Court File and Parties

COURT FILE NO.: CV-24-00719589-00CL DATE: 20240820

SUPERIOR COURT OF JUSTICE – ONTARIO (COMMERCIAL LIST)

IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, C. c-36, AS AMENDED

AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF CLARKSON ROAD DEVELOPMENTS GP INC., CLARKSON ROAD HOLDINGS INC. AND 2813427 ONTARIO INC.

BEFORE: Cavanagh J.

COUNSEL: Chris E. Reed for CS Capital Limited, assignee of the QRC Limited Partnership and Black Saxon QRC Inc. James Renihan, Megan Fougere and Evan Cobb, for Kenaidan Contracting Limited Howard Wise, Chris Armstrong, and Jill Snelgrove for Delgant (T.O.) Ltd. Heather Meredith for Clarkson Road Developments GP Inc., Clarkson Road holdings Inc., and 2813427 Ontario Inc. Chris Burr for PricewaterhouseCoopers Inc. in its capacity as Monitor of the Applicants David Ward, counsel for the Stalking Horse Purchaser/Investor

HEARD: July 25, 2024

Endorsement

Introduction

[1] CS Capital Limited (“CS Capital”), a secured creditor and mortgagee, brings this motion for an order:

a. declaring that a mortgage (the “Mortgage”) registered on title to property at 1101 to 1125 Clarkson Road North, Mississauga (the “Property”) has priority over all lien claims to the extent of at least $20,055,136 plus interest and other expenses; or

b. in the alternative, declaring that the lien holdback has priority to the Mortgage but that otherwise the Mortgage has priority over all lien claims to the extent of at least $20,055,136 plus interest and other expenses.

[2] For the following reasons, the motion by CS Capital is dismissed.

Background Facts

[3] CS Capital is owned and controlled by Al Pace and his wife.

[4] Title to the Property was owned at the relevant times by a bare trustee, Clarkson Road Holdings Inc. (“Clarkson Holdings”). Clarkson Holdings holds the Property in trust for a limited partnership, the Clarkson Road Developments Limited Partnership (“Clarkson LP”). The general partner of Clarkson LP is Clarkson Road Developments GP Inc. (Clarkson GP”).

[5] Until July 30, 2021, QRC Limited Partnership (“QRC LP”) through its general partner Black Saxon QRC Inc. (“Black Saxon QRC”) owned all of the shares of Clarkson GP and all the partnership units of Clarkson LP. In turn, CS Capital owned all shares of Black Saxon QRC and all the partnership units of QRC LP. CS Capital is now the successor in interest to Black Saxon QRC and the QRC LP which were wound up on December 22, 2022.

[6] Until July 30, 2021, CS Capital, through Mr. Pace, directed all the activities of these partnerships, general partners, and Clarkson Holdings (the bare trustee and registered owner of the Property). These entities are referred to as the “Pace Entities”.

[7] The Pace Entities first acquired part of the Property in 2013. Mr. Pace was introduced into the Property by Michael Moldenhauer. A company controlled by Mr. Moldenhauer owned 1101 Clarkson, one of the four parcels assembled into the Property. Mr. Moldenhauer’s company was insolvent. 1101 Clarkson was being sold under power of sale.

[8] During the period from 2013 through 2016, at the direction of Mr. Pace, the Pace Entities purchased the other parcels of land that were assembled into the Property. In 2018, the Pace Entities obtained a zoning bylaw amendment permitting the construction of 136 four-storey stacked townhouse dwellings and 2 three-storey commercial buildings on the Property. In 2018 through 2020, the Pace Entities marketed a 136-unit condominium project and obtain some presales.

[9] During this period, the Pace Entities hired the architectural firm KFA Architects and Planners Inc. (“KFA”) to work on obtaining zoning for 136 units, to do design work on the 136-unit condominium proposal, and to assist with a variance to permit 176 units. On August 25, 2020, the zoning was varied to permit 176 dwelling units on the Property. The re-zoning change became firm in mid-September 2020 following expiry of the appeal period. KFA began its architectural work to support the planning application in 2017.

[10] After September 2020, no other work was done on the Property. By this time, Mr. Pace instructed that all work by consultants be shut down. Mr. Pace and the Pace Entities focused on finding a buyer for the Property.

[11] The buyer that the Pace Entities found was 2813427 Ontario Inc. (the “Purchaser”). The Purchaser is a company controlled by and ultimately beneficially owned by Mr. Moldenhauer and three brothers - Aidan, Patrick, and Wayne Flatley.

[12] On July 30, 2021, a sale and purchase transaction was completed whereby, pursuant to a Unit and Share Purchase Agreement, the Purchaser acquired the “Purchased Securities” described in this agreement which included the shares of Clarkson GP and the limited partnership interests in Clarkson LP.

[13] After completion of this transaction, the Purchaser began the construction of a 176 unit stacked townhouse development. In September 2021, the Purchaser caused Clarkson LP to hire Kenaidan Contracting Ltd. (“Kenaidan”) to manage this work. On September 3, 2021, the Purchaser caused Clarkson Holdings (the bare trustee) to hire KFA to provide construction drawings, construction review, and as-built drawings for this work. Kenaidan hired all other trades and consultants.

[14] Eventually, the Purchaser and Clarkson LP became insolvent. In late 2023, corporations working at the Property, including Kenaidan, began registering liens on the Property. All of the liens are for Kenaidan’s work or for work done for Kenaidan.

Analysis

[15] There are three principal issues that arise on this motion. I address each in turn.

Is the Mortgage a prior mortgage such that s. 78(3) of the Act applies?

[16] Lien rights are created by s. 14 of the Construction Act (the “Act”) which provides:

14(1) A person who supplies services or materials to an improvement for an owner, contractor or subcontractor, has a lien upon the interest of the owner in the premises improved for the price of those services or materials.

[17] Section 15 of the Act provides that a lien created by section 14 arises and takes effect “when the person first supplies services or materials to the improvement”.

[18] Section 78(1) of the Act provides:

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.

[19] In Boehmers v. 794561 Ontario Inc., the Court held that s. 78(1) of the Act necessarily implies that in cases of conflict as to the determination of priorities, the burden must be on the mortgagee to persuade the court that it falls within a specified exception to the generalized priority of the liens.

[20] Section 78(3) of the Act provides:

(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.

[21] In order to determine whether the Mortgage has priority over the Kenaidan lien (and the liens of entities contracting with Kenaidan) pursuant to s. 78(3) of the Act, it is necessary to decide whether CS Capital has shown that the first lien (in respect of the improvement under which the Kenaidan lien arose) arose after July 30, 2021, when the Mortgage was registered.

[22] Section 1(1) of the Act provides that in the Act, “improvement” means, in respect of any land,

(a) any alteration, addition or capital repair to the land,

(b) any construction, erection or installation on the land, including the installation of industrial, mechanical, electrical or other equipment on the land or on any building, structure or works on the land that is essential to the normal or intended use of the land, building, structure or works, or

(c) the complete or partial demolition or removal of any building, structure or works on the land.

[23] CS Capital submits that the Kenaidan lien (and all other liens of entities contracting with Kenaidan) arises from work to construct a 176 unit stacked townhouse development on the Property done at the request of the new owner, the Purchaser, after the Mortgage was registered. CS Capital describes this improvement as the “Construction Improvement”. CS Capital submits that the prior work done for the prior owner to obtain zoning and planning approvals and permissions was in respect of a separate improvement that it describes as the “Development Improvement”.

[24] With respect to the separation between the prior design work (the “Development Improvement”) and the architect’s work on the “Construction Improvement”, CS Capital relies on the following evidence given by Kenaidan’s representative, Gian Fortuna, when he was cross-examined on his affidavit:

I think the purpose of this paragraph was to explain that when we received the drawings in July or August or so 2021, there had been previous design work done, under an original contract, that would have entailed the preliminary design, which would be the concept design, which would permit all of the consultants to review it for code acceptance, probably submit the site plan application on. Once the designers get past that stage, then they get into another package of work, being the working drawings or the administrative design services. And the contract that you pointed to that Moldenhauer signed in 2021 [with KFA] was for the second half of the package. There was clearly an earlier package that prepared all of the preliminary designs and concepts and reviews and approvals and responded to the reports involved, which I believe, based on the drawing dates, took a year or two to do, probably more.

[25] CS Capital submits that services and materials supplied for a given project does not mean that all services and materials are supplied to the same improvement. CS Capital submits that KFA, the architect that worked on the “Development Improvement” prior to July 31, 2021, and other consultants who provided services prior to that date, did not supply services or materials to the same improvement as did Kenaidan. In support of this submission, CS Capital relies on Ontario Wealth Management Corp. v. 1713515 Ontario Ltd., 2013 ONSC 6503.

[26] In Ontario Wealth, the receiver of a hotel property owned by the debtor sought directions in relation to priority over funds held by it representing proceeds from the sale of the property. At the time of the sale, the hotel was under renovation for use as a boutique hotel. The renovations were not completed before the sale. Prior to the sale, Ontario Wealth held a first mortgage that was registered on November 10, 2008 in respect of which Ontario Wealth made seven advances totalling $1.9 million. The initial advance for $500,000.

[27] A lien claimant claimed priority over the mortgage. The amount of the lien claim was less than the amount of the initial advance. The lien claimant filed no evidence on the motion. The only evidence before the motion judge was the receiver’s report. [1]

[28] The motion judge, at para. 44, held that when the Ontario Wealth mortgage was registered, there were no construction liens on title. The motion judge concluded, adopting the reasoning of Lane J. in Royal Bank of Canada v. Lawton Developments Inc., that given his finding that the initial advance by Ontario Wealth of $500,000 was to pay out the existing mortgage and not for improvements, s. 78(3) of the Act is applicable and this advance of Ontario Wealth takes priority over any lien claim in favour of the lien clamant.

[29] The lien claimant argued that the work done prior to and after its involvement was in respect of the same improvement, and the mortgage was registered after the time when the first lien arose in respect of the improvement. The lien claimant submitted that the fact that there is more than one contract in respect of an improvement does not mean that there is more than one improvement. Therefore, the lien claimant argued, its lien has priority over the mortgage under the Act. Ontario Wealth argued that the lien claimant was attempting to bootstrap into an earlier improvement under a separate contract in order to assert priority over Ontario Wealth.

[30] The motion judge in Ontario Wealth, at para. 48, held that there was no evidence before him that the improvement undertaken by the lien claimant related to any of the same improvements undertaken prior to Ontario Wealth registering its mortgage. The motion judge held that the facts in the case before him are very distinguishable from the facts in authorities cited by the lien claimant where there was a prior lien for the same improvement. He held, at para. 50, that he could not find that the improvements by the lien claimant relate to the same contract as the prior improvements and, although the improvements undertaken by the lien claimant may relate to the same project as other lien claimants they are, on the evidentiary record before him, stand-alone improvements disconnected from the prior lien claimants’ interests that were discharged or vacated prior to Ontario Wealth providing financing. The motion judge concluded that Ontario Wealth was in a priority position to that of the lien claimant.

[31] The motion judge in Ontario Wealth decided the priority issue by finding that there was no evidence that the improvement in respect of which the lien claimant’s lien arose related to the same improvement in respect of which liens arose prior to registration of Ontario Wealth’s mortgage. This finding was made based on the particular, and limited, evidentiary record before the motion judge. I do not regard Ontario Wealth as an authority for the general proposition that where services and materials for the same project were previously supplied under an earlier contract (for, say, pre-construction development), services or materials supplied under a new contract (for, say, construction work) should be treated as being in respect of a separate improvement.

[32] The definition of “improvement” in the Act does not include language showing that services or materials supplied under separate contracts in relation to the same project must be treated as having been supplied in respect of separate improvements. Kenaidan submits that the Act broadly defines an “improvement” to include any construction, erection or installation on the land. Kenaidan submits that an improvement is the overarching project and not a discrete phase or scope of work in a project. In support of this submission, Kenaidan relies on XDG Ltd. v. 1099606 Ontario Ltd..

[33] In XDG, a trial was held to determine the priority between lien claimants and the mortgagee with respect to certain lands. One of the issues was whether the mortgage was registered prior to the time when the first lien arose in respect of the improvement under which the liens of the lien claimants arose. The trial judge held that he had to make a preliminary finding as to whether there was one improvement or several improvements, where various contractors provided services and materials for the lessee at the property at different times, under different contracts, and with numerous subcontractors.

[34] In XDG, the trial judge, at para. 89, wrote:

The ultimate goal of the project was to raise the roof on the building, a large undertaking. EDG was to perform that actual work, however, demolition and electrical disconnection was required before they could commence work on the site. In my view, therefore, this appears to be one project, or improvement, not several, as suggested by GECC [the mortgagee]”.

[35] The trial judge in XDG referred to additional evidence that, he held, confirmed this observation. The demolition contractor contracted with the lessee before registration of the mortgage. There was evidence of a proposal by the electrical contractor who was on site before the registration of the mortgage to disconnect electrical services and the proposal was “... to assist you in raising your roof ...”. The trial judge referenced minutes of a meeting which referred to one project with numerous components. The trial judge, at paras. 91-92, having considered this evidence, found that there was one improvement and that the mortgage was a subsequent mortgage.

[36] KFA began its architectural work to support a planning application for zoning approval in 2017. Demolition work began at the Property in 2017. Other preliminary design work was done, and KFA submitted its proposal for the main architectural work in November 2018. KFA re-submitted a site plan approval application following the August 18, 2020 approval to add 40 units to their design.

[37] The proposal by KFA prepared for Black Saxon Development dated November 2018 describes the project:

The subject site is proposed to include a 4-storey stacked townhouse development with 136 suites, 2 commercial buildings at 28,000 sf and 2 levels of underground parking.

[38] KFA’s proposal dated March 9, 2021 to Mr. Moldenhauer describes the project:

1101 Clarkson Road has two major components consisting of five blocks of four-story stacked townhouses facing Clarkson Road to the west and the municipal park to the south and east and two blocks of three-story commercial buildings adjacent to the north property line. The residential component contains 176 units and the two commercial blocks have a total gross floor area of approximately 2700 sq. m. Parking is primarily below grade on two levels with approximately 328 cars.

[39] The Kenaidan Construction Management Agreement dated September 12, 2021 includes, in Article A-3, a description of the project that reads, in part:

The construction of a 176 Stacked Townhouse development, consisting of a below grade parking structure, 5 Residential Buildings and 2 Commercial Buildings.

[40] The evidence before me establishes that the work done that CS Capital describes as the “Development Improvement” is in respect of the same project as the work done in respect of what CS Capital describes as the “Construction Improvement”. That project is a four-storey stacked townhouse development consisting of five residential buildings, two commercial buildings, and a below-grade parking structure.

[41] Extensive work was done for this project prior to July 30, 2021. This work included architectural work by KFA to support a planning application for zoning approval in 2017; demolition work in 2017; services provided by the mechanical and electrical contractor and the structural consultant, and preliminary shoring design by the geotechnical consultant.

[42] Kenaidan submits that KFA’s work for site plan approval in 2018 establishes that KFA had lien rights arising from its services for the project prior to registration of the Mortgage. The Act, in s. 14(3), provides that subsection (1) applies to services or materials supplied by an architect as defined in the Architects Act and any employees of the architect. This is the result of an amendment to the Act in 2017.

[43] In RSG Mechanical Incorporated v. 1398796 Ontario Inc., 2013 ONSC 1606, the Court held, at para. 157, that there were no mortgages registered prior to the time when the first lien arose in respect of the improvement because all mortgages were registered after the time when the first such lien arose, namely, when the architects started work on the improvement.

[44] The work done by KFA for site plan approval in 2018 was in respect of an improvement the ultimate goal of which was completion of a four-storey stacked townhouse development consisting of five residential buildings, two commercial buildings, and a below-grade parking structure. The fact that there were several contracts in respect of this project does not support the conclusion that the supply or services or materials under separate contracts, including construction contracts, were in respect of separate improvements. I find that the services and materials supplied by Kenaidan in respect of which its lien arises were in respect of the same improvement as the improvement in respect of which the KFA lien arose for services supplied prior to registration of the Mortgage.

[45] I conclude that Mortgage was not registered prior to the time when the first lien arose in respect of the improvement from which Kenaidan’s, and the other lien claimants’, liens arise. As a result of this conclusion, s. 78(3) of the Act does not apply. CS Capital has a mortgage that was registered after the time when the first lien arose in respect of this improvement. CS Capital has a subsequent mortgage which is governed by s. 78(5) and s. 78(6) of the Act.

[46] Section 78(5) of the Act provides:

(5) 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.

[47] Under s. 78(5), the liens of Kenaidan and the other lien claimants would have priority over the Mortgage to the extent of the deficiency in the statutory holdbacks that should have been retained by the owner.

Was there an advance in respect of the Mortgage?

[48] Section 78(6) of the Act provides:

Subject to subsections (2) and (5), a conveyance, mortgage or other agreement affecting the owner’s interest in the premises that is registered after the time when the first lien arose in respect to the improvement, has priority over the liens arising from the improvement to the extent of any advance made in respect of that conveyance, mortgage or other agreement, unless,

(a) at the time when the advance was made, there was a preserved or perfected lien against the premises; or

(b) prior to the time when the advance was made, the person making the advance had received written notice of a lien.

[49] Kenaidan submits that the Mortgage is a collateral mortgage in respect of which no advance was made. Kenaidan submits that, therefore, the Mortgage does not have priority over its lien claim or the lien claims of other claimants.

[50] I first address the legal documents which are relevant to the sale transaction.

[51] CS Capital and other entities, as vendors, entered into a Unit and Share Purchase Agreement (“SPA”) made as of March 30, 2021 with the Purchaser. The SPA provides for the sale and purchase of securities defined as the “Purchased Securities” for a purchase price of $25,000,000 subject to adjustment.

[52] Under the SPA, the purchase price was to be paid, as to an amount equal to $20,000,000, by the Purchaser making payments of principal pursuant to the terms of the “VTB Mortgage” which term was given meaning in article 2.07 of the SPA.

[53] Article 2.07 of the SPA provides that on the closing date, “the Purchaser shall grant to the CSC Vendor [CS Capital], on behalf of the QRC LP Vendor, as described in Section 2.03 (sometimes referred to as the “VTB Mortgagee”), and the VTB Mortgagee shall take back, a first-ranking mortgage over the Property as security for the payment of the amount of the Purchase Price as set out in Section 2.03(c) hereof (the “VTB Mortgage”) and a pledge of the Purchased Securities relating only to the legal entity registered with Tarion Warranty Corporation (the “VTB Pledge”) as more specifically described in Schedule B”.

[54] The “Mortgage”, as this term is used in this endorsement, is the same mortgage as the “VTB Mortgage”, as defined in the SPA.

[55] A VTB Mortgage Agreement dated July 30, 2021 was made between QRC LP (defined as the “Mortgagee”) and Eleven11 LP (defined as the “LP Units Purchaser”) and 2813427 Ontario Inc. (defined as the “Shares Purchaser”) and Clarkson Road Developments Limited Partnership (defined as the “Mortgagor”).

[56] Article 3.01 of the VTB Mortgage Agreement provides that “[t]he Mortgagor guarantees unconditionally and promises to pay to the Mortgagee, or as the Mortgagee may direct in writing, the amount of any obligation of the Purchaser, including any principal, interest, costs, charges or expenses relating to this Agreement or the Security Documents as may be amended from time to time”.

[57] Article 5.01 of the VTB Mortgage Agreement provides that “[t]he repayment of the Principal Amount and interest and the obligations of the Mortgagor hereunder shall be secured by the following (collectively, the ‘Security Documents’):

(a) First-priority charge registered in favour of the Mortgagee against the Property securing the Principal Amount (the “Mortgage”);

(b) Pledge of all of the shares in Clarkson Road Holdings Inc. and limited partnership units in the Mortgagor forming part of the Purchased Securities (as defined in the SPA);

(c) General security agreement securing all of the assets of the Mortgagor;

(d) Assignment of insurance respecting the Property; and

(e) Assignment of contracts respecting the Property.”

[58] The Mortgage was registered on July 30, 2021. The Mortgage provides, in article 1.01:

1.01 Collateral Charge

This Charge is a collateral charge, securing the obligations of Clarkson Road Developments LP (the “Chargor”), as guarantor of the obligations of 2813427 Ontario Inc. and Eleven 11 LP (collectively, the “Purchaser”) in connection with a VTB Mortgage Agreement dated July 30, 2021 (the “VTB Mortgage Agreement”) made between the Purchaser, the Chargor and QRC Limited Partnership (the “Chargee”).

[59] CS Capital submits that the Mortgage secures the unpaid balance of the purchase price ($20,055,136.98) for the conveyance of the beneficial ownership of the Property. CS Capital submits, citing Scott, Pichelli & Easter Limited v. Dupont Developments Ltd., 2022 ONCA 757, that the Mortgage is a vendor-take-back mortgage in respect of which an advance was made. In Scott, a vendor-take-back mortgage was given by the purchaser of the land to the seller as partial payment of the purchase price of the land. The lien claimants argued (citing XDG) that a vendor-take-back mortgage is the equivalent of a collateral mortgage where the subordination of the collateral mortgagee’s interests is accepted law. Lauwers J.A., writing for the Court, rejected this argument and, at para. 11, held that a vendor-take-back mortgage is the equivalent of an advance for the purposes of the Act.

[60] The question in this case is whether the Mortgage is a vendor-take-back mortgage given in partial payment of the purchase price for the conveyance of the beneficial ownership of the Property or whether it is a collateral mortgage in respect of which no advance was made.

[61] Kenaidan submits that there was no advance made in respect of the Mortgage. It submits that the Mortgage is not a vendor-take-back mortgage, rather, it is a collateral mortgage in respect of which no advance was made because it was given by Clarkson LP to secure its guarantee of a separate debt owed by the Purchaser to CS Capital and other related entities as vendors. Kenaidan submits that, therefore, s. 78(6) does not grant the Mortgage priority over its lien.

[62] In support of this submission, Kenaidan cites XDG. In XDG, the owner of a property leased it to a company with the same controlling shareholder. Lien claimants provided services and material to the land. The lessee agreed with its lender to amend its loan agreement and the amendment resulted in the owner of the property providing a guarantee and mortgage in favour of the lender regarding the indebtedness of the lessee. The property was sold by an interim receiver and the proceeds were insufficient to pay the lien claimants and the mortgagee.

[63] The trial judge held that no advance was made to the landowner who guaranteed the lessee’s debt and gave a collateral mortgage to secure this obligation. The trial judge noted that the landowner did not benefit in any manner. The trial judge concluded that there was no advance under the mortgage and, therefore, the lien claimants have priority pursuant to s. 78 of the Act.

[64] On appeal, the Divisional Court held that the mortgagee had failed to establish that the trial judge was clearly wrong in his findings of fact or in his application of legal principles, and he applied the correct legal principles to the facts. The appeal was dismissed. See XDG Ltd. v. 1099606 Ontario Ltd..

[65] Kenaidan also cites Jade-Kennedy Development Corporation (Re), 2016 ONSC 7125. In Jade-Kennedy, the application judge was called on to determine the relative priorities of the lien claimants and mortgagees asserting interests in the lands of the borrower, Jade-Kennedy. Jade-Kennedy was incorporated for the purpose of owning and developing a condominium project. Jade-Kennedy granted a first mortgage on its lands in favour of Laurentian Bank of Canada. In addition, Jade-Kennedy granted a separate charge on the lands which secured a guarantee given by Jade-Kennedy to Laurentian of credit facilities made available by Laurentian to 144 Park Ltd., which also granted a mortgage on its property to secure the loan.

[66] In Jade-Kennedy, the lien claimants submitted that the monies secured under the mortgage given by Jade-Kennedy (to secure its guarantee obligation of the indebtedness of 144 Park Ltd. to Laurentian) do not constitute “any advance made in respect of that ... mortgage” for the purposes of s. 78(6) of the Act.

[67] The application judge, at para. 52, held:

Third, XDG Ltd. establishes that a collateral mortgage given to secure a guarantee of an underlying loan to another party does not give rise to “an advance made in respect of that mortgage” at least to the extent that no further advance is made after delivery of the collateral mortgage. I would note, however, that this result follows from the absence of any advance, rather than from an interpretation of the meaning of the phrase “in respect of”.

[68] The application judge, at paras. 53-60, went on to consider whether the phrase “in respect of” provides a priority to a collateral mortgage in circumstances where an advance is made pursuant to the underlying loan, rather than the collateral mortgage, after delivery of the collateral mortgage. The application judge, at paragraph 61, concluded that an advance made under a loan agreement between the lender and the borrower is not “an advance in respect of” a collateral mortgage given to secure the obligations of a guarantor under a guarantee of the borrower’s obligation under the loan agreement.

[69] The application judge, at para. 71, concluded that the lien claimants have priority over the collateral mortgage to the extent that they have registered and perfected liens over the lands subject to the collateral mortgage.

[70] CS Capital submits that the Mortgage is not a “true collateral mortgage”, that is, a mortgage registered against the property of one entity to secure a pre-existing debt of an unrelated entity. CS Capital submits that the Mortgage is unlike the collateral mortgage in Jade-Kennedy because (i) it did not secure a pre-existing debt, (ii) the mortgagor and the borrower were not separate and unrelated entities, (iii) the mortgagor received a benefit from the arrangement, and (iv) the debt was related to the land that was being improved. CS Capital submits that the Mortgage is part of an inextricably related set of contracts (an Agreement of Purchase and Sale, a VTB Mortgage Agreement, and the Mortgage itself) that transfers beneficial ownership of the Property in exchange for a mortgage securing the unpaid balance of the purchase price for that very property.

[71] CS Capital submits that to hold that the purchase price debt owing under the Mortgage is not an advance in respect of the Mortgage requires willful blindness as to the substance of the transaction and would subvert the realities of this commercial transaction.

[72] Although the collateral mortgage in Jade-Kennedy secured advances made to the principal borrower before and after the registration of the collateral mortgage, the application judge did not hold that this was a material factor in relation to his conclusion that there was no advance under the collateral mortgage. There is no reason, in principle, why a mortgage must secure a guarantee of existing indebtedness to qualify as a “true” collateral mortgage. The significant factor is that the mortgage secures the guarantee given by the mortgagor of indebtedness owed by another entity, the principal debtor. In such circumstances, the advance is made to the principal debtor, not to the guarantor.

[73] In Jade-Kennedy, the guarantor was a separate entity from the borrower, and they shared common ownership. On the motion before me, the guarantor and mortgagor under the Mortgage (Clarkson LP) and the borrower (the Purchaser) are also separate entities. Although the collateral mortgage in Jade-Kennedy was given over property that was not related to the land being improved, in XDG, the borrower was a tenant and related to the owner. The improvement in issue was a renovation of the building the borrower was using for its business. I do not agree that Jade-Kennedy and XDG are distinguishable for the reasons given by CS Capital.

[74] CS Capital, a sophisticated commercial entity, chose to participate in a transaction that was structured as a sale of securities rather than a sale of land. It agreed to take a guarantee from the landowner. It agreed to take a collateral mortgage from the landowner to secure its guarantee obligations.

[75] The legal consequence of the transaction as it was structured is that the Mortgage is collateral security for the guarantee given by Clarkson LP. The Mortgage expressly so provides in article 1.01. I do not accept the submission of CS Capital that the legal consequence of this structure should be disregarded and that the Mortgage should be treated as a vendor-take-back mortgage given as partial payment for the conveyance of the beneficial ownership of the Property. Having chosen to structure and complete the transaction as it did, CS Capital must accept this legal consequence.

[76] I conclude that the Mortgage is a collateral mortgage that was given by Clarkson LP to secure its obligation as guarantor of the indebtedness of the Purchaser to CS Capital to pay part of the purchase price for the purchased securities.

[77] As a result, and on the authority of XDG and Jade-Kennedy, which I follow, there was no advance made in respect of the Mortgage within the meaning of s. 78(6) of the Act. The Mortgage does not have priority over the Kenaidan lien or other liens under s. 78(6) of the Act.

Has CS Capital shown the actual value of the premises at the time when the first lien arose?

[78] This issue arises only if the Mortgage is a prior mortgage under s. 78(3) of the Act. I have held that it is not. I go on, nevertheless, to address this issue.

[79] Section 78(3) of the Act provides that 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 has 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.

[80] Kenaidan submits that CS Capital has the onus of proving that the Mortgage has priority over Kenaidan’s lien, and this onus includes establishing the actual value of the premises at the time when the first lien in respect of the improvement arose. Kenaidan submits that even if CS Capital holds a “prior mortgage” under s. 78(3) of the Act, CS Capital has failed to adduce evidence on this motion that is sufficient to discharge this onus.

[81] CS Capital submits, citing Cam Moulding & Plastering Ltd. v. Dupont Developments Ltd., 2018 ONSC 3126, at para. 72, that the “value” of the premises, as that term is used in s. 78(3) of the Act, is “the price that would likely result from negotiations between a willing vendor and a willing purchaser”. CS Capital submits that the Pace Entities and the Purchaser were willing vendors and purchaser that negotiated and closed a sale at a price of $25,000,000. They did so without collusion or fraud. CS Capital submits that, therefore, it has shown that the “value” of the Property was $25 million in July 2021.

[82] In his affidavit, Mr. Pace deposes that he was unwilling to proceed with construction or other work towards building 176 dwelling units on the Property, or any units. The only remaining option for him was to find a buyer. He deposes that by 2021, the total investment in the Property was around $17 million. He was determined to obtain a price of $25 million which, he believed, was the fair market value. Mr. Price deposes that he found a potential buyer, the Purchaser, which signed a letter of intent for the purchase of the Property on February 3, 2021. Mr. Pace deposes that over the next several months, the Purchaser completed its due diligence and the conditions for the sale were removed. Mr. Pace deposes that he did not deal directly with the Purchaser’s representative, Aidan Flatley, but dealt through intermediaries.

[83] CS Capital submits that the value of the Property did not change between July 2021 and September 2021 when the first lien arose in respect of what CS Capital calls the “Construction Improvement”. CS Capital submits that because the value of the Property was higher than the amount of the advance under the Mortgage, the Mortgage has priority over the liens under s. 78(3) for the full amount of the advance of $20,055,136.98.

[84] Kenaidan notes that CS Capital has not adduced expert evidence of the value of the Property to support its argument that the Property had a value of $25 million in September 2021.

[85] Kenaidan submits that the evidence that the Purchaser agreed to purchase the property from a willing seller for $25 million is not reliable evidence of the value of the Property for several reasons:

a. First, Kenaidan notes that the $25 million price was first proposed in or before December 2021, nine months before September 2021 and, therefore, this price cannot establish the value of the Property in September 2021 because many factors can affect the value of a property over nine months.

b. Second, Kenaidan submits that there is no admissible evidence to show that the value of the Property did not change from July 2021.

c. Third, Kenaidan submits that evidence upon which CS Capital relies to support the $25 million purchase price, in addition to the evidence of the agreed upon price between willing sellers and a willing buyer, consists of inadmissible hearsay.

d. Fourth, Kenaidan submits that the evidence of the circumstances which resulted in agreement on the $25 million purchase price is not reliable evidence establishing value because the parties did not obtain an appraisal or take other steps to determine the market value before agreeing on a price. The agreed upon price was not the product of negotiations, but simply the price that Mr. Pace wanted.

e. Fifth, Kenaidan submits that the $25 million purchase price was not the product of arm’s length negotiations, and the evidence shows that that Mr. Moldenhauer was, surreptitiously, involved on both sides of the transaction.

[86] Kenaidan submits that the only admissible and reliable evidence of the Property’s value comes from the expert report given by Kroll Canada Limited, who opined that the Property was worth $13,300,000 as of July 30, 2024, the date immediately before the completion of the sale transaction.

[87] I disagree that CS Capital has not tendered evidence to prove the value of the premises. CS Capital has shown that the price was determined through arm’s length negotiations. Although the amount that was negotiated was the amount that Mr. Pace wanted to receive, the Purchaser was not compelled to agree to this amount. There is no evidence that there were any significant changes in the marketplace that would materially affect property values in this market over the ensuing several months. The fact that Mr. Moldenhauer was involved in the transaction for both the seller and the buyer does not change the fact that the transaction was made between a willing buyer and a willing seller at the negotiated price.

[88] The expert report from Kroll does not take into account that the price was determined through an arm’s length sale. I agree with CS Capital that this was critical information that would be relevant to the appraised value. I am unable to determine how this information, had it been taken into account by Kroll, would have affected its opinion. I do not accept Kroll’s opinion as to the value of the Property.

[89] I am satisfied that CS Capital has shown the value of the Property at the time that the first lien arose and that this value is $25 million.

Disposition

[90] For these reasons, the motion by CS Capital is dismissed.

[91] If the parties are unable to resolve costs, they may make written submissions in accordance with a schedule (and with reasonable page limits) to be agreed upon by counsel and approved by me.

Cavanagh J. Date: August 20, 2024

[1] See the decision of Strathy J.A. (as he then was) on the lien claimant’s unsuccessful motion to extend the time to move for leave to appeal and for leave to appeal: Ontario Wealth Management Corporation v. Sica Masonry and General Contracting Ltd., 2014 ONCA 500, at para. 29.