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Construction - Mortgage Priority. Scott, Pichelli & Easter Limited v. Dupont Developments Ltd.
In Scott, Pichelli & Easter Limited v. Dupont Developments Ltd. (Ont CA, 2022) the Court of Appeal considered a priority dispute involving mortgages and provisions of the Construction Act:[7] This appeal turns on a question of law relating to the interpretation of s. 78 of the Construction Act, R.S.O. 1990, c. C.30, as amended by the Construction Lien Amendment Act, S.O. 2017, c. 24. More specifically, the question is whether the priority that the prior mortgages have over lien claims extends to arrears in interest, fees, charges, and expenses that relate to the mortgage and its enforcement, under s. 78(3) of the Construction Act.
[8] The interpreter’s task in statutory interpretation is to discern the legislature's intention in order to give effect to it. The interpreter must attend to text, context, and purpose, to which I now turn: Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65, [2019] 4 S.C.R. 653, at paras. 117, 118-124.
[9] The purpose of the Construction Act is to protect lien claimants by ensuring that they are compensated for the increase in the value of a property to which their work contributed. But this purpose is hedged about with exceptions. One exception is for mortgages. The policy orientation of the Act can be seen in s. 78(1) and the mortgage exception is found in s. 78(3):Priority over mortgages, etc.
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.
Building mortgage
(2) 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.
Prior mortgages, prior advances
(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. [10] The appellants urge this court to apply literally the language of s. 78(3)(b)(i), which protects only amounts that were “advanced in the case of a mortgage”. The appellants present their arguments in two forms.
[11] The appellants’ most radical argument is that a vendor-take-back mortgage is not a mortgage in which an advance of cash has taken place. Accordingly, the entire mortgage amount is subordinated to the interests of lien holders. The appellants argue 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: XDG Ltd. v. 1099606 Ontario Ltd. (2002), 2002 CanLII 22043 (ON SC), 41 C.B.R. (4th) 294 (Ont. S.C.), aff'd (2004), 2004 CanLII 15997 (ON SCDC), 1 C.B.R. (5th) 159 (Ont. Div. Ct.). I would reject this argument. Giving effect to it would impair the use of vendor-take-back mortgages in the real estate market. In my view, a vendor-take-back mortgage is the equivalent of an advance for the purposes of the Construction Act.
[12] Both parties invoke the Supreme Court’s decision in M. Sullivan & Son Ltd. v. Rideau Carleton Raceway Holdings Ltd., 1970 CanLII 21 (SCC), [1971] S.C.R. 2, but take different views of its impact. The Supreme Court decided that principal and interest are equally secured by a mortgage:This legislation has been in force for a long time. Until the issue was raised in these proceedings, there was no case which drew any distinction between the rights of the mortgagee to priority for principal and his rights to priority for interest.
Both the trial judge and the Court of Appeal in this case have rejected any such distinction and I agree with them. Principal and interest are equally secured under the mortgage. The right to interest is an essential, inseparable, constituent part of the advance made on account of the mortgage. Without such a right no building loans would ever be made in a commercial way. The registration of a claim for lien or notice in writing of such a claim cannot stop the running of interest or affect the mortgagee's priority for continuing interest on advances validly made under s. 13(1) of The Mechanics' Lien Act. [Emphasis added.] [13] The appellants’ second argument, which hearkens back to Sullivan, is that interest and other costs are not advances of funds to the mortgagor and are accordingly not given priority over liens under the Construction Act.
[14] The appellants submit that this expansive language was appropriate in Sullivan because at issue there was a building loan, which is a different thing than an ordinary mortgage, as in this case. Section 78(2) of the Construction Act affords better protection to building loans.
[15] I do not agree with the appellants’ approach. Instead, I would accept the approach taken by Wilton-Siegel J. in Re Jade-Kennedy Development Corp., 2016 ONSC 7125, 72 C.L.R. (4th) 236, at para. 49:M. Sullivan & Son and XDG Ltd. demonstrate that the concept of an "advance" is not limited to the principal amount advanced under a mortgage. It includes all amounts which the mortgagor is contractually obligated to pay in respect of any such principal amount advanced, including interest and the costs of registration, perfection and enforcement of the mortgagee’s security for the advance irrespective of when incurred. As the Supreme Court noted, without such a right, building loans and other commercial loans would not be made in a commercial manner. [Emphasis added]. [16] I would reject the appellants’ argument that Sullivan’s application is restricted to building loans, for three reasons. First, this argument has no support in the precedents. The practice has developed in accordance with the approach in Sullivan to extend beyond building loans, as Wilton-Siegel J. noted. The Supreme Court in Sullivan did not expressly limit its findings to building loans. In Jade-Kennedy Wilton-Siegel J. observed that without such priority, even “other commercial loans would not be made in a commercial manner.”
[17] It would be unwise to interfere with settled practice. The Sullivan approach has already been followed by Ontario courts in the context of mortgage priority over construction liens. In 830889 Ontario Inc. v. 607643 Ontario Inc. (1990), 43 C.L.R. 181 (Ont. Gen. Div.), Hoolihan J. held that because principal and interest are equally secured under a mortgage, and “advances” or “money advanced” include interest, interest payments with respect to two non-building mortgages had priority over a construction lien. This finding has been accepted by text writers to stand for the principle that a mortgagee’s “priority include[s] a continuing claim to interest”: Harvey J. Kirsh & Matthew R. Alter, A Guide to Construction Liens in Ontario, 3rd ed. (Toronto: LexisNexis Canada, 2011), at § 10(B)(vi). It seems to be settled practice that a mortgagee’s “priority also extends to any interest on an advance that is paid on account of a mortgage”: Halsbury's Laws of Canada, “Real Property”, (Toronto: LexisNexis Canada, 2021 Reissue), at HRP-99.
[18] I note that the Report of the Attorney General’s Advisory Committee on the Draft Construction Lien Act (Toronto: Ministry of the Attorney General, April 1982), which led to the enactment of the Construction Lien Act, does not comment on the specific question of the priority of interest and other expenses. The Committee commented, at pp. 180-181, only on the relative priorities of prior and subsequent advances under what was then s. 80(3), now s. 78(3):“[P]rior” interests are generally accorded priority over the lien. However, under subsection 3 the priority of those interests is limited in the case of advances made prior to the commencement of the improvement of the actual value of the premises at the time when the making of the improvement commences. Where advances are made in respect of those interests after this date, they are entitled to priority in respect of those advances in accordance with much the same rules as apply under subsection 6, in respect to advances under subsequent interests. [19] Second, the appellants were not able to point to textual support for the proposition that the statutory language in the Mechanics’ Lien Act is sufficiently different than the statutory language in the Construction Act such that the interpretation of the former in Sullivan does not apply to the latter. Section 13(1) of the Mechanics’ Lien Act used the language of “payment or advances made on account of any conveyance or mortgage”. Section 78(3)(b)(i) uses the language of “advanced in the case of a mortgage”.
[20] Nor does the contrast between the subparagraphs (i) and (ii) of para. 78(3)(b) of the Construction Act assist the appellants. They submit that mortgage interest is “secured” by a mortgage but is not “advanced” under it, in the words of s. 78(3)(b)(i). They argue that the Construction Act makes the relevant distinction by using the words “advanced or secured” in relation to a conveyance “or other agreement” in s. 78(3)(b)(ii). I disagree. The “other agreement” language in subsection (ii) seems to refer only to a vendor’s lien on property. The appellants were not able to provide any other examples of the operation of the language in subsection (ii). A vendor’s lien is clearly not an advance.
[21] Third, the effect of adopting the novel interpretation that the appellants propose is not entirely clear, but it would impose additional risk on purchase money mortgagees, who might then be required to actively monitor properties to ensure that improvements made by owners did not deplete the mortgagee’s entitlement to payment for interest. (The argument that an improvement might increase the equity to the mortgagee’s ultimate advantage is not much comfort to a mortgagee.) The appellants’ proposed approach would introduce a sea change in risk assessment by mortgage lenders that is simply not warranted by the legislative history or long-standing practice. The possibility of inadvertently doing harm is very much present. . BCIMC Construction Fund Corporation v. 33 Yorkville Residences Inc.
In BCIMC Construction Fund Corporation v. 33 Yorkville Residences Inc. (Ont CA, 2023) the Court of Appeal considered a messy construction lien versus mortgage priority dispute involving the receiver of an insolvent condominium development:[1] The appellants are lien claimants who provided services to the owner of a condominium development. That owner went bankrupt in the very early stages of construction. A dispute developed as to the quantum of the priority to which the appellants were entitled under s. 78(2) of the Construction Act, R.S.O. 1990, c. C.30.
[2] Section 14 of the Construction Act gave the appellants liens on the interest of the owner of the condominium for the price of the services or materials supplied by the appellants. Section 22(1) of the Construction Act required the owner to retain a holdback equal to 10 percent of the price of the services or materials provided by the appellants. Section 78(1) provided that the appellants’ liens had priority over all mortgages “[e]xcept as provided in this section”. Section 78(2) addresses the extent of lien claimants’ priority when the mortgage is what is commonly referred to as a “building mortgage”. The section reads: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. [3] The owner did not hold back any of the required funds. On the motion, the appellants submitted that to the extent there were deficiencies in the holdbacks when calculating the quantum of the priority created in the lien claimants’ favour under s. 78(2), the lien claimants were entitled to a priority of 20 percent (10 percent x 2) because there were two building mortgages in place.
[4] The respondent receiver submitted that, under the scheme established by the Construction Act, there was only one holdback regardless of the number of building mortgages. Any deficiency in that holdback for the purposes of s. 78(2) is determined by deducting any amount held back by the owner from the 10 percent requirement in s. 22.
[5] The motion judge accepted the position advanced by the respondent.
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[12] Turning to the merits, the parties have both made forceful, attractive submissions in support of their respective interpretations of s. 78(2). They agree that as the matter is one of statutory interpretation, the standard of review is correctness.
[13] We have carefully reviewed the arguments and the reasons of the motion judge. The motion judge correctly identified and applied the modern purposive and contextual approach to statutory interpretation. He reviewed the factors relevant to that analysis, including the language of the section, and the context and purpose of the provision. The motion judge also reviewed related authority from the Superior Court: G.M. Sernas & Associates Ltd. v. 846539 Ontario Ltd. (1999), 48 C.L.R. (2d) 1 (Ont. S.C.).
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