Does An Interim Lender To A Construction Project Owe A Duty of Care?

Construction projects don’t often proceed without a lender. And often there is an interim lender which provides financing pending the advancement of funds by the final lender. In this circumstance, two questions arise:

First:  Does the interim lender owe a duty of care to the owner or purchaser of the project?

Second:  If the interim lender makes representations to the owner or purchaser, does that lender owe a duty to make those representations carefully?

In Condominium Corporation No. 0321365 v MCAP Financial Corporation, the Alberta Court of Appeal recently answered Yes to the first question, but Maybe to the second question.

The MCAP decision is important because different answers were given to these two questions. The different answers highlight the difference between the duties of a lender, acting strictly as a lender, and the duties which a lender may assume if it makes representations to the owner or purchasers.

The answers to these questions become even more problematic when the interim lender receives vital information about the safety of the construction, or if the interim lender or its agents are arguably performing statutory duties. Can the lender ignore the impending safety risks? Can it ignore the potential application of statutory duties? If the lender receives vital information about the safety of the structures and makes representations to third parties about those matters, does it assume a duty of care which it would not otherwise have?

Background Facts

MCAP was the interim lender to a condominium construction project in Fort McMurray, Alberta. MCAP provided interim construction financing to the developer of the project.

The commitment letter between MCAP and the developer of the project stated that a soils test report by a professional engineer would be provided, demonstrating that the proposed construction and site improvements of the project were feasible under existing soil conditions. The commitment letter also required the lender’s cost consultant to verify the costs of the condominium project.

The commitment letter stated that, prior to the initial advance a project and budget review report would confirm that project has been designed in accordance with a geotechnical engineer’s report, and that all requests by the developer for advances would include an inspection certificate from the lender’s cost consultant confirming that the work to date was in accordance with the plans and specifications. The commitment letter also stated that if actual costs exceeded the budgeted and approved costs, then the developer would contribute the excess before receiving any further advances.

MCAP retained a cost consultant and parts of the commitment letter were attached to the contract between MCAP and the cost consultant. Effectively, the key provisions of the contract between MCAP and the developer were mirrored in the contract between MCAP and the cost consultant. The purchaser alleged that MCAP’s cost consultant was the “cost consultant” of the developer under section 14 of the Alberta Condominium Property Act (the Act). The purchasers accordingly argued that MCAP and its consultant had statutory duties with respect to certifying the cost to complete the project before funds were released to the developer.

In 2002, conversations occurred between a consultant acting for the purchasers of the condominium units and MCAP. According to the purchasers, in those conversations MCAP represented to the purchasers’ consultant that the terms and conditions of the commitment letter would be enforced for the benefit of the purchasers of units in the condominium project and that MCAP’s cost consultant would be the “cost consultant” under the Act.

In September 2001, the purchaser’s consultant wrote letters to MCAP’s cost consultants, copying MCAP, and set out various alleged serious deficiencies in the design and construction of the condominium project, including suspected Alberta Building Code, development permit and contractual deficiencies. It was the purchasers’ position that these letters signalled grave concerns that the units and related common property in the project were not in fact substantially completed as contemplated by the Act. The purchasers said that the suspected construction and design deficiencies required that statutory holdbacks be maintained to cover these deficiencies.

In late September 2003, a number of the purchases of the condominium units were completed and the developer received payment of the purchase prices. That money was used by the developer to reduce the loan from MCAP. In the closings, the developer’s lawyers gave undertakings about maintaining holdbacks pursuant to section 14 of the Act. In those undertakings, the developer’s lawyers referred to MCAP’s cost consultant as the developer’s costs consultant.

The purchasers and the condominium corporation then sued the developer and MCAP for damages. They alleged that the condominium was a disaster and was sinking into the ground due to numerous construction faults including the failure of the footings, improper compaction of fill and excessive moisture. The purchasers alleged that MCAP owed them a duty of care and had breached it by its failure and that of its cost consultant to take any steps to address the safety concerns of which they were well aware. The purchasers also alleged that MCAP had made negligent misrepresentations by effectively telling the purchasers that MCAP would enforce the commitment letter and that MCAP’s cost consultant would perform the duties of the “cost consultant” under the Act, and then failing to do either.

MCAP brought a motion to dismiss the action against it, asserting that it owed no duty of care to the purchasers, and that it owed no duty with respect to the statements which it or its cost consultant had allegedly made to the purchasers. The motion judge agreed with MCAP and dismissed the action against it. The purchasers then appealed.

The Decision

The Court of Appeal agreed that, apart from any duty arising from representations made by it, MCAP owed no general duty of care to the purchasers. The Court held that the purchasers’ assertion of such a duty failed on virtually every account.

First, the lender was entitled to waive defaults and give extensions in its own interest, and the existence of a duty to the purchasers would contradict that entitlement.

Second, the class of persons to whom the alleged duty was owed was indefinite as the circumstances relating to each purchaser could be different and the units could be “flipped”, making unfeasible for MCAP to consult with the class to which it allegedly owed a duty.

Third, the business interests of MCAP and the purchasers might well be different.

Fourth, the commitment letter was between MCAP and the developer and, as third parties to that letter, the purchasers had no legal rights in that letter.

Finally, policy reasons dictated that no such duty was owed. As the Court said: “The deleterious effects that recognizing this novel duty of care would have on commerce and the financial industry and in turn economic development are obvious.”

However, the Court of Appeal held that the purchasers had a potential claim against MCAP arising from negligent misrepresentation. The Court reversed the motion judge’s decision on this issue and directed that the action proceed to trial.

The Court held that the purchasers had a viable claim that MCAP had impliedly represented that it would enforce the commitment letter and that it had retained a cost consultant which would perform the duties of a “cost consultant” under the Act, and that MCAP had done neither. The Court of Appeal held that, on a disputed evidentiary record, the motion judge was not entitled to make factual findings as to the existence and scope of any alleged representations made by MCAP, the existence of any special relationship between MCAP and the purchasers and whether the purchasers reasonably relied on any statements of MCAP. Those were factual matters that must go to trial.

The Court of Appeal distinguished the two torts as follows:

“I agree that an interim lender owes no duty of care to purchasers of units in a project it is financing to ensure that the project it is financing is completed in accordance with the lending agreement. I have explained why that is so earlier. However, the court cannot use the absence of a duty of care based on a lender-purchaser relationship to determine whether the specific facts and circumstances of a particular case created or gave rise to a special relationship between the lender and purchasers and a corresponding duty of care sufficient to ground an action in negligent misrepresentation.”

The Court noted that the British Columbia Court of Appeal had held that, in the particular circumstances of that case, a lender did owe a duty to a third party not to make negligent misrepresentations and was liable to that third party.

The Court of Appeal also held that the other claims against MCAP should also proceed to trial. Those claims were based on knowing assistance in a breach of trust by the developer and unjust enrichment. MCAP had accepted the monies paid from the developer. Those monies were paid to the developer by the purchasers and were trust funds under the Act. MCAP received payment at the very time that the costs consultants under the Act should, arguably, have ensured that those monies were set aside to properly complete the project and correct the deficiencies. In these circumstances, the Court held that there were arguable claims of knowing assistance in breach of trust and unjust enrichment.


Even though the decision in MCAP arose on a summary judgment motion, it demonstrates the pitfalls which may face a lender to a building project. These pitfalls are magnified if the lender learns of facts which raise real concerns about the safety of the project or building, and if there are statutory duties relating to the project. Since building projects are subject to a number of statutory regimes, including construction lien and building code legislation, the role of the lender may not be a happy one.

This decision should alert lenders to a variety of potential claims that can be made against them. Indeed, the claims asserted in the MCAP action are a good shopping list to consider, both for project lenders and purchasers and owners of allegedly defective buildings.

Two precautions for lenders arise from the decision:

First, be very circumspect in any dealings with third parties to a lending agreement and avoid any conduct which could be construed as a representation to the third parties or the assumption of statutory duties.

Second, be aware of the trust fund legislation applicable to monies held by a borrower, and be very careful in accepting monies which may be trust fund monies.

Condominium Corporation No. 0321365 v MCAP Financial Corporation, 2012 ABCA 26

Building Contracts – Consultants – Negligence and Negligent Misrepresentations – Knowing Assistance – Unjust Enrichment

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                         June 20, 2012