. The passages relied on by the lien claimants in the present case are obiter, the court having determined that the funds in issue had not been mortgage advances. The case was appealed to the Court of Appeal and then to the Supreme Court of Canada ([1984] 2 S.C.R 280), wherein the court determined that the mortgage had been a building mortgage and that funds had been advanced after the lien claimants had given notice of their lien claims. The Ken Gordon series of cases is not helpful in determining the issue of value.
[108] The lien claimants rely on Re Jade-Kennedy Development Corporation 2016 ONSC 7125 at paragraph 67 regarding a collateral mortgage, arguing that a vendor takeback mortgage is the same as a collateral mortgage and that no funds are advanced under a VTB. I disagree. A collateral mortgage is a form of guarantee: the funds secured by a collateral mortgage are not called upon unless there is default by the borrower under the principal lending instrument to which the mortgage is collateral. No funds are advanced under a collateral mortgage until there is default under the principal mortgage.
[109] In contrast, a VTB is the principal mortgage under which funds are advanced. It is not collateral to any other mortgage or lending instrument. But for the VTB in this case RAT could not have completed the transaction. The VTB financed the purchase to the extent of $6.5 million of the purchase price and the entire mortgage was advanced on September 10, 2012, with the balance of the purchase price paid in cash. Re Jade-Kennedy Development Corporation does not apply.
Was the value of the property on September 11, 2012 at least $6.5 million?
[110] The lien claimants argue that FAB has failed to prove that the value of the property on the date the first lien arose was at least $6.5 million. Counsel argues that RAT was an imprudent purchaser and as such the actual purchase price is not evidence of market value.
[111] The lien claimants assert that RAT was not a prudent purchaser because RAT submitted a firm rather than a conditional offer, whereas the other offers had been conditional. Ms Walton explained her reasons for doing so: Mr. Brudner told her he was considering another offer that was conditional. Ms Walton had significant experience in purchasing distressed brownfield properties. She knew that by presenting a firm offer RAT would have the best chance of beating a conditional offer.
[112] Ms Walton had prepared financial projections to support RAT’s $8 million APS. Unfortunately, the receivership triggered by other investments intervened. Ms Walton was so sure of her projections regarding the property that she formed another company and bid on the property again in 2015 when it was released from the receivership for FAB to sell it under power of sale. The financial projections of the successful 2015 purchaser, Thombar, corroborate that Ms Walton’s projections for the property as a viable commercial property were reasonable. These facts corroborate that RAT was not an imprudent purchaser.
[113] The lien claimants rely on the 1998 case of Park v Royal Bank of Canada 1998 CanLII 14660 for the proposition that in 1998 obvious contamination where the cost to remediate was unknown reduced the value of the land to zero. Justice Brockenshire wrote that he could not imagine a prudent purchaser not investigating the cost to remediate.
[114] The lien claimants argue that Park applies: RAT is not a prudent purchaser because RAT failed to investigate the cost to remediate and the lands had a value of zero. The Park case is distinguishable. In the past 20 years considerable progress has been made regarding contaminated lands and remediation. Furthermore the Park case is distinguishable on its facts. In Park remediation was required to sell the property. In the present case remediation was not required and the land was occupied and could continue to be used for commercial purposes without remediation. All that was required was venting to maintain air quality. Knowledge about remediation in 1980 was far less than it was in 2012 when contamination from dry cleaning chemicals could be ascertained and, if required, remediated and costs ascertained, and at the same time the property could continue to be used for commercial purposes. There is no evidence that the subject property had a value of zero in 2012. What may have been frightening about contamination to Justice Borckenshire in 1980 due to factors that were unknown when the Park case was decided is not frightening today (or in 2012) because these factors are now known or ascertainable.
[115] As explained earlier in these reasons I reject the lien claimants’ evidence of value, tendered through Mr. Uba’s opinion evidence of “sale price”.
[116] The lien claimants argue in the alternative that the price of the services and material supplied by the lien claimants increased the value of the property by the value of the services and materials supplied. On that basis they submit that the court should calculate the value by deducting the cost of services and materials supplied after the 2012 sale from the 2015 sale price to arrive at the value prior to the date of the first work in September 2012.
[117] The lien claimants calculate the cost of all services and materials supplied as in the $2 million range, calculated by adding the amounts paid to contractors to the total of all of the lien claims registered after the sale to RAT[^12]. Deducting that amount from the 2015 sale price of $7.5 million would result in a pre-renovation amount of $5.5 million. On that basis the lien claimants argue that the value of the property in September 2012 was not more than $5.5 million.
[118] The flaw in the lien claimants’ argument is that the starting point has not been proven to be the actual value of the property in 2015. The experts who testified opined that a power of sale proceeding depresses the sale price.
[119] In my opinion the best evidence of value on the date the first lien arose is the evidence of the APS’s submitted in 2011 to 2012 in amounts ranging from $7.7 million to $8.4 million and in particular the offer made by RAT as a willing purchaser to FAB as a willing seller, the parties being at arm’s length. The evidence of value is corroborated by events that transpired subsequently and related earlier in these reasons.
[120] For these reasons I find that the value of the property as of September 2012 was at least $6.5 million and that the actual sale price of $8 million is evidence of the actual value of the property for purposes of section 78(3) of the Act.
(ii) Is a VTB “advanced” on closing?
[121] The lien claimants argue that in the case of a VTB no funds are advanced and consequently for purposes of section 78(3) of the Construction Lien Act no funds have been advanced. The argument requires the court to accept that a lender in the case of VTB financing has a lesser priority than an institutional lender provides a bank draft or a certified cheque or electronically transfers funds to finance the purchase.
[122] A VTB is the facility by which funds required to purchase a property is lent by the seller to the buyer promises to repay the principal of the mortgage plus interest in accordance with the terms of the mortgage. An institutional mortgage is the same: the bank or financial institution lends money in return for interest and return of principal in accordance with the terms of the mortgage. The only difference is that an institutional lender is in the business of financing property whereas a VTB lender is usually a private lender.
[123] Often when a VTB is involved in financing the property is riskier or the borrower for whatever reason, cannot access institutional funds. In this case the evidence of Ms Walton, who arranged the VTB on behalf of RAT in 2012, and the evidence of Mr. Thomas, who arranged VTB financing when the property was sold under power of sale in 2015, was similar. VTB financing was required because of the contamination issue and the time required to renovate and attract commercial tenants. Ms Walton testified that RAT commenced its Phase Two environmental assessment immediately upon closing with the intention of carrying out whatever remediation was required to continue the commercial uses on the property. Mr. Thomson testified that remediation in the form of venting for air quality purposes was undertaken in 2015 and continues pursuant to annual inspections to the satisfaction of the institutional lender, the Bank of Montreal, the mortgagee brought in to replace the VTB financing in 2017.
[124] I find that for purposes of section 78(3) of the Construction Lien Act a VTB is the same as an institutional mortgage. In the present case the VTB mortgage was fully advanced to fund the purchase price, with an additional cash payment making up the balance. Had FAB not advanced the full face value of the VTB RAT would not have had sufficient funds to close the transaction on September 10, 2012.
[125] I reject the lien claimants’ argument that a VTB is the same as a collateral mortgage. It is not. A collateral mortgage is a form of guarantee. No funds are advanced under a collateral mortgage unless the principal borrower defaults under the principal lending instrument.
[126] I find that FAB advanced $6.5 million to RAT on September 10, 2012 pursuant to a mortgage to finance the purchase of the property.
(iii) Calculations
Are the lien claimants entitled to any of the funds held in court?
[127] Justice Patillo, by order dated October 9, 2014, lifted the receivership stay[^13] in respect of the property at 1485 Dupont and granted leave for FAB as mortgagee to sell the property to enforce its mortgage remedies through power of sale proceedings. The sale to Thombar was approved by vesting order of Justice Newbould dated May 11, 2015 (the “Vesting Order”) in Commercial Court action CV-13-10280-00CL, with the purchaser being 1485 Dupont Inc., the sole-purpose company formed by Thombar’s principals to take title.
[128] The Vesting Order required a portion of the proceeds of sale to be paid into court pending a determination of priorities as between the first mortgagee and the lien claimants in the lien actions. The amount to be paid into court pursuant to the Vesting Order was the lesser of:
a) the total of the face value of all six preserved lien claims plus the lesser of $50,000.00 or 25% for costs, calculated as $1,289,524.14; and
b) $608,119.43, being the cash proceeds of sale after applying all expenses permitted by the Vesting Order.
[129] As a result of this calculation $608,119.43 was paid into court out of the proceeds of sale. A portion of that fund was released following settlement of four of the lien claims, leaving only the CAM and Gentry lien claims as challenging FAB’s priority.
[130] The lien claimants argue that at most FAB as mortgagee has priority to the extent of $6.5 million, and that any other expenses claimed by FAB as arising from the receivership and the power of sale proceedings do not stand in priority to the lien claimants’ claims.
[131] FAB filed an accounting statement of the net proceeds of sale under the Vesting Order[^14]. Mr. Brudner testified as to the costs and expenses listed in the accounting statement. Justice Newbould approved these items implicitly in the Vesting Order at paragraph 4 wherein he defined net proceeds of sale as including the charges and expenses that are listed in the accounting statement. Nevertheless the lien claimants seek to go behind the accounting statement in these lien proceedings.
[132] As a result of the Vesting Order the amount paid into court was $608,119.43 on account of all of the lien claims then outstanding. The sum of $608,119.43 was calculated and determined in the Commercial Court receivership proceedings. It is not for this lien court to go behind the calculation.
[133] For the VTB mortgagee to be made whole under the VTB that triggered the power of sale proceedings, FAB would be entitled to the entire balance of the monies paid into court, unless the lien claimants have a priority claim by reason of the Construction Lien Act. For the reasons given, I find that the lien claimants do not have a priority claim over FAB as first mortgagee. There are no funds remaining after payment of the VTB mortgage and the fees, charges and expenses approved by reason of the Vesting Order.
[134] On that basis the entire balance remaining in court out of the $608,119.43 paid into court from the proceeds of sale is payable to FAB, FAB being the mortgagee with a proven priority to the lien claims of CAM and Gentry.
Should payments by the receiver be deducted from the principal amount of the lien claims?
[135] Another calculation issue concerns the Gentry lien claim. FAB argues that $50,000.00 paid to Gentry by the receiver in December 2013 to connect the HVAC system at the request of the receiver should be deducted from the amount claimed in the lien claim. I disagree. The sum was paid for a specific extra that arose after the lien claim had been registered. It is not properly deducted from the balance remaining in the lien claim.
[136] As previously noted, the distribution made in April 2017 by the receiver to creditors that include CAM and Gentry is properly credited to the lien claims and should be deducted from the lien claims, leaving the balance of the unpaid CAM lien claim as $70,658.85 and the balance of the unpaid Gentry lien claim as $258,476.58. However, given my findings regarding the priority issue, this calculation is moot.
III. Conclusion
[137] I conclude that for purposes of section 78(3) of the Construction Lien Act the FAB mortgage registered on September 10, 2012 was registered prior to the date that the first lien arose and has a priority over the liens of CAM and Gentry. The funds remaining in court as proceeds of the sale that resulted from power of sale proceedings under the VTB are payable out of court to FAB together with accrued interest.
IV. Costs and Report
[138] This trial will resume on Thursday May 24, 2018 at 10:00 a.m. for the purpose of fixing costs and finalizing the report.
[139] The parties should attempt to resolve the issue of costs themselves. If the parties cannot resolve the issue of costs, the court will hear submissions as to costs on May 24, 2018.
[140] Counsel for the defendants shall prepare a Report, in draft, for review by the plaintiffs and the court at the attendance on May 24, 2018.
Master C. Albert .
Released: May 17, 2018
2018 ONSC 3126
COURT FILE NO.: CV-13-494453 and CV-14-496630
DATE: May 17, 2018
SUPERIOR COURT OF JUSTICE
BETWEEN:
Cam Moulding & Plastering Ltd.
Plaintiff
- and -
Dupont Developments Ltd., The Rose and Thistle Group Ltd., Florence Leaseholds Limited, Beatrice Leaseholds Limited and ADA Leaseholds Limited
Defendants
Gentry Environmental Systems Ltd.
Plaintiff
-and-
Dupont Developments Ltd., The Rose and Thistle Group Ltd., Florence Leaseholds Limited, Beatrice Leaseholds Limited and ADA Leaseholds Limited
Defendants
REASONS FOR JUDGMENT
Master C. Albert
Released: May 17, 2018
[^1]: As discussed later in these reasons the first lien arose when work started on September 11, 2012 [^2]: Instrument AT3123491 [^3]: According to expert geologist Albert Maddalena [^4]: Including the TIL report summary [^5]: described in the Robson report, exhibit 9 [^6]: A Record of Site Condition (“RSC”) is a document issued by the provincial government recording that the lands are environmentally suitable for the proposed use. A RSC is required when changing the use of a property from commercial to residential uses. A RSC is not required when continuing ongoing commercial and industrial uses. [^7]: Mr. Thomson’s oral evidence and the abstract of title [^8]: Exhibit 10, volume 2, tab KK, page 612 [^9]: Subsection 78(2) applies to building mortgages to finance construction, which liens arising the improvement financed by the mortgage have priority. The VTB was not a building mortgage. [^10]: Subsection 78(2) applies to subsequent advances of prior mortgages. In the present case the entire principal of the mortgage was applied to the purchase price. There were no subsequent advances. Subsection 78(4) does not apply and neither party relies on subsection 78(4). [^11]: exhibit 10, tab M [^12]: The total of all registered lien claims was $1,063,849.29. [^13]: Order of Justice Newbould dated November 5, 2013 [^14]: Exhibit 2, tab 7