Deconstructing Construction Liens

• Author: Duncan W. Glaholt/Markus Rotterdam
• Profession: Glaholt & Associates
• Pages: 225-270

Deconstructing

Construction Liens

Duncan

W.

Glaholt

and

Markus

Rotterdam

I.

INTRODUCTION

The

occasion

of

these Special Lectures presents

an

ideal opportunity

to

look

back over

the 130

years

of

lien legislation

in

Ontario

to see how far we

have come

in

achieving

its

purpose.

How

intrusive does this statute need

to be and how

intrusive

has it

become?

How

does

it

affect

the day to day

world

of the

real estate practitioner?

The

plan

of

this paper

is to

examine

three aspects

of our

lien legislation

in an

effort

to

answer these questions.

First,

we

will examine

the

statutory scheme

of

priorities,

as

this

is

the

most obvious intrusion

of

this statute into

the day to day

world

of

the

real estate lawyer.

It is

suggested that

the

priority sections

of the

Construction Lien

Act1

are

best understood

by

examining

the

underlying

policy

they express, rather than

by

puzzling through examples

on a

case

by

case basis.

Our

second inquiry

is

into

a

feature

of our

lien legislation

that

is

slightly less obvious,

but now

equally intrusive, namely,

the

statutory owner's trust. Recent judicial consideration

of the

statutory

owner's trust

has

discovered consequences

in the

legislation well

beyond those that were within

the

contemplation

of

most practitioners

at

the time. Our

third

and

final

enquiry examines

and

reinforces

the

130-

year-old assumptions upon which this statute rests: that

it

applies only

Of

Glaholt

&

Associates,

Toronto.

R.S.0.1990,

c.

C.30, Part

XI,

ss. 72 to 85.

225

1

226

Duncan

W.

Glaholt

and

Markus Rotterdam

to

interests

in

land. This proposition

was

tested again recently

as a

result

of

the

sophistication

of

modern infrastructure procurement processes

and

involved

the

lienability

of

inchoate,

future,

equitable interests.

The

authors have added

a

note

on the

current state

of

liens

on

leasehold

interests

and

mortgagees

as

owners

to

complete this discussion.

The

Construction

Lien

Act

represents

an

extraordinary ongoing

effort

at

balancing

a

number

of

legitimate, complex,

and

competing interests.

Owners

are

interested

in

improving

the

value

of

their land while keep-

ing

their title

free

from

the

claims

of

strangers over whose accounts they

have

no

control.

At the

same time they

are

interested

in

encouraging

a

competitive marketplace into which

to

tender their projects. This means

caring about

the

creditworthiness

of

contractors. Contractors,

of

course,

want

profit.

All

want

to

acquire

and

complete

as

many lucrative con-

tracts

as

they can, with

as

little interference

as

possible

in

their dealings

with subtrades. Some take

a

larger view

and

want

to

sustain

and

pre-

serve their

profitability

through many generations

of

management. This

means caring about

the

cash

flow

of

their subcontractors. They

too

need

and

want

a

sustainable, competitive market

for

construction services.

They resent

the

interference

of

subtrades

in

their contractual relation-

ship with owners

on the one

hand,

but are

often

quick

to

make non-pay-

ment

by the

owner their

subcontractors'

problem,

not

their own.

Subcontractors

just

want

to get

paid. There

is

also

a

public interest

in

enforcing

legal contracts,

but

there

is a

countervailing public interest

in

equity. Owners should

not get the

benefit

of

work without paying

for it.

Outside

of the

construction pyramid (owner, contractor, subcon-

tractor,

supplier),

the

interests

of

lien claimants

as a

whole need

to be

balanced with

the

interests

of

others

who

take security

in

real property.

Foremost among this group

are

mortgagees. They

are to the

construc-

tion industry what

the sun is to

agriculture: nothing

can

grow without

sun,

nothing

gets

built

without

capital. Access

to

capital

is a

fundamen-

tal

value

in the

system

of

construction lien remedies.

The

Construction

Lien

Act

therefore represents

a

thoughtful

ongoing

attempt

at

balancing

all of

these

interests.

In the

case

of

mortgagees,

for

example,

if the

statutory priority scheme

is

allowed

to

work,

trades

and

suppliers will

not

have enhanced

the

value

of

mortgaged property with-

out

compensation,

and

mortgagees should have their reasonable expecta-

tions

met as to the

value

of

their security.

The

current vigour

of

Ontario's

construction industry

is

sufficient

proof

that

the

system

is

working.

We

must

now

look more closely

at the

priority

provisions

of the Act

in

order

to see how

they work

to

balance interests

and to

what extent

the Act

achieves

its

purposes.

Deconstructing Construction Liens

227

H.

PRIORITIES

UNDER

THE

CONSTRUCTION

LIEN

ACT

1)

Basic Principles

Let

us

begin with

first

principles.

The

Construction Lien

Act is

unique

in

that

in its

entirety,

by

design,

it

creates

a

special class

of

creditor within

the

construction industry. Thus, access

to the

statute

is

jealously guard-

ed, but

once within

the

statute

its

provisions, including Part

XI

(Priorities)

enjoy

a

large

and

liberal interpretation

in

favour

of the

lien

claimant. This principle

was

most recently

affirmed

by

Justice Campbell

in Re

A.G.

Simpson

Co.,2

quoting

from

the

forty-year-old decision

of the

Supreme Court

of

Canada

in L. Di

Cecco

Co. v. Ace

Lumber

Ltd.:3

The

lien commonly known

as the

mechanics' lien

was

unknown

to the

common

law and

owes

its

existence

in

Ontario

to a

series

of

statutes,

the

latest

of

which

is

R.S.O.

I960,

c.

233.

It

constitutes

an

abrogation

of

the

common

law to the

extent that

it

creates,

in the

specified

circum-

stances,

a

charge upon

the

owner's lands which would

not

exist

but for

the

Act,

and

grants

to one

class

of

creditors

a

security

or

preference

not

enjoyed

by all

creditors

of the

same debtor; accordingly, while

the

statute

may

merit

a

liberal interpretation with respect

to the

rights

it

confers

upon

those

to

whom

it

applies,

it

must

be

given

a

strict inter-

pretation

in

determining whether

any

lien-claimant

is a

person

to

whom

a

lien

is

given

by it.

Part

XI

(Priorities) creates

a

complete code both within

the

con-

struction pyramid itself (sections

79,

80(1),

81, 82) and

outside

of the

construction pyramid (sections

77, 78, 83,

85), wherever

the

statute

might intersect with other schemes

and

creditors, such

as

execution

creditors,

mortgagees,

insureds

and

trustees

in

bankruptcy.

There

are

three

first

principles that

are key to the

analysis

of any

pri-

orities problem within

the

Construction Lien

Act:

a)

Lien rights and, thus,

the

statutory code

of

priorities,

are

enforceable

whether

the

underlying contract

has

been completed

or

not.

The

sta-

tus of the

underlying construction contract

is

meaningless

as far as

2

[2002]

OJ.

No. 262

(S.C.J.).

3

[19631 S.C.R.

110 at 114

(S.C.C.).

See

also

Gillies

Lumber

Inc.

v.

Kubassek

Holdings

Ltd.

(1999),

176

D.L.R. (4th)

334

(Ont. C.A.);

and

Rudco

Insulation

Ltd.

v.

Toronto

Sanitary

Inc. (1998),

41

C.L.R. (2d)

1

(Ont. C.A.).