Court File and Parties

Court File No.: C-538-14 & C-540-14 Date: 2018-10-16 Ontario Superior Court of Justice

Between: Hogg Fuel & Supply Limited, Plaintiff – and – Historic Royal Wales Apartments Inc., Madison Avenue Construction Corporation, Home Trust Company and Centurion Mortgage Capital Corporation, Defendants

Counsel: Jeremy Forrest, for the Plaintiff Stephen Schwartz, for the Defendants, Home Trust Company and Centurion Mortgage Capital Corporation No one appearing for Historic Royal Wales Apartments Inc., and Madison Avenue Construction Corporation Alex Toolsie, for Absolute Electric

And Between: Hogg Fuel & Supply Limited, Plaintiff Jeremy Forrest, for the Plaintiff – and – Chvrchill Developments B Inc., Madison Avenue Construction Corporation, Home Trust Company and Centurion Mortgage Capital Corporation, Defendants

Counsel: Stephen Schwartz, for the Defendants, Home Trust Company and Centurion Mortgage Capital Corporation No one appearing for Chvrchill Developments B Inc. and Madison Avenue Construction Corporation

Heard: September 12, 2018

The Honourable Mr. Justice G.E. Taylor

Reasons for Judgment

Introduction

[1] The trial of these two construction lien actions took place at the same time. The participants at the trial were the two lien claimants and two mortgagees. The owners and the general contractor did not attend the trial.

[2] There is no dispute that the holdback required by section 22 of the Construction Lien Act, R.S.O. 1990 Chapter C. 30 was not retained. The issue to be determined is the liability of the mortgagees to the lien claimants for the deficiency in the holdback. It is common ground that there is a deficiency in the holdback. The lien claimants say that the deficiency relates to the basic holdback and the mortgagees say that the lien claimants are entitled to look to have their liens satisfied from the finishing holdback only.

[3] The parties are also in agreement that if the deficiency is with respect to the basic holdback then both lien claimants are entitled to judgment for the full amounts of their lien claims. If the deficiency relates to the finishing holdback both lien claimants are entitled to judgment for 10% of the amount of their liens.

[4] Hogg Fuel & Supply Limited registered two construction liens against three properties. Absolute Electric, a sole proprietorship, sheltered under one of the liens registered by Hogg Fuel.

Facts

[5] At issue are construction liens registered against three properties in the City of Kitchener. The properties were located at 46 College Street, 58 Weber Street West and 64 Weber Street West. The three properties were originally owned by related corporations who were renovating older apartment buildings on each of the properties.

[6] At the relevant time, 46 College Street and 64 Weber Street West were owned by Historic Royal Wales Apartments Inc. and Chvrchill Developments B Inc. was the owner of 58 Weber Street West. Madison Avenue Construction Corporation was the general contractor responsible for the renovations at each of the three properties.

[7] Hogg Fuel entered into a contract with Madison and supplied services and material to the improvement at 46 College Street in the amount of $106,250.12 inclusive of HST. Hogg Fuel was not paid for the services and material supplied after October 8, 2013 and on April 9, 2014, registered a construction lien in the amount of $44,045.81 being the balance owing for the services and materials supplied to 46 College Street.

[8] Absolute Electric entered into a contract with Madison pursuant to which services and materials were supplied to the improvement at 46 College Street in the amount of $48,638.25 inclusive of HST between October 16, 2013 and May 23, 2014. On June 25, 2014, Absolute Electric registered a construction lien in the amount of $36,408.90 being the balance owing for the services and material supplied to 46 College Street.

[9] Hogg Fuel entered into a contract with Madison and supplied services and material to the improvement at 58 Weber Street West in the amount of $35,458.50 inclusive of HST. Hogg Fuel was not paid for the services and material supplied after October 24, 2013 and on April 9, 2014 registered a construction lien in the amount of $20,047.84 being the balance owing for the services and materials supplied to 58 Weber Street West.

[10] Hogg Fuel entered into a contract with Madison and supplied services and material to the improvement at 64 Weber Street West in the amount of $41,563.67 inclusive of HST. Hogg Fuel was not paid for the services and material supplied after December 24, 2013 and on April 9, 2014 registered a construction lien in the amount of $4,275.01 being the balance owing for the services and materials supplied to 64 Weber Street West.

[11] The total of the three liens registered by Hogg Fuel is $68,368.66 and the total of the amount owing to Absolute Electric is $36,409.90.

[12] On March 1, 2013, two mortgages were registered in favour of Computershare Trust Company of Canada against 46 College Street, 58 Weber Street West and 64 Weber Street West in the total amount of $7,100,000. The purpose of the two mortgages was for construction financing in relation to the improvements at the three properties. On June 4, 2013, a second mortgage was registered in favour of AMK Mortgages Ontario Inc. against the three properties in the total amount of $90,750.

[13] On December 12, 2013, a Certificate of Completion was published in the Daily Commercial News in relation to the three properties. The Certificate was signed on November 1, 2013 and stated that the date of substantial performance was November 1, 2013.

[14] On December 20, 2013, Home Trust Company registered a mortgage against 46 College Street, 58 Weber Street West and 64 Weber Street West in the total amount of $7,250,000. Home Trust advanced the sum of $7,150,000 on the security of its mortgage and held back the balance of $100,000 which was never advanced. The funds advanced by Home Trust were utilized to discharge the mortgages of Computershare and AMK.

[15] On February 14, 2014, Centurion Mortgage Capital Corporation registered a mortgage against 46 College Street, 58 Weber Street West and 64 Weber Street West in the total amount of $700,000. Centurion advanced the sum of $700,000 which was not used to fund any construction on the three properties.

[16] On May 6, 2015, Home Trust transferred its mortgage to Centurion with the balance owing being $7,067,107.09.

Positions of the Parties

[17] The parties agree that the issue to be decided is the priority as between the lien claimants and the mortgagees. The priority is to be determined by reference to the deficiency in the holdback required to be maintained pursuant to s. 22 of the Construction Lien Act, R.S.O. 1990 Chapter C. 30.

[18] The mortgagees agree that there is a deficiency in the holdback. The lien claimants assert that there ought to be priority given to them as a result of the deficiency in the basic holdback. This would result in the lien claimants being paid the full amounts owing to them. The mortgagees assert that there is a deficiency in the finishing holdback for which Home Trust only is liable. Centurion asserts that there can be no priority as against it in favour of the lien claimants.

[19] The mortgagees assert that to be entitled to look to the deficiency in the basic holdback the lien claimants were obliged to preserve their liens before the expiry of the 45 day period following publication of the Certificate of Completion. Because the liens were not preserved until after the expiry of the 45 day period, the lien claimants are limited to the deficiency in the finishing holdback.

[20] The mortgagees do not challenge the amount of the liens registered by Hogg Fuel or Absolute Electric. The mortgagees do not challenge the timely preservation or perfection of the liens although they do maintain that the lien claimants cannot assert priority with respect to any deficiency in the basic holdback.

[21] It is common ground that if the deficiency in the holdback relates to the basic holdback then the lien claimants are entitled to priority for the full amounts of their liens. If however, the deficiency only relates to the finishing holdback then the lien claimants are entitled to priority for 10% of the amounts of their respective liens.

Discussion and Analysis

[22] Section 22(1) of the Act creates the basic holdback which requires a holdback equal to 10% of the price of the services or materials supplied to the improvement to be retained until all liens that may be claimed against the holdback have expired. Section 22(2) creates a separate holdback for finishing work. When a contract has been certified to be substantially performed but services and materials remain to be supplied to complete the contract, a separate holdback equal to 10% of the price of the remaining services or material is to be maintained until all liens that may be claimed against the holdback have expired.

[23] Section 23(1) of the Act makes an owner liable for the holdbacks required to be retained. It is not disputed that the owners of the three properties which are the subject of this action failed to maintain the proper holdbacks.

[24] Section 78(2) of the Act provides that when a mortgage is taken for the purpose of financing an improvement, any liens arising from the improvement have priority over the mortgage to the extent of any deficiency in the holdbacks required to be maintained by the owner. The section treats a mortgage which repays the original construction mortgage in the same manner. I am therefore satisfied that the Home Trust mortgage is a construction mortgage and is liable to the lien claimants to the extent of the deficiency in the holdbacks which should have been maintained by the owner.

[25] According to s. 31(3)(a)(i), a lien for services or materials supplied to an improvement before the date certified to be the date of substantial completion expires 45 days after the date of publication of the Certificate of Completion.

[26] The Home Trust mortgage was registered more than 45 days following the date of substantial performance specified in the Certificate of Completion but less than 45 days after the date of publication of the Certificate. This means that Home Trust should have held back 10% of the amount of the mortgage. It failed to do so. However, if Home Trust had retained the required holdback, it would have been entitled to release the holdback after January 26, 2014 which was 45 days after publication of the Certificate of Completion. As of January 27, 2014 none of the liens which are the subject of the present action had been preserved or perfected.

[27] According to the lien claimants, the deficiency in the holdback crystallized on December 20, 2013, when Home Trust advanced funds to pay out the building mortgages. The lien claimants reason that s. 15 of the Act provides that a lien arises when the services or materials are first supplied. Section 78(2) uses the wording: “the liens arising from the improvement have priority over that mortgage …”.[underlining added] This means, say the lien claimants, that preservation of their liens was not required for there to be priority over the Home Trust mortgage up to the amount of the basic holdback.

[28] The lien claimants rely on the case of Boehmers v. 794561 Ontario Inc., [1993] O.J. No. 1805 and in particular paragraph 52 which states:

As it seems to me, any other interpretation of s. 78(4) would emasculate the intended effect of the subsection. To me, s. 78(4), like s. 78(2), stands as a warning to all mortgagees who deal with the property in question: if the mortgagee wishes to finance the project, it must honour the dictates and strictures of this subsection. The mortgagee is given fair warning of the inescapable holdback deficiency priority of s. 78(2) . Equally, under s. 78(4), the mortgagee is in effect told: "Thou shall not advance when a registered lien is on title" (unless it takes care to employ protective procedures otherwise available under the Act). [Underlining added]

[29] In Boehmers, a mortgagee advanced funds when there was a lien registered against the property. It was held, in reliance on the wording of section 78 (4) of the Act, that all lien claimants, even those who registered their liens subsequent to the date of the advance had priority over that particular advance. It seems to me that the critical fact in Boehmers was that the mortgagee had clear notice at the time of making the advance that there was a preserved lien against the property. The section makes it clear that the mortgagee loses its priority to the extent of the advance made with knowledge of a preserved or perfected lien.

[30] In the present case, the payment by Home Trust was made at a time when there were no preserved or perfected liens against the property.

[31] The scheme of the Act is premised on liens being preserved by registration. Section 31(3)(a)(i) of the Act makes it clear that a lien expires 45 days after publication of the Certificate of Completion. As was stated in Kappeler Masonry Corp. v. Winston Hall Nursing Homes Ltd., [2001] O.J. No. 3008 at paragraph 30:

Publication of a certificate of substantial performance is notice to all suppliers of services and materials in a project that lien periods have started to run, irrespective of what stage the work is at. The bench mark for preservation and perfection of a lien is the date of publication of the certificate, and suppliers of services or materials who ignore that event do so at their peril. [Authorities omitted]

[32] I agree with the position of the mortgagees. A lien expires 45 days after publication of the Certificate of Completion. Only lien claimants with properly preserved and perfected liens are entitled to make a claim against a deficiency in the holdbacks. There were no preserved or perfected liens against the properties within 45 days after the publication of the Certificate of Completion. Therefore, those lien rights expired in relation to a claim against the basic holdback.

[33] A mortgagee such as Home Trust can determine by conducting the appropriate searches if there are liens which have been preserved at the date of paying out a construction mortgage just like the mortgagee in Boehmers could have protected the priority for the advance in question by conducting a search and learning that the lien was registered against the property. If liens have been registered and the required holdback is not maintained or the advance is made in any event then the lien claimants are entitled to priority over the mortgage up to the amount of the deficiency in the holdback or the amount of the advance.

[34] It seems to me that the reasoning in Boehmers would apply if Home Trust had paid off the construction mortgage in the face of a preserved or perfected lien without retaining a holdback. This would then result in Home Trust losing its priority over all lien claimants, who properly preserved and the perfected their liens, up to the deficiency in the basic holdback.

[35] I would have had no difficulty in finding the lien claimants in this case to be entitled to priority over the Home Trust mortgage if the liens had been registered before the expiry of the 45 day period following publication of the Certificate of Completion. This is because, in my view, Home Trust should have withheld 10% of the amount of the mortgage which was advanced on December 20, 2013. If Home Trust had done so, the holdback could have been released on or about January 27, 2014 and the lien claimants could have no basis to claim priority. As stated by counsel for Hogg Fuel, if that had occurred “I would not be here”. I cannot accept the argument that because Home Trust failed to withhold 10% of the mortgage and the owner failed to maintain the proper holdback, the lien claimants are in a better position than they would have been if Home Trust had not advanced the full amount of the mortgage.

[36] Having concluded that the liens of the two claimants which had arisen as at December 20, 2013 expired because they were not preserved within the 45 day period following publication of the Certificate of Completion, there is no dispute that both lien claimants are entitled to priority over the Home Trust mortgage for the deficiency in the finishing holdback in accordance with s. 31(4) of the Act.

[37] The Centurion mortgage was not a construction mortgage. The lien claimants can have no priority over that mortgage.

[38] The lien claimants are entitled to judgment for the full amounts of their liens against the defendants Historic Royal Wales Apartments Inc., Chvrchill Developments B Inc. and Madison Avenue Construction Corporation together with at declaration of the validity of the liens.

Conclusion

[39] For the foregoing reasons, there will be judgment in favour of Hogg Fuel against Home Trust for $6,837. There will be judgment in favour of Absolute Electric against Home Trust for $3,641.

[40] There will be a declaration that Hogg Fuel and Absolute Electric are entitled to valid liens against the property located at 46 College Street, Kitchener, Ontario, PIN 22317 – 0070. There will be a declaration that Hogg Fuel is entitled to a valid lien against the property located at 58 Weber Street West, Kitchener, Ontario, PIN 22315 – 0051. There will be a declaration that Hogg Fuel is entitled to a valid lien against the property located at 64 Weber Street West, Kitchener, Ontario, PIN 22315 – 0052.

[41] There will be judgment in favour of Hogg Fuel against Historic Royal Wales Apartments Inc., and Madison Avenue Construction Corporation for $48,320.82. There will be judgment in favour of Hogg Fuel against Chvrchill Developments B Inc. and Madison Avenue Construction Corporation for $20,047.84. There will be judgment in favour of Absolute Electric for $36,408.90 against Chvrchill Developments B Inc. and Madison Avenue Construction Corporation. Hogg Fuel and Absolute Electric are entitled to interest on the amount of the judgments against Historic Royal Wales Apartments Inc., Chvrchill Developments B Inc. and Madison Avenue Construction Corporation calculated in accordance with the Courts of Justice Act.

[42] If the parties are unable to agree on the appropriate disposition as to costs, they may make written submissions. Cost submissions on behalf of any party claiming costs are to be delivered to my office at 85 Frederick St., Kitchener, Ontario, no later than November 9, 2018. Responding submissions are to be delivered to my office no later than November 30, 2018. The written cost submissions are not to exceed three pages in length exclusive of Bills of Costs and Costs Outlines. Electronic copies of the cost submissions should be forwarded to Kitchener.superior.court@ontario.ca.

G.E. Taylor, J. Released: October 16, 2018