What Mortgage Payments Are “Advances” That Have Priority Over Lien Claims?

A recurring issue for construction and builders liens is whether the liens have priority over mortgage advances.  One question which does not often arise is:  what sort of payments by a mortgagee do constitute “advances” under a mortgage?  In other words, what sort of payments by a mortgagee can even qualify for priority over lien holders?

A mortgagee may make payments for many reasons, but a lien holder may question whether the payment qualifies as an “advance” under the mortgage.  For example, when a mortgagee appoints a receiver and loans moneys to the receiver under new arrangements with the receiver, are those loans “advances” under the original mortgage?  Are those loans entitled to priority over existing registered lien holders?  The British Columbia Court of Appeal recently answered “No” to these two questions in Bank of Montreal v Peri Formwork Systems Inc.

 The background:

 The Bank was a mortgagee to the owners and developers of the project.  On June 21, 2009, it demanded payment of $29 million on the mortgage.  On July 21, 2009, the owners obtained an order under the Companies’ Creditors Arrangement Act (CCAA).  The order permitted the owner to borrow $2 million in Debtor-in Possession (DIP) financing from the Bank.  The order stated that the loan had priority over all other security interests including builders’ liens.

On July 28, 2009, Peri Formwork filed a builders’ lien.

In December 2009, the CCAA proceedings came to an end.  The monitor under the CCAA proceedings was then appointed as receiver of the borrowers.  Under the terms of the receivership order, the receiver was permitted to borrow up to $21 million from the Bank.  The terms of that loan had different terms than the original mortgage.

The receivership order stated that the receiver’s borrowings were to have priority over all other security interests or liens except builders liens filed prior to the date of the order which totaled about $2 million.  As to those liens, the order stated that the priority between the receiver’s borrowings and the prior liens would be determined in a separate hearing.

The Bank commenced foreclosure proceedings in December 2009.  Before the December 2009 receiving order, the monitor’s assessment was that, if the property was sold on an “as is” condition, there would be a substantial shortfall for the mortgagee, and that by continuing the construction, a substantially reduced shortfall would likely result.

In April 2010, a judge of the BC Supreme Court held that loans which the Bank proposed to advance to the receiver took priority over the prior liens.  This decision was reversed by the BC Court of Appeal.  That decision was based on three grounds:

First, the Court of Appeal held that the priority of the loans to the receiver could not be based on the CCAA proceedings and orders.  By the time of the mortgage and receivership proceedings, the CCAA proceedings had been “effectively terminated” and there was “no life remaining” in those proceedings.

Second, the Court of Appeal held that there was no inherent jurisdiction of the court to accord priority to the Bank’s loans to the receiver that would over-rule the statutory scheme in the Builders Lien Act (the Act).

Third, the Court of Appeal held that the loans to the receiver could not qualify as “further advances under the mortgage” within the meaning of Section 32(5) of the Act.  The Court noted that Section 21 of the Act expressly gives priority to liens over “receiving orders”.  The Court held that Section 32(5) provides an exception to the priority in favour of lien holders over mortgage advances in Section 32(2).    The words in Section 32(5) had to be given a restrictive meaning, and an interpretation which gives effect to the purpose of the Act, which is to “to ensure that contractors and suppliers are paid for materials provided and for services rendered”.  Accordingly, those words only apply to an advance under the original mortgage.  The loans to the receiver were to be under different terms and were distinct loans, and accordingly were not “advances” made under the original mortgage.

Section 32(5) and (6) of the Act states that the mortgagee may apply to the court and obtain an order that its further advances are to be given priority over the registered liens, and that the court must make such an order if it finds that the advances will be applied to complete the improvement and will result in an increased value of the land at least equal to the amount of the proposed advances.  The Court of Appeal held that, in light of its decision that the loans to the receiver were not “advances”, it did not have to consider whether Section 32(6) applied.

While this decision was made in the context of loans to a receiver, it raises the much broader question about when monies paid by a mortgagee will be given priority over lien holders.  Generally speaking, the construction and builders lien Acts across Canada use the words “advance” and “in respect of” or “on account of” the mortgage.  For instance, section 78(4) of the Ontario Construction Lien Act refers to “any advance made in respect of that conveyance, mortgage or other agreement.”  Section 31 of the Manitoba Builders’ Lien Act refers to “payment or advances made on account of any conveyance or mortgage”  Section 23(2) of the Nova Scotia Builders’ Lien Act refers to “funds advanced in good faith”, without stating that the advance must be in respect of the mortgage, although that requirement may be assumed.

What may not be obvious in each case is whether the payment made by the mortgage is an “advance” and whether it is “in respect of” or under the mortgage.  If it is not, then according to the Peri Formwork decision, the payment will not obtain priority over competing lien claims.

Construction Liens   –   Priority   –    Mortgage advances  –  Receiver

Tags:    priority – foreclosure proceedings – receiver – lien – builders

Bank of Montreal v Peri Formwork Systems Inc., 2012 BCCA 4

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                       March 22, 2012


Can Money Paid Into Court Be Used To Discharge Other Liens?

When a contractor pays money into court to discharge a lien of a sub-contractor, can that money only be used to discharge that lien holder’s claim?  Or is it available to pay the liens of all eventual lien holders?  In Canadian Western Bank v. 702348 Alberta Ltd., the Alberta Court of Queen’s Bench recently decided that all lien holders have a claim to that money under the Alberta Builders Lien ActThis may depend on the specific wording of the Alberta Act.  Indeed the Alberta Court recognized that the result is not the same in Saskatchewan.

The Alberta Court held that the 2007 decision of the Alberta Court of Appeal in Maple Raiders Inc. v Eagle Sheet Metal Inc. had decided the issue.  In Maple, the general contractor paid money into court to discharge the lien of a sub-sub contractor (the “lien discharge monies”).  The general contractor later applied to create a lien fund for all the claimants, under s.27(3) of the Alberta Act, to replace the previous monies paid into court, and to have the lien discharge monies incorporated into the lien fund.  The effect of incorporating the lien discharge monies into the lien fund was to diminish the sub-sub-contractor’s share from about $26,000 to $7,000.  The Alberta Court of Appeal upheld the lower court’s decision in Maple granting the contractor’s application.  It held that the principle that all lien holders are to be treated equally mandated the result.

The Alberta Court of Appeal in Maple held that the payment into court of the lien discharge monies did not make the owner liable for the full amount of those funds, but only such portion as the lien holders in total might be entitled.  Put another way, the payment into court did not make the owner liable for more money to the other lien holders.  That would be the effect if the original lien holder could keep the lien discharge monies solely for payment of its lien and prohibit the other lienholders from having access to those monies.

In Canadian Western Bank, the Alberta Court Queen’s Bench held that the same principles apply when the original lien claimant is a sub-contractor, not a sub-sub-contractor.  The lien claimant asserted that the decision in Maple should not apply since it was a sub-contractor and in a direct contractual relationship with the contractor which paid the money into court.  Since it had a direct contractual right to be paid by the contractor, the sub-contractor argued that the lien discharge monies were effectively security for its direct contractual claim.  The Alberta Court disagreed, holding that those monies stood in place of the land, for the benefit of all lienholders.

The Alberta Court acknowledged that the result might be different in another province.  It pointed to the Saskatchewan decision in Town-N-Country Plumbing & Heating (1985) Ltd. v Schmidt.  In that decision, the Saskatchewan Court of Appeal relied upon the Saskatchewan Act which provides that, when a lien holder’s lien is discharged by payment into court, the lien holder has a first charge upon those monies.  Accordingly, the Saskatchewan Court of Appeal held that the lien holder was entitled to those monies to the exclusion of other lien holders.  There is no similar “first charge” provision in the Alberta Act.

The construction, builders and similar lien statutes in Manitoba, New Brunswick, and Newfoundland and Labrador all state that the lien holders whose lien has been discharged by payment of money into court or by provisions of security has a first charge on that money or security.  Accordingly, in those provinces the result in Town-N-Country Plumbing & Heating appears to apply.  The legislation in other provinces does not state that the lien holder whose lien has been so discharged has a first charge on that money or security.  Accordingly, in those provinces the result in Canadian Western Bank appears to apply.  The usefulness of this disparity in legislative regimes seems doubtful.

Does the Canada Revenue Agency have a claim to the lien funds?

Another interesting aspect of the Canadian Western Bank decision is the claim by the Canada Revenue Agency (CRA) to the lien funds.  CRA claimed these moneys because the general contractor that paid them into court had not made the proper deductions and remittances to the CRA under the Income Tax Act (ITA).  CRA claimed that s.227(4) of the ITA imposed a trust in favour of Her Majesty on the lien fund in priority to that of the lien claimants.

This claim raised the issue:  who owns the trust funds in court:

–          the contractor (because it paid the moneys into court)

–          the owner (since those funds stand in place of the Lands)

–          or the lien holders?

The Court held that a trial on that issue must be held to determine “the issues upon which [the contractor] paid the moneys into court to clear [the owner’s] title to the land.” The decision to direct a trial of the issue seems unnecessary since the question appears to be a legal one and not dependent on the facts.  The sole purpose of the payment by the contractor into court was to release a claim against the owner’s land.  The money paid into court stands in place of any remaining claim against the owner’s land.  In these circumstances, the contractor’s claim to those funds appears more akin to a resulting trust than ownership.

In the result, a sub-contractor cannot be assured that it will ultimately receive the money paid into court to discharge its lien.  In some provinces, other lien claimants may have a right to those funds.  So may the CRA.

Can the sub-contractor improve its situation by making other arrangements? 

The decision in Canadian Western Bank raises a further question. What if the order paying the money into court stated that the lien claimant has a first charge on those funds (following the Saskatchewan Act)?  What if the order said that the monies were to be held by the lien claimant, rather than paid into court, subject to the litigation to resolve the lien claim?  Can the court make such an order, or can parties make such an agreement, and deprive the other lien claimants of their claim to these monies?  If it is solely a matter of the parties’ intentions, as the Alberta Court appears to hold Canadian Western Bank, then the court or the parties might make such an arrangement. But if the matter is one of law, and the parties cannot contract out of the statutory regime, then neither the court nor the parties could deny the other lien claimants their share of the lien discharge monies.  In any event, it is unlikely that the contractor or owner would agree to that sort of arrangement.

As a result, when a lien holder’s claim is discharged by payment of monies into court, the lien holder’s claim to those monies will remain precarious depending on the provincial jurisdiction of the claim and, possibly, the terms upon which the monies are paid into court.

Construction Liens   –   Payment into Court   –   Priority of lien-claimants

Canadian Western Bank v. 702348 Alberta Ltd., 2012 ABQB 89

Thomas G. Heintzman O.C., Q.C., MCIArb                                                                                            March 13, 2012