In Westpoint Capital Corp. v. Solomon Spruce Ridge Inc., 2017 CarswellAlta 580, 2017 ABQB 254, the Alberta Court of Queen’s Bench made a number of decisions relating to the priorities between lienholders and mortgagees.

The court found that a mortgagee was not an “owner” of the land within the Alberta Builder’s Lien Act. In any event, by not claiming in its lien and lien action that the mortgagee was an owner, the lien claimant could not assert a claim that the mortgagee was an owner.

The court also found that under the Alberta Act, the mortgage advances had priority over the lien claimant even though they exceeded the value of the land at the time that the first lien arose.

Background

The mortgagee W was controlled by V. V also controlled the prior owner of the lands who had sold them to the present registered owner S. S was controlled by G.

W “advanced” monies under its mortgage but $1 million of that advance went into a GIC in W’s name, as security for the mortgage loan and in particular for the completion of “deep services” on the land. In addition, about $600,000 of the mortgage advance went into a GIC in W’s name as security for a development agreement with the municipality.

S agreed to sell the land to B, and B claimed priority under its agreement of purchase and sale.

Contractor P registered a builder’s lien and commenced a lien action against S. It joined W to the action, not as an owner, but as a “nominal” defendant and encumbrancer.

In the subsequent court proceedings, both mortgagee W and buyer B made tenders to buy the property and B was the successful bidder.

Both contractor P and buyer B claimed that mortgagee W was an “owner” under the Alberta Builder’s Lien Act.

Decision

The court held that “[r]emedies against a mortgagee or landlord such as declaring them to be an owner under the Builder’s Lien Act are unusual and rare. Clear circumstances must exist for this extraordinary remedy to be imposed. In my view, those circumstances are absent here.”

The court relied upon the following factors in finding that the mortgagee W was not an owner:

  1. there was no information that W and V were not acting at arms-length to the owner S.;
  1. there was nothing sinister or suspicious about the dealings;
  1. while W advanced more money than the land was worth at the time the mortgage was advanced, $1.5 million was “advanced” to invest in GICs in W’s name as security for S’s obligations under the mortgage loan;
  1. most of the registered owner S’s creditors on the project were paid. Accordingly, there was no basis for a suggestion that the mortgagee W and the registered owner S colluded to harm contractors and subcontractors;
  1. there was no evidence of direct dealings between the mortgagee W and any of the contractors or subcontractors. W did not pay the contractors or subcontractors directly and had no involvement with the construction on the lands, other than to release monies from one of the GICs to the registered owner S after it was satisfied that certain work had been completed;
  1. there was no evidence that, at any time before S defaulted on the mortgage, the mortgagee W had any intention of having an interest in the lands other than as mortgagee.
  1. there is no evidence of any request, express or implied by the mortgagee W that any contractor do any work on the property.
  1. the fact that G, who controlled the registered owner S, worked for or with the mortgagee W after the mortgage default was not relevant. G “undoubtedly had an interest in working with a major creditor to minimize his risks.”

The court also found that the contractor P’s claim that the mortgagee W was an “owner” of the land failed due to its failure to file a lien against the estate of W as owner:

“Essentially, a builder’s lien has no value until it is registered. While registration may have some retroactive effects, as under s 11(1) referenced above, it does not attach any interest in the lands until it is registered. A builder’s lien claim against an owner who has not contracted directly with the claimant provides in rem remedies only, and does not make an owner personally liable to the claimant. It is the owner’s interest in the lands that is at stake, not the owner’s other assets….Here, any builder’s lien claim against [W] is well past the filing deadline. Not by a few days or weeks, but rather years. Despite not claiming a lien against [W] interest in the lands, [P] has made no attempt to amend the lien it did file to include a claim against [W].

The court held that the mortgagee had priority over the lienholder and purchaser even to the extent of advances made which exceeded the value of the land when they were made:

“No authority is cited for the proposition that advances beyond the value of the mortgaged lands are not entitled to the same priority as advances up to the value of the lands and buildings. That may be the case in jurisdictions where lien claimants have priority over mortgagees to the extent that the lien claimants have increased the value of the property since the last mortgage advance. That is not the law in Alberta.”

The court also held that the contractor P’s claim against the mortgagee W could not be corrected under the curative section, section 37 in the Alberta statute, because “[t]he court has no discretion to depart from statutory requirements.”

Discussion

This decision provides a good check-list for those factors which may be considered in determining whether a mortgagee – or landlord or other person – is an “owner” under the lien statute. Here, there were circumstances which on the surface might raise suspicions: the prior owner was controlled by the same person who controlled the mortgagee which sought to be the buyer in the ultimate court proceedings. Was the “man in the middle”, S, simply a stooge? The court went through an eight point check-list and found no evidence to that effect.

The decision is also a warning that, if an ownership claim is to be made against any person, then the lien must be filed against that person’s interest in the land and an action asserting such a claim must be made against that person. And if such a claim is not made, the curative section will be of no avail.

The court’s finding that the mortgage advances had priority over the lienholder even to the extent of the advances exceeding the value of the land is noteworthy. Section 11((4) of the Alberta Builder’s Lien Act says that a registered mortgage “has priority over a lien to the extent of the mortgage money in good faith secured or advanced in money prior to the registration of the statement of lien” and does not mention the value of the land at the time when the first lien arose. By contrast, section 78(3) of the Ontario Act says that a prior mortgage has priority over liens “to the extent of the lesser of, (a) the actual value of the premises at the time when the first lien arose” and the amount of the advances.

In this case, a large portion of the “advances” made by the mortgagee were effectively to itself and were put into GICs in its name which provided security for the mortgage and for performance of the builder’s obligation and obligations under the development agreement with the municipality. Were these payments truly “advances” under the mortgage so far as the lien statute is concerned?

The curative section in the Ontario lien statute is proposed to be widened by the Construction Lien Amendment Act, 2017, which has now received second reading. Under new subsection 6(2) of what will be known as the Construction Act, the “minor irregularities” that are not to invalidate a certificate, declaration or claim for lien are expanded. They will now include minor errors or irregularity in the name of the owner, or person from whom materials or services are provided, or the legal description of the premises, or in placing owner’s name in the wrong portion of a claim for lien. However, it seems unlikely that this expanded section will cure the failure in a lien to make a claim against a party as an owner, or to do so in the statement of claim.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 16, section 4(a)(iv), 4(d) and 4(l)(C).

Westpoint Capital Corp. v. Solomon Spruce Ridge Inc., 2017 CarswellAlta 580, 2017 ABQB 254

Building contracts – builder’s and construction liens – claim against mortgagee as owner – curative section

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.), FCIArb                                 November 14, 2017

www.heintzmanadr.com

www.constructionlawcanada.com