COURT FILE NO.: CV-13-494453 and CV-14-496639

DATE: 2019-07-30

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: SCOTT, PICHELLI & EASTER LIMITED, as assignee for CAM MOULDING & PLASTERING LTD., and GENTRY ENVIRONMENTAL SYSTEMS LTD. BY ITS TRUSTEE, SCOTT, PICHELLI & EASTER LIMITED, Plaintiffs

AND:

DUPONT DEVELOPMENTS LTD., THE ROSE AND THISTLE GROUP LTD., FLORENCE LEASEHOLDS LIMITED, BEATRICE LEASEHOLDS LIMITED and ADA LEASEHOLDS LIMITED, Defendants

BEFORE: Sossin J.

COUNSEL: Antonio Conte, Counsel for the Plaintiffs

Michael Handler and Emily Evangelista, Counsel for the Defendants

HEARD: March 26, 2019

REASONS FOR DECISION

OVERVIEW

[1] This motion is brought by Scott, Pichelli & Easter Ltd. on behalf of the plaintiffs, two companies, Cam Moulding & Plastering Ltd. (“Cam Moulding”) and Gentry Environmental Systems Ltd. (“Gentry”) (collectively the “Lienholders”), seeking to oppose confirmation of the Report of Master Albert dated May 17, 2018 (Cam Moulding & Plastering Ltd. v Dupont Developments Ltd., 2018 ONSC 3126).

[2] In 2012, the Lienholders provided services on a commercial property located at 1485 Dupont Street, in Toronto, (the “Dupont Property”), then owned by the Defendant, Dupont Developments Ltd. Their liens were registered in 2013, along with several other service providers on the Dupont Property, and neither the validity or the timing of these liens is at issue in this motion.

[3] The Dupont Property is subject to mortgages held by Florence Leaseholds Limited, Beatrice Leaseholds Limited, and Ada Leaseholds Limited (the “Defendant Mortgagees”).

[4] The issue before Master Albert and at the heart of this motion was whether the Lienholders or the Defendant Mortgagees should have priority under the terms of s.78(3) of the Construction Act, R.S.O. 1990, c. C.30 (previously the Construction Lien Act) (the “Act”). This section provides that priority in recovering proceeds of a sale of property subject to liens is given to the mortgagee to the extent of the lesser of (i) the actual value of the premises at the time when the first lien arose; and (ii) the total amounts that prior to that time had been advanced.

[5] The significance of a finding as to whether the Defendant Mortgagees meet the terms of s.78(3) also relates to a portion of the funds arising from the sale of the Dupont Property in 2015 for $7.5 million which have been paid into Court pending the outcome of the construction lien litigation.

[6] In her Report, Master Albert ruled that the Defendant Mortgagees established priority over the Lienholders under s.78(3) of the Act. She further held that as a result of this finding, the Defendant Mortgagees are entitled to all of the proceeds of sale of the Dupont Property which were paid into Court.

[7] For the reasons that follow, I find that Master Albert committed no error in fact or law in determining that the Defendant Mortgagees met the criteria under s.78(3) of the Act and had priority over the Lienholders for the funds advanced under the mortgage, and the Master’s Report is confirmed to that extent.

[8] The Defendant Mortgagees priority ended, however, with the funds advanced under the mortgage. While property taxes and legal expenses relating to the sale of the property stand in priority to the liens, additional fees, charges and expenses associated with the property and receivership do not take priority over the valid liens. Therefore, the Defendant Mortgagees are not entitled to all of the funds paid into court as part of the May 11, 2015 Vesting Order of Justice Newbould.

[9] For reasons set out below, the portion of Master Albert’s Report setting out the Defendant Mortgagees entitlement to the funds paid into Court beyond the value of the actual mortgage funds advanced (together with legal expenses and expenses directly relating to the sale of the Dupont Property, and property taxes) is set aside.

FACTS

[10] The Dupont Property was contaminated as a result of it housing a dry cleaning business as a tenant between 1995 and 2011. When that tenant decided to move, the owners elected to sell the property.

[11] A real estate agent, Paul Pearl (“Pearl”), made a conditional offer to buy the property for $7.7 million with a 60% vendor take back (“VTB”) mortgage. Pearl, in turn, arranged with Norma Walton (“Walton”), principal of the defendant, Rose & Thistle Group (“RAT”) to purchase the property for $8 million, with a deposit of $150,000.00, and a five-year VTB mortgage of $6.5 million.

[12] This offer was to buy the property “as is, where is” with no conditions. The offer was accepted and the defendant Dupont Developments Ltd. was incorporated to own and develop the property.

[13] As a result of an alleged fraud, the investor behind RAT put the company and others formed for developing properties into receivership.

[14] Six companies who provided services on the Dupont Property, and who were not paid for their work, registered construction liens.

[15] Based on their work on the Dupont Property after the purchase in 2012, Cam Moulding’s lien was in the amount of $70,658.85, and Gentry’s lien was in the mount of $258,476.58.

[16] On October 9, 2014, following a motion by the Defendant Mortgagees, Justice Patillo issued an order lifting the stay of proceedings imposed following the Receivership Order.

[17] In 2015, the Dupont Property was ultimately sold to Thombar Property Management Inc. (“Thombar”), in trust, for $7.5 million with a $5.5 million VTB mortgage. The Agreement of Purchase and Sale also contained an “as is, where is” clause.

[18] In preparation for a proceeding to determine the approval of the sale, Jack Brudner (“Brudner”), a retired lawyer who managed the property through his company Millwood Management Limited (“Millwood”), and who had been involved in that capacity both in the original 2012 sale to RAT as well as the subsequent 2015 sale to Thombar, provided evidence of the expenses associated with the receivership and sale the Dupont Property.

[19] On May 11, 2015, Justice Newbould issued the Amended and Restated Approval and Vesting Order (the “Vesting Order”), approving the sale of the Dupont Property. The Vesting Order approved the accounting provided by Brudner, and required the leaseholders to pay the “net proceeds” of the sale to Thombar into Court, pending the resolution of the priority dispute between the Defendant Mortgagees and the Lienholders. The amount paid into Court originally totaled $608,119.43. All the liens were subsequently vacated, except the liens of the Lienholders in this action, and the sum held in Court was reduced by $195,896.27.

[20] The trial to determine the priority as between the Defendant Mortgagees and the Lienholders pursuant to s.78(3) of the Act, and to address who had a right to the remaining funds paid into Court, took place before Master Albert on January 11, April 10-13, 17, 19 and May 24, 2018.

[21] After the trial, Master Albert found that the Defendant Mortgagees are entitled to priority over the Lienholders. Based on this finding, she held that the entire balance of the funds paid into Court should be paid to the Defendant Mortgagees’ solicitor in trust. The Defendant Mortgagees also were awarded costs in the event in the amount of $86,235.50.

ANALYSIS

[22] This motion is brought under Rule 54.09 of the Rules of Civil Procedure, R.R.O. 1990, Reg 194.

[23] Under Rule 54.09, I may dispose of this motion by requiring the Master to give further reasons or I may “confirm the report in whole or in part or make such other order as is just”.

[24] The Master is entitled to considerable deference. The Master’s Report should be confirmed unless,

a) there has been some error in principle;

b) the Master’s jurisdiction has been exceeded; or

c) there has been some patent misapprehension of the evidence.

See R.P. International v. DiFlorio, 2010 ONSC 4648; and RSG Mechanical Incorporated v.1398796 Ontario Inc., 2014 ONSC 3936.

[25] Master Albert’s decision turned on her interpretation and application of s.78(3) of the Act to the facts and circumstances of this case.

[26] Section 78 of the Act provides,

Priority over mortgages, etc.

78 (1) Except as provided in this section, the liens arising from an improvement have priority over all conveyances, mortgages or other agreements affecting the owner’s interest in the premises. R.S.O. 1990, c. C.30, s. 78 (1); 2017, c. 24, s. 70.

Building mortgage

(2) Where a mortgagee takes a mortgage with the intention to secure the financing of an improvement, the liens arising from the improvement have priority over that mortgage, and any mortgage taken out to repay that mortgage, to the extent of any deficiency in the holdbacks required to be retained by the owner under Part IV, irrespective of when that mortgage, or the mortgage taken out to repay it, is registered. R.S.O. 1990, c. C.30, s. 78 (2).

Prior mortgages, prior advances

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

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

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

(i) advanced in the case of a mortgage, and

(ii) advanced or secured in the case of a conveyance or other agreement. R.S.O. 1990, c. C.30, s. 78 (3); 2017, c. 24, s. 70, 71.

[27] The parties agree that the Act, as remedial legislation, should be interpreted liberally in favour of lien claimants who prove valid liens; Re Jade Kennedy, 2016 ONSC 7125 at para. 43.

[28] Given that the Defendant Mortgagees rely on an exception to the operation of the Act in favour of Lienholders, the burden rested with them to establish on a balance of probabilities that they fall within the terms of s.78(3) that give them priority over the Lienholders.

[29] Master Albert found that the value of the Dupont Property was more than the $6.5 million vendor take back (VTB) mortgage on September 11, 2012, the date determined to be the one when the first lien arose. Master Albert therefore found that the Defendant Mortgagees registered a mortgage where the amount advanced under the mortgage was not more than the value of the property when the first lien arose, and thereby the exceptional situation where mortgagees take priority over lienholders under s.78(3) applicable in this case.

[30] The Lienholders oppose the confirmation of the Report of Master Albert. They argue that Master Albert made a number of errors of fact, of law and of mixed fact and law which justify this Court in not confirming her decision.

[31] The Lienholders advance three main arguments:

a. The nature of the collateral mortgage meant that no money was actually advanced as security, and thus s. 78(3), properly interpreted, did not apply;

b. The property was purchased “as is where is” in 2012 for $8 million, and improvements of approximately $2 million were made. It is inconsistent with the fair market value that the property could be worth only $7.5 million in 2015. The Defendant Mortgagees failed to meet their burden as to any priority under s.78(3) of the Act; and

c. Even if the Master could find that the mortgagee has priority over the lienholders for the full face of the $6.5 million secured, and subtracting the costs of the sale and prior claims such as tax arrears, there remained funds to provide to the lienholders.

[32] The Defendant Mortgagees assert that Master Albert’s decision should be confirmed, apart from Master Albert’s costs decision, dated May 24, 2018, which denied recovery of a specific disbursement.

[33] The Defendant Mortgagees take the position that any other errors Master Albert might have made were “minor and insignificant” and did not affect the Master’s reasoning or the outcome of her decision. They argue that the majority of the Master’s impugned findings of fact are “well-supported by the record and do not constitute errors.” (para. 28 of the Defendant Mortgagees’ factum).

[34] I address the alleged factual and legal errors in Master Albert’s reasons below.

Alleged Factual Errors

[35] Deference is warranted toward a Master absent errors of law or palpable and overriding factual errors; Zeitoun v. Economical Insurance Group, 2008 CanLII 20996 (ON SCDC), 2008 CarswellOnt 2576 (Div. Ct.) at para. 33; and 250 Front Street West Inc. v. DCT5 Inc., 2018 ONSC 1159, at para. 3.

[36] The Lienholders allege that the Master misapprehended the evidence of the property valuation in 2012. The Lienholders take issue with how Master Albert conveyed the results of the three realtors who gave opinions to the vendor of the Dupont Property in 2012, and contests the authorship of other opinions. While these potential errors may affect the narrative presented by Master Albert, I do see how they would alter her reasoning or analysis.

[37] Master Albert summarized her conclusion as follows (at para. 70),

[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.

[38] Subsequently, she returned to this issue and again reiterated the basis for her decision in the actual purchase price paid by RAT, and the evidence of other offers in a similar range (at paras. 95-96),

[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.

[39] The Lienholders further allege that Master Albert confused the issue of the need for a site condition with the need to remediate the contamination on the site. However, this distinction does not affect Master Albert’s reasoning that the RAT, as a willing purchaser, was aware of the contamination issue, and that remediation would be required.

[40] Master Albert stated that Walton “was fully aware of the contamination issue when, on behalf of RAT, she prepared and submitted the APS for $8 million," and that she had conducted “research on the property.” The Lienholders allege that RAT had no knowledge of the impact of contamination on property and that Walton had conducted no research.

[41] The Lienholders also allege that the Defendant Mortgagee’s own expert, Robert Robson (“Robson”), had determined Walton was not “prudent.” That said, Walton’s evidence clearly referred to her experience with distressed properties, including those with contamination issues. Master Albert stated (at para. 68),

[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.

[42] Master Albert did state that Walton was not an “imprudent purchaser” but also concluded that whether Walton was prudent or not was not relevant to the valuation standard on which she relied (which was the value that a willing buyer would pay to a willing seller for the property in its current state).

[43] I find that Master Albert’s characterization of Walton’s evidence did not constitute a misapprehension of that evidence or a palpable and overriding error of fact.

[44] Master Albert is alleged by the Lienholders to refer to inadmissible opinion evidence with out stating that it is inadmissible. Master Albert found (at paras. 47-49),

[47] I noted 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… 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.

[45] The Lienholders allege that Master Albert accepted inadmissible opinion evidence from Mr. Thomson and Walton in these passages. The Defendant Mortgagees counter by arguing such lay opinion evidence in the personal experience of persons with knowledge of the subject matter of the dispute (in this case, professional commercial real estate purchasers) fit within the admissible lay opinion evidence recognized in R. v. Graat, 1982 CanLII 33 (SCC), [1982] 2 S.C.R. 819 (“Graat”) at pp. 835-837.

[46] In light of the Graat standard, I find that Master Albert did not commit an error in referring to this lay opinion evidence.

[47] Master Albert is alleged by the Lienholders to have relied on her own finding of fact on the value of the Dupont Property in May, 2015, when she made no such finding. Rather, she stated only that the Lienholder’s asserted value had not been proven. An agreement between RAT and the Defendant Mortgagees, the Lienholders argue, is not determinative of the actual value of the Dupont Property. The Lienholders argue (at para. 35 of their factum),

As Ms. Walton admitted in her testimony, her purchase price has included in it an expected increase in value due to the addition of labour and material. This means that the purchase price is not an accurate measure of the actual value of the property when the offer is made within the meaning of the Construction Lien Act. The most fundamental principle in the Construction Lien Act, that the increase in value of the property that is due to the work of the lien claimants is to go first to the lien claimants, is negated if the actual value can be set by a purchase price that is based on that future increased value … This is a fundamental error of principle made by the Master in her interpretation of the s.78(3) of the Act.

[48] Master Albert deals with this issue in her reasons. She stated that Walton not only was aware of the contamination but that she “factored that issue into the price that RAT offered for the property.” (at para. 62) This is not the same as finding that RAT’s purchase price was based on the value of the property after remediation. The extent of remediation required depended on the proposed future use. Master Albert referred to the fact that continued light, industrial use or use similar to the dry-cleaning business would required only modest remediation. I find no error in Master Albert’s conclusion on this issue.

[49] The Lienholders allege that Master Albert disregarded the date of the Lienholders’ “Phase One” work on the property, which commenced prior to closing. The Master also is alleged to have erred in referring to the date on which the work began was agreed to by the parties when it had not been.

[50] While the date may not be agreed upon by the parties, the date on which Master Albert concluded that the Lienholders commenced work, September 11, 2012, is supported by the evidence in the record (including the Phase Two ESA Report from the consultants retained by RAT the day after closing). I find no error in Master Albert’s reliance on this evidence.

[51] Master Albert is alleged by the Lienholders to have misapprehended the evidence of their expert on valuation for contaminated properties, Mr. Grant Uba (“Uba”), and also misapprehended the evidence of the Defendant Mortgagees’ expert (“Robson”).

[52] The Lienholders argue that Uba’s evidence was submitted primarily to explain how market values are determined for contaminated properties and to show that the Defendant Mortgagees had not discharged their burden of producing evidence of the “unimpaired market value” of the property in 2012. While he was bound by the relevant consulting standards to indicate that his opinion might not be accurate f the assumptions on which it was based were not true, Master Albert should have relied on Uba’s findings as none of the assumptions referred to were contested by the Defendant Mortgagees.

[53] Additionally, at para. 86, Master Albert stated that Uba relied on an assumption that the Dupont Property purchase price should be based on rezoning or that a record of site condition would be required. The Lienholders assert that neither assumption was made by Uba.

[54] Master Albert found the evidence of Uba to be unhelpful on multiple grounds. She concluded (at para. 88),

[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.

[55] Even if Master Albert’s alleged errors were rectified, there is no basis to think she would rely on Uba’s opinion in her calculation of the actual value of the property. I do not find Master Albert erred in her conclusion with respect to Mr. Uba’s evidence.

[56] The Lienholders also argue that Master Albert misapprehended the evidence of Robson, the Defendant Mortgagees’ expert, by stating that Robson concluded that the value of the Dupont Property was within the range of the five offers received, while in fact no such conclusion is contained in his report or in his viva voce evidence.

[57] I do not view this alleged error in Master Albert’s characterization of Robson’s evidence as material. Master Albert relies on the fact of the various offers, not Robson’s opinion on those offers, in supporting her findings.

[58] The Defendant Mortgagees dispute many but not all the characterizations of Master Albert as making factual errors. For example, Master Albert set out (at para. 29 of the endorsement) that the Receiver authorized Brudner’s management company to act as manager of the Dupont Property. The Lienholders point to a decision in the receivership proceedings indicating Brudner took over the management of the property so as to take power of sale proceedings. The Lienholders also allege that Master Albert incorrectly stated that the Receiver settled four of the six lien claims, as the Receiver did not settle any of these claims.

[59] The Defendant Mortgagees do not contest such errors but argue they affect only the narrative of Master Albert’s reasons, not her reasoning process. I agree.

[60] The Lienholders refer to Master Albert’s “major factual error” in stating that Justice Newbould’s Vesting Order of May 11, 2015, approved the sale “including all calculations.” For reasons set out below, I find this determination is a legal rather than factual finding.

[61] I have not reviewed each and every factual finding of Master Albert challenged by the Lienholders, but beyond those addressed above, the remaining alleged errors primarily relate to Master Albert’s narrative and I am satisfied do not rise to a palpable and overriding error that would justify interfering with Master Albert’s Report.

[62] Overall, I am satisfied that Master Albert has not committed a factual error that meets the palpable and overriding threshold.

Alleged Legal Errors

[63] In order the Defendant Mortgagees to gain priority over the Lienholders in this case, Master Albert held, the Defendant Mortgagees had to establish that their $6.5 million VTB mortgage was advanced on September 10, 2012, and that the value of the property at that time was at least $6.5 million. She further held that if the Defendant Mortgagees established priority over the Lienholders, they had a right to be made whole, and this would entitle them to the entire balance of funds paid into Court pending the outcome of this action.

[64] The Lienholders assert each of Master Albert’s findings on these key questions was in error.

[65] With respect to the applicable legal principles and application of s.78(3) of the Act, the Defendant Mortgagees assert that Master Albert committed no errors of law.

Was the VTB Mortgage an “Advance”?

[66] In my view, Master Albert set out the proper test under s.78(3) of the Act. Because s.78(3) establishes the principle that liens have priority over all other claims unless one of the exceptions applies, the burden falls on the party seeking to fall within an exception: Re Jade Kennedy, 2016 ONSC 7125.

[67] In order to meet the test under s.78(3)(b)(i) of the Act, the Defendant Mortgagees must establish the amount of funds advanced under the mortgage prior to the liens being registered. On this issue, Master Albert rejected the argument of the Lienholders that no advances were made under the VTB mortgage in this case,

[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.

[68] The Lienholders argue that Master Albert committed an error of law in her misapprehension of a VTB mortgage, concluding that it was akin to an institutional mortgage rather than a collateral mortgage, which have been held not to take priority over liens.

[69] The Lienholders rely on Mackovic v. Dudo, 2007 CanLII 33760 (“Mackovic”) and Jade Kennedy, but neither case stands for the proposition that a VTB does not qualify as a security under which funds are “advanced” under a mortgage.

[70] Master Albert did not err in distinguishing a VTB from the collateral mortgage. In my view, Master Albert did not err in distinguishing a VTB from the collateral mortgage.

[71] Mackovic did deal with a VTB but does not stand for the proposition that such mortgages do not include “advances.” Rather, in the circumstances of that case, involving allegations of negligent misrepresentation, the VTB was found to have distorted the purchase price sufficient to justify an injunction over the sale of the property until the litigation could be resolved.

[72] On this issue, I find that Master Albert did not commit an error of law in finding that the mortgage funds were “advanced” within the meaning of the Act.

Was the Actual Value of the Property on the date of sale more than $6.5 Million?

[73] Master Albert found that the value of the property on September 11, 2012 was at least $6.5 million. The issue in dispute is the reliance by Master Albert on the purchase price in reaching her conclusion on the actual value of the Dupont Property for purposes of s.78(3) of the Act. She held (at paras. 119-120),

[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 and 2012 in amounts ranging from $7.7 million to $8.4 million and in particular the offer made 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.

[74] The Lienholders assert that it was an error of law for Master Albert to ignore binding precedent in Mackovic which they argue established that a purchase price does not determine value for purposes of s.78(3) of the Act. Mackovic, however, dealt with whether the test for an injunction was met, and in my view does not stand for the proposition that Master Albert erred by using the purchase price as a basis for determining actual value.

[75] The Lienholders assert that Master Albert erred by finding that the “actual value” of the Dupont Property in 2012 contained within it a component of expectation of future value. The Defendant Mortgagees dispute that this characterization of Master Albert’s reasons is accurate.

[76] Master Albert addresses this issue and found that the purchase price in 2012 reflected the purchaser’s knowledge of the contamination of the property and did not include an expectation of the increase in value of the property after remediation of the contamination.

[77] She cited Burnaby/New Westminster Assessor, Area 10 v. Haggerty 1997 CarswellBC 1453 at para. 8, and case law referred to therein as authority for the proposition that actual value of a property may be determined by reference to the price a willing buyer would pay from a willing seller, and that case also involved contaminated property.

[78] For the reasons set out above, I find Master Albert did not err in determining the Defendant Mortgagees established that, pursuant to s.78(3), their VTB mortgage of $6.5 million was advanced within the meaning of s.78(3) and that the actual value of the property was greater than $6.5 million at the time the first lien arose.

[79] Therefore, in my view, Master Albert did not err in concluding that the Defendant Mortgages met the requirements of s.78(3), and established priority over the Lienholders’ liens.

Are the Lienholders entitled to the funds paid into Court under Justice Newbould’s Vesting Order?

[80] As set out above, Justice Newbould’s Vesting Order resulted in net proceeds from the sale in the amount of $608,119.43 being paid into Court pending the outcome of the construction lien litigation. All the liens were subsequently vacated, except the liens of the Lienholders in this action, and the sum held in Court was reduced by $195,896.27.

[81] In the proceedings before Justice Newbould, fees, charges and expenses in the amount of $1,219,625.77 were approved. These included realty tax arrears of $209,035.90, as well as charges and management and borrowing costs of the Receiver, accrued interest on the first mortgage, an appraisal, property management fees and legal fees.

[82] The issue which Master Albert was asked by the Lienholders to consider is whether the lien or the Defendant Mortgagees’ charges, fees and expenses take priority after the mortgage advance pursuant to s.78(3) had been paid. This, she did not do.

[83] While Master Albert referred to Justice Newbould’s approval of the sale as “including all calculations” (at para. 46), she seemed to accept that the mortgage consisted of the amounts advanced and all of those calculations (including the fees, charges and expenses).

[84] With respect to the Vesting Order of Justice Newbould, Master Albert held (at paras. 128-134),

[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. 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. (Emphasis added.)

[85] I do not read Justice Newbould’s Vesting Order as establishing that all of the fees, charges and expenses which form part of the calculations approved in the Vesting Order were to take priority over the Lienholders’s lien. In the same paragraph of the Vesting Order referring to “net proceeds,” Justice Newbould expressly stated that, “The priorities as between the Mortgagees’ mortgage and the construction lien claimants shall be determined in the construction lien actions.” (at para. 4).

[86] In my view, Justice Newbould’s reference to “net proceeds,” and approval of certain fees, expenses and charges in relation to the receivership and sale of the Dupont property was not intended to be construed as affecting the priorities as between the Defendant Mortgagees and Lienholders in any way.

[87] If Justice Newbould had intended to make a determination that the Defendant Mortgagees’ fees, charges and expenses take priority over the liens, he would have done so expressly. Given that s.78(3) of the Act creates an exception from the general remedial structure of the Act in favour of lienholders, it should be interpreted narrowly and strictly, just as the provisions entitling lienholders otherwise to enforce liens under the Act should be interpreted generously, and with ambiguities resolved in favour of the lienholders; see 697470 Ontario Ltd. v. Presidential Developments Ltd. (1989), 1989 CanLII 4336 (ON SC).

[88] The Defendant Mortgagees argue that the Lienholders had an opportunity to object to the accounting and whether any particular item deducted from the purchase price was a proper deduction. According to the Defendant Mortgagees’ factum, “All the Master had to determine in this action was whether the lien claimants or the mortgagees had priority to the Net Proceeds paid into court.”

[89] At the outset of her decision, Master Albert posed the question at issue in the action as: “Who has priority: two unpaid lien claimants or the mortgagee?” She answers that question at the end of her introduction (at para. 4): “For the reasons that follow this court finds that the mortgagee’s interest has priority over the lien claimant’s interests and that the mortgagee is entitled to the funds held in court.” (Emphasis added). In my view, these represent two separate findings which both must be confirmed in Master Albert’s Report.

[90] I agree with Master Albert that it was not for her to look behind the accounting undertaken as part of Justice Newbould’s Vesting Order. It would not have been open to the Lienholders, for example, to take issue with the reasonableness of fees and expenses included as part of the net proceeds in this proceeding, or to attempt to challenge a calculation approved by Justice Newbould. Determining priorities as between the Defendant Mortgagee and the Lienholders, however, was the subject matter of the proceeding before Master Albert, and expressly was not the subject of the Vesting Order.

[91] At no point did Master Albert appear to consider the possibility that the Defendant Mortgagees’ interest could have priority over the Lienholders’ interest to the extent of the actual mortgage advances, but that the Lienholders could have priority over other fees, charges and expenses which form part of Justice Newbould’s calculation of net proceeds, and therefore be entitled to the funds held in court to an extent sufficient to pay their liens.

[92] Master Albert does not rely on case law for authority that fees and expenses of a mortgagee take priority over lienholders pursuant to s.78(3) of the Act, or for the proposition that the Defendant Mortgagees are entitled by virtue of gaining priority under s.78(3) to be “made whole,” nor have the Defendant Mortgagees cited case law or other clear authority which stands for this proposition.

[93] Section 78(3) states that where a mortgage is registered prior to the registering of the first lien, that mortgage will “have priority over the liens … to the extent of the lesser of … (b) the total of all amounts that prior to that time were, (i) advanced in the case of a mortgage.” (Emphasis added.) The Act itself is silent with respect to fees, charges and expenses associated with a mortgage for purposes of s.78(3), though the plain meaning of this section would appear to limit any priority of a mortgagee to “advances” actually made prior to a valid lien being registered.

[94] The Lienholders rely on Boehmers v. 794561, 1993 CanLII 8486 aff’d Boehmers v. 794561 Ontario Inc., 1995 CanLII 660 (ON CA) (“Boehmers”), where Justice Killeen provided an accounting of priorities as between a lienholder and mortgagee in the context of s.78 of the Act. In that case, the parties agreed that a mortgage was registered prior to the first lien and therefore under s.78(3) stood in priority to the lien. The dispute in Boehmers concerned additional advances under the mortgage subsequent to the liens being registered. On the proper interpretation of s.78 of the Act, Killeen J. held,

Section 78(4)(a) says, in effect, that the prior mortgage will have priority over "liens arising from the improvement" to the extent of any advance made unless, at the time of the advance, there was a preserved or perfected lien against the premises.

Here, however, the evidence shows indisputably that, when Royal Life made advance no. 4 of $252,759, on February 2, 1990, the Moffatt lien was preserved by timely registration on January 25, 1990.

In my view, the inevitable effect of this advance in the teeth of the Moffatt lien must be that the mortgagee loses its priority for this advance for all purposes vis-à-vis not only the Moffatt lien but all liens arising on the project. This means that, up to the amount of this advance of $252,759, the liens arising on the project are given what amounts to another priority charge like the holdback deficiency over the mortgage.

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).

The ultimate proof of this conclusion is contained in the opening words of s. 78(1) where it is said in most explicit terms that, "[e]xcept as provided in this section, the liens arising from an improvement have priority over all conveyances, mortgages or other improvements affecting the owner's interest in the premises."

Section 78(1) is the overarching principle of the new regime of the Act for the determination of priorities. It is, if you will, the central interpretive principle for the adjudication of conflicts of the type before the court in this case. Surely it necessarily implies that, in cases of conflict, as here, the burden must be on the mortgagee to persuade the court that it somehow falls clearly within a specified exception to the generalized priority of the liens.

When one looks at the exception afforded to the mortgagee under s. 78(4) one finds not a comfort station but a roadblock. The mortgagee is told that it will only get priority for "any advance" if there is no lien registered at the time of such advance. This language can only mean that the mortgagee loses priority up to the full amount of any advance made in the teeth of a registered lien.

[95] As a result of this analysis, Justice Killeen placed the funds advanced under the mortgage prior to the first lien first in priority, followed next by the lien, and followed in turn by later mortgage advances made after the lien was registered.

[96] Master Sandler considered the question of fees, charges and expenses of a mortgagee who holds priority under s.78(3) of the Act in greater detail in David Schaeffer Engineering Ltd. V. D.T.A. Investments Inc. 1998 CarswellOnt 90 (Gen. Div.) (“Schaeffer”). In that case, Master Sandler found that a mortgagee met the criteria under s.78(3) and gained priority over a lienholder for proceeds of the sale of property under power of sale. As in this case, the lienholders in Schaeffer argued that if the mortgage advances took priority over the lien, the lien should take priority over the real estate commission, legal fees, real estate taxes and related expenses arising under the transaction, as these expenditures were not incurred until after the lien was in place. In rejecting this argument, Master Sandler held (at paras. 22-23),

[22] In my view, the position of the mortgagee is the correct one. Once the priority of the mortgagee is established under s.78(3), then one must turn one’s attention to the question how the security for the lien, the land, is to be realized upon, and how such realization is to be distributed. And whether the realization is accomplished by the plaintiff under s.65(1) or by the mortgagee under its power of sale, the party with carriage of the sale will be entitled to have the reasonable “fees and actual disbursements” in connection with the sale deducted from the gross proceeds and reimbursement allowed accordingly. This position is in accordance with the common practice of the Court in all sorts of proceedings where the sale of land is ordered. I see nothing in s.78(3) which would prevent me from reaching this conclusion.

[23] However, I do not think such sale expenses are “advances” under the mortgage within 78(3), but rather, are to be allowed by the court under its powers under sections 59, 62(5), 65, 58(4), 84 and 86 re: costs. In this case, those expenses of the mortgagee not directly relating to the sale of the property, such as for “upkeep” while in possession, are small … this is because the land in question was vacant land. The only work done on this vacant land was by the plaintiff for engineering services, to make the land ready for development. In light of the amounts allowed for the other expenses, which takes the net figure well below $525,000, it does not really matter, in this case, if these small “up-keep” amounts are allowed by me or not; it will not change the result. But if the property were a commercial building that had major management and up-keep expenses that were not off-set by any income, and were paid by the mortgagee over a period of years, before the sale actually took place, then quaere whether such expenses could be deducted by the mortgagee from the gross sale proceeds. Such a problem might be overcome by the appointment of a trustee under s.68, where the trustee could then recover its expenses and management costs, that exceeded any income, under s.68(3). (Emphasis in original)

[97] While Schaeffer clarifies that there is authority for the general practice of mortgagees claiming sale-related expenses such as legal expenses, that decision also casts some doubt on whether management fees, borrowing costs, or other expenses not directly related to the sale should stand in priority to the liens. While that issue had no practical importance in Schaeffer, in this case, it may bear on the proper disposition of the funds paid into Court under the Vesting Order.

[98] The largest component of expenses approved in the Vesting Order relates to the Receiver’s fees and charges. The Lienholders frame their argument on this issue as follows (at para. 53 of their factum), “A Receiver who sells property does not have priority for his fees over secured parties, such as lien claimants, who have enhanced the value of the sold property. In our case, although the Receiver’s fees were ordered to be paid out ahead of the mortgage and liens, there was never an Order as to how this affected the priority between the liens and the mortgagee… The fees should not, however defeat lien claims, but should be on account of the mortgagee only, since he was responsible for these fees being incurred.”

[99] While there is no question that the Receiver is entitled to recover its reasonable fees and expenses, it is not clear what authority the Defendant Mortgagees rely on to establish these expenses should stand in priority to the Lienholders.

[100] I am satisfied that, pursuant to s.78(3) of the Act, the Defendant Mortgagees’ priority does not extend to fees, charges and expenses beyond those relating directly to the sale of the Dupont Property, such as legal expenses.

[101] The Lienholders further rely on 416171 B.C. Ltd. v. Northwest Langley Arenas Ltd., 1999 CanLII 6368 (BC SC) (“Northwest Langley”), with respect to the proposition that interest on a mortgage does not stand in priority to valid liens pursuant to s.78(3) of the Act. In Northwest Langley, Harvey J. cited with approval the following finding by Master Kirkpatrick (as she was then) in C.I.B.C. Mortgage Corporation v. Duguay (1991), 49 C.P.C. (2d) 129 (B.C.S.C.) considering whether various protective disbursements paid by the mortgagee were “advances” under a mortgage. Master Kirkpatrick found they were not “advances” and stated (at p.148),

I do not consider the disbursements of the kind in question here to be "advances" under the mortgage. Although the money expended is expected to be repaid either by the mortgagor or from the sale proceeds, the expenditure is made entirely at the direction of the mortgagee

[102] In Northwest Langley, after reviewing this and other cases to consider the issue of whether arrears of interest can be considered an “advance” under a mortgage, Harvey J. reached a similar finding (at para. 20),

The cases indicate that, unless specifically stated in the mortgage, arrears of interest cannot be considered advances. Under Aldom Drain an amount of money must be under the control of the mortgagor to be considered an advance. Interest arrears are never under the control of the mortgagor. Further, interest arrears are payments made for the benefit of the mortgagee and therefore do not constitute an advance under the reasoning of Master Kirkpatrick in C.I.B.C.

[103] I see no reason to depart from this principle in this case. Therefore, interest charges which form part of the “net proceeds” calculation in the Vesting Order also cannot take priority over the Lienholders’ liens.

[104] The Lienholders concede that the property tax arrears do stand in priority to be paid ahead of the liens. A similar approach was taken by Justice Killeen in Boehmers with respect to the realty taxes in that case.

[105] In light of this analysis, Master Albert erred in finding that the Defendant Mortgagees were entitled to all of the funds paid into Court without regard to the priority as between the Defendant Mortgagees and Lienholders.

[106] On this question of law, I conclude that the Lienholders should have access to the funds paid into Court necessary to satisfy the liens, to the extent these funds are equal to or less than the fees, charges and expenses calculated as part of the “net proceeds” in the Vesting Order (apart from the legal expenses and other direct expenses relating to the sale of the Dupont Property, and the property tax arrears, which both take priority over the liens).

THE DEFENDANTS’ CROSS-MOTION

[107] The Defendant Mortgagees bring a cross-motion opposing confirmation of Master Albert’s Report, dated May 24, 2018, on the issue of costs alone.

[108] In awarding costs to the Defendant Mortgagees, Master Albert declined to include the amounts paid by the Defendant to retain their expert, Robson.

[109] In her decision on costs dated May 24, 2018, Master Albert stated,

The expert for the defendant did not provide an appraisal report, and the court recognizes an appraisal report is excessively expensive… for $21,000 dollars, he critiqued Mr. Uba’s opinion, and basically that’s the role of the court. It is for the court to take the opinions of an expert and look at the flawed foundation upon which it is built, and look at whether it is what it purports to be. It was not an opinion of value. The court did not need Mr. Robson to tell the court that. To undermine Mr. Uba’s opinions was a matter of counsel cross-examining Mr. Uba and making submissions. Mr. Robson did not add anything to that. I have not allowed that disbursement as a cost to be passed on to the plaintiff in assessing costs.

[110] The Defendant Mortgagees argue that Master Albert clearly relied on Robson’s evidence in reaching her findings on priority under s.78(3) of the Act, and specifically with respect to the actual value of the Dupont Property at the time of the first lien being registered.

[111] The Defendant Mortgagees submit that Master Albert failed to follow the principles set out in Hamfler v. 1682787 Ontario Inc., 2001 ONSC 3331 (“Hamfler”), which set out that disbursements will be recoverable where they are reasonable and have been charged to the client. The Defendant Mortgagees argue Master Albert erred in determining the Robson expenses were not recoverable because his evidence was not necessary for her to come to her conclusion. They further argue that Master Albert failed to accurately set out the scope of Robson’s report and testimony.

[112] As the Defendant Mortgagees acknowledge, costs awards are subject to deference by a reviewing court; Hamilton v. Open Window Bakery, 2004 SCC 9, [2004] 1 S.C.R. 303 at para. 27.

[113] I do not find anything in Master Albert’s decision on the Robson disbursement that rises to an error of legal principle which would justify interfering with her exercise of discretion on costs.

[114] While the Defendant Mortgagees’ disbursement on Robson’s expert report may have been reasonable, and therefore potentially “recoverable” (as set out by M. Edwards J., in Hamfler, at para. 13, which distinguished reasonable disbursements from excessive ones), this does not mean the Defendant Mortgagees were legally entitled to the recovery of this disbursement. Master Albert retained the discretion to allow or disallow disbursements even where those disbursements were reasonable.

[115] Similarly, the fact that Robson commented on matters beyond a critique of Uba’s report does not alter the scope of Master Albert’s discretion.

[116] Therefore, the cross-motion by the Defendant Mortgagees is dismissed.

CONCLUSION

[117] As a result of the findings above, the Master’s Report may be confirmed in part, but the decision of Master Albert that the Defendant Mortgagees are entitled to all of the monies that were paid into Court is set aside.

[118] I expect that counsel should be able to agree upon the content and wording of the order to give effect to this decision. A draft order should be submitted to Judge’s Administration at 361 University Avenue for my signature, or I may receive brief, written submissions as to the appropriate wording of the order within 30 days of this judgment.

COSTS

[119] In her supplemental reasons for judgment on costs, dated May 24, 2018, Master Albert concluded that costs should follow the event, and awarded the Defendant Mortgagees costs in the amount of $86,235.50. In light of these reasons, that costs award will need to be set aside and a fresh determination of costs made.

[120] With respect to the costs of this motion, both parties submitted Bills of Costs at the end of the hearing. While the Defendant Mortgagees have been successful in arguing that Master Albert’s decision with respect to priority under s.78(3) of the Act should be confirmed, the Lienholders have been successful in arguing that this priority does not extend to all of the fees, charges and expenses approved as part of the Vesting Order, and thus that they should receive funds paid into Court, to the extent there are funds left to satisfy their liens.

[121] In these circumstances, the Lienholders are entitled to their costs, but the amount will be discounted to reflect this outcome, and the fact that the Lienholders raised a number of alleged errors in Master Albert’s Report which were not necessary to litigate, and which contributed to the complexity and cost of the motion.

[122] The Defendant Mortgagees will pay costs of this motion to the Lienholders fixed at $15,000.00, all inclusive, payable within 30 days of this judgment.

Sossin J.

Released: July 30, 2019