Does The Removal Of Equipment Amount To An Improvement For Lien Purposes?

Update:  The decision of the BC Supreme Court in West Fraser Mills Ltd. v. BKB Construction Inc., referred to in this article has since been reversed by the BC Court of Appeal.  Please see my blog of April 7, 2012.  The decision of the BC Supreme Court may still be relevant if and when that court finally considers whether demolition amounts to an “improvement” under the BC Builders Lien Act.

An important issue for construction and builders liens is whether destroying or removing land, structure and equipment qualifies as an “improvement.”  Why shouldn’t it, if it benefits the owner?  After all, the land itself couldn’t care less.  It is the benefit to the owner of the land that an “improvement” is all about.

In West Fraser Mills Ltd. v. BKB Construction Inc., the British Columbia Supreme Court recently applied the traditional approach to this issue and held that the removal of equipment was not an improvement and did not give rise to a builders lien.  This decision is noteworthy in itself, but it also raises the question of whether the result would be different under a recent amendment to Ontario Construction Lien Act which specifically deals with the installation of equipment.

The Background

West Fraser shut down its paper mill in Kitimat, B.C.   It then sold the paper machinery separately from the land.  It did so, as the court found, in order to enhance the total proceeds that it received from the land and machinery although the removal of machinery lowered the value of the land.

Under the agreement by which West Fraser sold the machinery, the buyer was obliged to remove the equipment.  The buyer hired BKB to remove the machinery and BKB hired a subcontractor to assist it in the removal.  BKB and its subcontractor were not paid in full by the buyer and filed a builders’ lien against West Fraser’s property.

The B.C. Supreme Court found that West Fraser was an “owner” under the B.C. Builders Lien Act since West Fraser held an estate or interest in the land and, through its sales contract with the buyer, had knowledge of and had given its consent to the work of removing the machinery.  In addition, the removal of the machinery directly benefitted West Fraser by enabling the sale of the machinery to occur on terms advantageous to it.

The Court also held that BKB and its subcontractor were both “subcontractors” under the Act. It said that:

“The Act does not require a direct contractual relationship between the respondents and West Fraser for liens to arise.  Additionally, it does not require contractual relationships between BKB or [its subcontractor] and any person engaged directly by West Fraser.”

However, the Court held that the removal of the machinery was not an improvement of the land.  Demolition work may be an improvement, it said, if undertaken as part of a project to create an altered structure, but work to preserve the value of removed or salvaged material which does not benefit the landowner qua landowner is not an improvement within the Act.

The Court held that the removal of the machinery fell into the latter category.  The land or buildings were not improved by the removal of the machinery nor was the removal incidental to a project to improve the land.

This decision is noteworthy on two accounts.

First, it is surprising that the court found that the value of the land was not improved by the removal of the machinery.  Surely the abandoned paper mill machinery detracted from the value of the land.  Otherwise, why did West Fraser require the buyer to remove it, and to do so at the buyer’s cost?  If the lien claimant proved that the market value of the land was increased by the removal of the machinery, would the result have been the same?

Second, would the result have been different under other provincial lien Acts?  Thus, the Ontario Construction Lien Act was amended in 2010 to broaden the definition of “improvement” to include “the installation of industrial, mechanical, electrical or other equipment on the land.”  Under the Ontario Act, the definition of “improvement” already included  the demolition or removal of any building, structure or works on the land.  The 2010 amendment was apparently intended to reverse the 2007 decision in Kennedy Electric Ltd. v. Rumble Automation Inc. (which, interestingly was not cited in the West Fraser decision).  In Kennedy Electric, the Ontario Court of Appeal held that the installation of large assembly-line equipment for the manufacture of truck frames was not an “improvement.”

By logic, the amendment to the Ontario Act should apply to the removal as much as the installation of equipment, but does it?  Is the equipment “building, structure and works on the land”?  It could be argued that it is not, because if it is, then there was no need to amend the Act in 2010, since the words “building, structure and works on the land” were already in the Act, and it was amended for the very reason that those words did not include “equipment.”  The part of the definition of “improvement” which refers to demotion or removal was not also amended to refer to “equipment”.

If the argument (that the installation of the equipment is within the Act but the removal is not) was successful, it would be unfortunate because the legislative purpose behind including the equipment seems so obviously applicable to the removal.  But making legislative intent clear is a challenge.

Construction Law  –  Construction Liens  –   Removal of Equipment:

West Fraser Mills Ltd. v. BKB Construction Inc. 2011 BCSC 1460

Thomas G. Heintzman O.C., Q.C.                                                                      December 4, 2011

A Builders Lien Does Not Apply To The Lease Of An Airport

The British Columbia Court of Appeal recently considered the constitutional limits of the Builders Lien Act of that province.  In Vancouver International Airport Authority v. British Columbia, the Court held that the Act did not apply to the leasehold interest of the Vancouver International Airport Authority.  The Court drew the constitutional boundary based upon the purpose of the lease from the Federal Crown.  The drawing of the boundary based upon the purpose of the lease may raise questions relating to the enforcement of provincial lien statutes against sub-leases of federal lands or from federally regulated institutions.  

          The Authority leases the Vancouver Airport from the Federal Crown under a 60 year Lease. The Lease required the Authority to use the Airport Lands for the management, operation and maintenance of an international airport.  It also required the Authority to keep the Demised Premises free of encumbrances, to indemnify the Federal Crown from construction or builders liens and prohibited the Authority from transferring its leasehold interest except with the consent of the Federal Crown.

The Builders Lien Act of British Columbia says that any agreement that provides that the Act is not to apply is void.

The B.C. Court of Appeal upheld the decision of the lower court that the Builders Lien Act did not apply to the Authority’s Lease.  The Court first applied the constitutional principle of “interjurisdictional immunity”.  This principle holds that, under the Constitution Act, there is a core of legislative jurisdiction reserved to each of the federal Parliament and the provincial legislatures, and that provincial legislatures cannot invade the core of federal legislative authority. The B.C. Court of Appeal applied recent decisions of the Supreme Court of Canada which limited the interjurisdictional immunity principle to circumstances in which provincial legislation impairs, and not merely affects, a federal power.  Accordingly, if the Builders Lien Act impaired the federal authority over aviation, then the Act was inapplicable to that extent.

The Court then reviewed the extent of the federal power over aviation.  It acknowledged that anything which is an “integral and vital part of aeronautics and aerial navigation” falls within that power and that, accordingly, airports are integral to aviation.  The Court concluded that the ultimate “hammer” in a builder’s lien is the enforcement of the lien, which would impair the operation of the airport if the lease was seized. In addition, the ability to register a lien impaired the ability of the Authority to obtain financing of the improvements necessary to fulfil the Authority’s mandate.

The Court distinguished the decision in Western Industrial Contractors Ltd. v. Sarcee Developments Ltd (1979), 98 D.L.R. (3d) 424 (Alta. C.A).  In that case, the Crown had leased land to a native development corporation, and the Alberta Court of Appeal held that the lease was subject to the provincial builders’ lien legislation, notwithstanding the federal Indian Act.   The B.C. Court of Appeal held that the distinction between the two cases arose from the purpose of the lease in each case.  In Sarcee, the purpose of the lease was for a commercial development having nothing to do with the federal legislative power. In the Vancouver International Airport Authority case, the purpose of the Lease “concerns the matter of aeronautics” and therefore the Lease fell within the exclusive federal jurisdiction.

The Court did not rule on an alternative argument, namely, that the airport land itself was “Public Property” and therefore within exclusive federal jurisdiction under s. 91(A) of the Constitution Act.

The Court’s decision raises interesting questions for sub-leases of federal land or from federally regulated institutions.  If the sublease from the airport is to a donut shop, or a clothing or magazine store, would the same result pertain?  Would the unpaid lien holder’s claim against the store owner interfere with the “purpose” of the airport?  What if the sub-lease was from a bank or a port authority, which are both federally regulated institutions, to a purely commercial operation having nothing to do with banking or shipping?  Would the lien holder’s claim against the shop owner and its sub-lease fall within the Vancouver International Airport Authority decision, or the Sarcee decision?  Does the answer change depending how important the lessee’s operations are to the commercial success, or how distant they are from the aeronautical nature, of the airport?  Thus, does a sub-lease of space to an airline fall on one side of the line and the donut shop sub-lease fall on the other?   These are questions for which the present decision provides no clear answers.

Construction Liens – Constitutional law:  Vancouver International Airport Authority v. British Columbia (Attorney General), 2011 BCCA 89 (CAnLII)