COURT FILE NO.: CV-20-00637297-00CL
DATE: 2022-04-29
SUPERIOR COURT OF JUSTICE – ONTARIO (COMMERCIAL LIST)
RE: BCIMC CONSTRUCTION FUND CORPORATION and OTÉRA CAPITAL INC., Applicants
AND:
33 YORKVILLE RESIDENCES INC. and 33 YORKVILLE RESIDENCES LIMITED PARTNERSHIP, Respondents
BEFORE: Penny J.
COUNSEL: Heather Meredith, Julie Parla and Alexander Steele for the Receiver, PricewaterhouseCoopers Inc.
Brendan D. Bowles and John Paul Ventrella for GFL Infrastructure Group Inc.
Adam Pantel for Royal Excavating & Grading Limited c.o.b. Michael Bros Excavation
Salvatore Mannella and Robert J. Kennaley for Aqua-Tech Dewatering Company Inc.
HEARD: April 14, 2022
ENDORSEMENT
Overview and Issue
[1] Three lien claimants provided services to the owner of a condominium development. They have not been paid. The owner is now insolvent and in receivership. The Receiver sold the property in accordance with an order of the court. There is a dispute about the distribution of the proceeds of sale. Under the Construction Act, the lien claimants are entitled to a priority payment out of the proceeds of sale to the extent of any deficiency in the owner’s holdback. This is not in dispute. What is in dispute is the method of determining the amount of the deficiency to which the priority applies. This question turns on the interpretation of s. 78(2) of the Act. The three lien claimants have brought a motion to determine this issue.
[2] The parties agreed on the form of the question to be answered:
What is the proper interpretation and application of s. 78(2) of the Construction Act when, as here, there is more than one mortgage taken with the intention to secure the financing of an improvement (i.e., building mortgages)? Specifically, do the liens have priority, to the extent of any deficiency in the holdbacks required to be retained by the owner (the “owner’s holdback”) over each building mortgage [the lien claimants’ position]? Or are the lien claimants limited to priority, to the extent of any deficiency in the owner’s holdback, over all building mortgages combined [the Receiver’s position]?
[3] For the reasons that follow, I conclude that the lien claimants’ priority under the Act is limited to the extent of the deficiency in the owner’s holdback over all building mortgages combined. Accordingly, the lien claimants’ motion is dismissed. The Receiver’s proposed priority methodology is approved.
Background
[4] There is an agreed statement of the facts. The respondents in this proceeding were the owners of a property being developed as condominiums at 33 Yorkville Ave. in Toronto. The respondents were placed in receivership by order of this Court on March 27, 2020. When the receivership order was made, the existing structure on the property had been demolished and a deep construction pit for the foundation and underground structure of the condominium tower was started but not yet finished. The lien claimants performed excavation, shoring and dewatering services on the pit. Their liens for these services were valued in the amounts shown in the following table. This table also highlights the economic impact of the priority amounts that are in dispute in this motion (which will be discussed in greater detail below):
| Party | Amount Outstanding | Amount Claimed in Proof of Claim | Amount Allowed (Owner’s Holdback) | Amount Now Claimed on this Motion (Owner’s Holdback x2) |
|---|---|---|---|---|
| GFL | $1,158,709.22 or $2,027,679.22 | $2,027,679.22 | $1,083,466.60 | $2,027,679.22 |
| Michael Bros. | $1,245,831.30 | $1,245,831.30 | $284,183.70 | $568,367.40 |
| Aqua-Tech | $217,924.25 | $217,924.25 | $41,622.27 | $83,244.54 |
[5] Also as of the date of the receivership order, there were six mortgages on the property. Two were building mortgages: the BcIMC Construction Fund Corporation and Otéra Capital Inc. mortgage in first position and the KingSett Mortgage Corporation mortgage in fourth position. An approval and vesting order for the sale of the property was issued on March 11, 2021. That order also approved an unopposed distribution of proceeds. The transaction closed on March 29, 2021 for a purchase price of $300 million.
[6] The order of priority of the six mortgages, and the amounts outstanding following the approved sale and distribution are set out in the following table. As shown in this table, the secured claims of BcIMC, Otéra, and KingSett have been fully satisfied by the unopposed distribution:
| Priority | Lender | Purpose | Charge | Secured Claim | Amount Now Owing |
|---|---|---|---|---|---|
| Senior Loan | BcIMC Construction Fund Corporation (“BCI”) and Otera Capital Inc. (“Otera”) | Construction financing and land acquisition | $817,875,000 | $185,038,968.24, of which, $76,000,000 was used to finance construction | $0 |
| 2nd | Westmount Guarantee Service Inc (“Westmount”) | Indemnity agreement security (Tarion bond, deposit insurance) | $21,000,000 | $21,000,000 | $0 |
| 3rd | City of Toronto | Development obligation security (remains on title) | $50,000 | $0 | $0 |
| 4th | KingSett Mortgage Corporation (“KingSett”) | Construction financing | $150,000,000 | $96,494,441.99 | $0 |
| 5th | Westmount | Indemnity agreement security (Tarion bond, deposit insurance) | $277,000,000 | $139,800,000 | $66,800,000 |
| 6th | KingSett Real Estate Growth GP No. 4 Inc. | Credit facility | $335,625,000 | $0 | $0 |
The Central Statutory Provisions
[7] The basic 10% holdback requirement holdback in the Construction Act, R.S.O. 1990, c. C.30, is set out in s. 22(1):
Each payer upon a contract or subcontract under which a lien may arise shall retain a holdback equal to 10 per cent of the price of the services or materials as they are actually supplied under the contract or subcontract until all liens that may be claimed against the holdback have expired or been satisfied, discharged or otherwise provided for under this Act.
[8] Section 24(1) provides that payments of up to 90% of the price of services or materials provided may be made “without jeopardy”:
A payer may, without jeopardy, make payments on a contract or subcontract up to 90 per cent of the price of the services or materials that have been supplied under that contract or subcontract unless, prior to making payment, the payer has received written notice of a lien.
[9] Section 78(1) sets out the basic rule that, subject to the exceptions set out later in that section, the liens arising from an improvement have priority over all mortgages. Section 78(1) provides:
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.
[10] As noted earlier, the applicable exception in this case appears in s. 78(2) dealing with building mortgages. In the case of building mortgages, the lien has priority to the extent of any deficiency in the holdbacks required to be retained:
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.
The Interpretation Exercise
[11] There is no dispute about the legal test to be applied to the interpretation of s. 78(2). The parties agree that the modern approach to statutory interpretation requires that the words of a statute be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of the legislature. This approach is consistent with the Legislation Act, 2006, S.O. 2006, c. 21, Sched. F, which provides, in part, that all legislation is to be interpreted as remedial and given such fair, large and liberal interpretation as best ensures the attainment of its objects.
The Lien Claimants’ Argument
The Words
[12] The lien claimants submit that the ordinary meaning of the words of s. 78(2) requires that each lien claimant have priority over each building mortgage to the extent of the deficiency in the holdback. Here, there was no holdback retained so the full 10% priority of the required holdback is available in respect of each of the two building mortgages, i.e., the mortgages of BcIMC and Otéra in first position and KingSett in fourth position. Accordingly, the lien claimants argue they are entitled to their priority amount twice, once in respect of the first mortgage and again in respect of the fourth mortgage. Put another way, the lien claimants argue they are, under the language of s. 78(2), entitled to a priority of, in effect, 20%, rather that the holdback required under s. 22 of 10%, because there are two building mortgagees against which they may assert their priority.
[13] They rely for this argument upon the singular form of the words “a mortgagee” taking “a mortgage” and the lien holder’s priority being over “that mortgage”. If, they say, there is only one building mortgage, the lien claimant only gets one priority claim in the amount of any deficiency in the 10% holdback. However, if there are, as is the case here, two building mortgages, the lien claimant gets a priority claim of up to 10% against one of the building mortgagees and another 10% priority claim against the other building mortgagee. If there were three building mortgages, the lien claimant would likewise have a full 10% priority claim against each building mortgagee, for a total of a 30% priority entitlement, and so on.
Context and Purpose
[14] The lien claimants also justify this interpretation based on the context and purpose of the Act which, they say, is to protect lien claimants. Each building mortgagee knows going in that its risk is 10% of any deficiency in the holdback. If each mortgagee is not in fact subject to the consequences of that risk where there is a deficiency and more than one building mortgage, but is subject to only one priority claim of 10% over all building mortgages, the risk of those mortgagees is being “diluted” and they are receiving a “windfall”. To similar effect, the lien claimants argue that any subsequent building mortgagee expects to assume more risk than the prior mortgagees. They should not be insulated from that additional risk by limiting a lien claimant’s priority to one 10% deficiency claim applicable to all building mortgagees.
Precedent - Sernas
[15] Finally, the lien claimants submit that the decision of Glass J. in GM Sernas & Associates Ltd v. 846539 Ontario Ltd, [1999] O.J. No. 3714 (S.C.), relied upon by the Receiver, is distinguishable and, in any event, should not be followed.
[16] In Sernas, the court considered whether, in a circumstance where there were two mortgages over which the Act granted lien claimants priority to the extent of the deficiency in the holdback (one a “building mortgage” under s. 78(2) and the other a “subsequent mortgage” under s. 78(5)[^1]), there should be two different priority claims such that the total lien claimant holdback priority claim would be 20%. The Court found that the maximum priority in a claim for lien over both mortgages is 10%, noting that, “[t]here is one holdback figure” and that “the deficiency is the full holdback figure”.
[17] The lien claimants say the argument about the use of the singular “mortgagee”, “mortgage” and “that mortgage” they are making in this case was not raised before Justice Glass in Sernas. They also say the decision in Sernas focuses on the argument that the holdback should be calculated for the improvement rather than the individual contracts, which the Court rejected. The lien claimants say that is not in issue here. The issue here is whether the priority is to be measured against each mortgage separately, not collectively; that issue, they say, was not really addressed in the Court’s analysis in Sernas.
[18] In any event, the lien claimants submit that the decision in Sernas, a decision of the Superior Court, is not binding on me. This court, they say, should find that Sernas was wrongly decided and, not being a binding precedent, should not be followed in this case.
[19] I am unable to accept any of these arguments.
Analysis
[20] The lien claimants’ interpretation, while it purports to be a “plain and ordinary” reading of the s. 78(2), limits the meaning and effect of key words in the section, over-weights the use of the singular form, implicitly reads in additional language which is not actually there, and produces a result which is inconsistent with the scheme and purpose of the Act.
The Words
[21] Section 78(2) provides priority to a mortgage taken with the intention to secure the financing of an improvement “to the extent of a deficiency” in the owner’s holdback. There is only one owner’s holdback and, if there is a deficiency, only one priority deficiency claim (Sernas, paras. 18 and 20). The lien claimants’ priority in respect of the deficiency took effect against the first mortgagee, because it is a building mortgage. Once effect was given to that priority, there was no more deficiency (Sernas, para. 23). The honouring of the lien claimants’ priority under s. 78(2) against the first building mortgage fully satisfied the deficiency and the situation was restored to what it would have been had the owner, as required by s. 22 of the Act, withheld the correct amount by way of holdback in the first place. This is not, as the lien claimants would have it, a “contest” between each priority claimant and each building mortgagee. There is one pot of money, one 10% holdback deficiency which is available for the priority payment. The lien claimants’ interpretation unreasonably seeks to expand “to the extent of any deficiency” to a multiple of that number.
[22] How the distribution unfolded in this case can be seen by reference to the table set out in para. 6 above. The Receiver is presently holding funds equal to the amount of the deficiency in the owner’s holdback in respect of each of the lien claimants. Once those funds are paid in priority to the first building mortgage, even if s. 78(2) were to be applied to the next building mortgage, there will no longer be any “deficiency” in the holdback that could take priority over a subsequent mortgage. After the first stage of distribution, the owner’s holdback fund has been effectively replenished, the deficiency has been satisfied and the priority claim has become nil.
[23] It is unnecessary, therefore, for the statute to say more in order to reject the lien claimants’ argument. Whether there is one building mortgage or two, or three, is irrelevant. The key principle is that the lien claimant receives priority only to the extent of any deficiency in the owner’s holdback.
[24] I also, however, cannot accept the lien claimants’ emphasis on s. 78(2)’s use of the singular, and the expression “that mortgage” as producing the result they urge upon the court. Given s. 67 of the Legislation Act, “words in the singular include the plural and words in the plural include the singular”, not much weight can be placed on the use of the singular “mortgagee” and “mortgage”. As well, the context is always important. The full introductory phrase to s. 78(2) is, “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” (emphasis added). The expression “that mortgage” is simply a means of expanding the priority to include, not only the mortgage taken with the intention to secure the financing of an improvement, but the other alternative as well, “any mortgage taken out to repay” the mortgage taken to finance an improvement.
[25] The lien claimants are asking the Court to interpret the language of s. 78(2) as relating directly to the number of building mortgages on a property and, without saying so, to interpret the priority as applying to “each” building mortgage. The word “each”, however, does not appear in s. 78(2).
Context and Purpose
[26] The context and purpose of the Act more generally also support my conclusion in four respects.
[27] First, contrary to the lien claimants’ submission, there is no broad principle that the Act should be interpreted to favour lien claimants. Rather, it is well accepted that the Act is remedial legislation that provides a means for contractors and subcontractors to obtain payment for labour and material supplied to a property, while balancing the competing interests of owners, contractors, subcontractors, and mortgagees in the construction process. Indeed, the parties seem to agree that the true object and purpose of the Act is to balance the interests of the various parties in the construction process and to fairly allocate risk and benefit between those who fund construction and those who provide services and materials. Section 78(2) is an important element in that balancing done by the legislature.
[28] In rejecting an argument that the narrow purpose of the Act is to protect lien claimants, the Divisional Court in RSG Mechanical Incorporated v.1398796 Ontario Inc., 2015 ONSC 2070, held that when the Act is read as a whole, it reveals no underlying policy directed solely to protecting lien claimants. Further, there is no suggestion in the Act that the interests of lien claimants should be favoured above the interests of mortgagees “beyond the value of the holdbacks the legislation requires” (para. 29).
[29] Second, the scheme of the Act imposes upon an owner the obligation to create and maintain a holdback fund (based on a percentage of the lien claimant’s actual contributions to the property) for the benefit of lien claimants. The lien claimants’ proposed interpretation arbitrarily diverges from this general scheme. It detaches the lien claimants’ priority holdback claim amount from the amount required to be retained by the owner as a holdback under s. 22 of the Act. On the lien claimants’ interpretation, there would be a completely different result between the case where the owner reserved the required amount (limited to one 10% holdback) and a case where there was a deficiency (where the priority payment could be 20%, 30% or more depending on the number of building mortgages).
[30] Thus, the lien claimants’ interpretation would provide different priority recoveries for service and material providers depending on the number of building mortgages on a property; that is, based on an entirely arbitrary criterion over which neither the individual lien claimant nor the building mortgagee has control. There is no principled reason, nor is there any reason articulated in the Act or the case law, to support differential recovery by claimants based on whether there is or is not a deficiency in the required holdback or on the number of building mortgages registered against the project.
[31] A third problem with the lien claimants’ argument is that it introduces an element of arbitrariness and unfairness into the cascade of mortgage priorities as well. This priority cascade among the secured creditors is set out at the table in para. 6 above. As this table shows, as funds are distributed in this case, any increase in the lien claimants’ priority holdback claim will result in a larger shortfall, not to either of the building mortgagees, but to the “fulcrum” creditor[^2] (in this case, the fifth mortgagee, Westmount, whose mortgage secured indemnities for Tarion warranty claims and deposit insurance). There is no impact on the recovery of other secured creditors (including the two building mortgagees) with prior-ranking claims. It is precisely for this reason that the Receiver obtained an unopposed distribution order and has paid those prior ranking creditors in full (again, including both the building mortgagees) from the proceeds of sale. If the lien claimants are right, Westmount, which does not control the number of building mortgages on the property and is not a building mortgagee, would be subordinated not only to the prior-ranking mortgages on the property and the priority of the owner’s 10% holdback prescribed by the Act but also to a multiple of the owner’s holdback amount merely because there happen to be two building mortgages on the property.
[32] Fourth, the analysis in the preceding paragraph also guts the lien claimants’ argument that the building mortgagees should not be permitted to “dilute” their risk or receive some kind of “windfall”. It is not the building mortgagees in this case who would bear the consequences of the lien claimants’ doubling up approach to the interpretation of s. 78(2); it is a subsequent, non-building mortgagee.
Precedent - Sernas
[33] Finally, while it may be that the exact arguments advanced by the lien claimants in this case were not put to Glass J. in Sernas, the substance of the positions taken and the statutory language were effectively the same. While another decision of the Superior Court of Justice is not “binding” on me, the approach taken by Glass J. and the result were, it seems to me, correct.
Conclusion
[34] For these reasons, the lien claimants’ motion for an order that they are entitled to a 20% priority payment, because there are two building mortgages, is dismissed. The Receiver’s proposed scheme for distribution of the priority claim funds is approved.
Costs
[35] The parties agreed that all inclusive costs of $50,000 should be awarded to the successful party. Costs of $50,000, therefore, are payable to the Receiver by the lien claimants.
Penny J.
Date: April 29, 2022
[^1]: Section 78(5) of the Act provides for a special priority against subsequent mortgages which is also said to apply “to the extent of any deficiency” in the required holdbacks:
Where a mortgage affecting the owner’s interest in the premises is registered after the time when the first lien arose in respect of an improvement, the liens arising from the improvement have priority over the mortgage to the extent of any deficiency in the holdbacks required to be retained by the owner under Part IV.
[^2]: That is, the creditor who, as a result of realizations being less than the total outstanding debt, will not recover 100% of what it is owed.