CAN A MORTGAGE LENDER BE HELD TO BE AN "OWNER" UNDER THE BUILDERS' LIENS ACT?

Posted: November 30, 2017 | Last Updated: January 25, 2018
Written by: Edward D. Brown

Edward D. (Ned) Brown

Pitblado LLP

Winnipeg, Manitoba

November, 2017

In most cases, the roles played by each "participant" in a construction/development project (the "Project") are quite distinct.  There is the owner/developer which holds title to the property and wishes to develop it with the Project (the "Owner"), the (general) contractor which is engaged by the Owner to oversee and effect construction of the Project (the "General Contractor") and those engaged under the General Contractor to provide the labour, services, materials and components required to complete the Project (the "Subcontractors").  Some of the Subcontractors will be engaged directly by the General Contractor, and others will be engaged by other Subcontractors.  In this sense, the individual persons who are engaged to provide labour can be considered Subcontractors.  An additional - and usually critically important - participant is the Owner's financier/lender who will typically take a real property mortgage from the Owner on the Owner's interest in the realty which includes the Project as it is constituted (the "Mortgagee).  The Mortgagee's financing (usually provided over a period of time and made available as the improvements are put in place) will be secured by the Mortgagee's mortgage.

The Builders' Liens Act (Manitoba) (and similar legislation in other jurisdictions) provides some measure of security for those Subcontractors who do not have the benefit of a direct contractual relationship with the Owner.  The legislation (the "Act"), among other things, gives such Subcontractors a monetary charge (a "builders' lien") against the Project.  This is a mechanism which performs a similar function to the Mortgagee's mortgage security.  If not paid, the Subcontractor (or more likely, a substantial portion or all of the Subcontractors, acting collectively) can cause the realty to be put up for sale, with the proceeds (or some of them) being then made available to satisfy the claims of the unpaid Subcontractors.

Wherever a debtor has two or more creditors, each of whom have acquired security in the same assets of the debtor, there is a potential for conflict between the secured creditors - unless the collateral available to all of the secured creditors is sufficient to satisfy all of their claims, a situation which usually doesn't occur when the debtor is in financial difficulties or is otherwise unable to fulfill its obligations to its creditors.  Thus there are sometimes disputes ("priority disputes") which arise between Subcontractors holding builders' liens and an Owner's Mortgagee.  Where an Owner finds itself in financial difficulties, typically in the midst of completion of a Project, you have the Mortgagee who has provided value to the Owner (financing) and the Subcontractors who have provided value to the Owner (their "inputs").  So the Owner has received value from all of these parties, and the Mortgagee and the Subcontractors - who are not being paid when due - feel "stiffed".  In other words, the Mortgagee and the Subcontractors are the "good guys" and the Owner is the "bad guy".  Of course there can be situations where the Mortgagee, without justification, reneges on its financing commitment and/or situations where the Subcontractors' inputs are deficient or defective.  But in most cases the contest - insofar as the secured creditors are concerned - is between two different sets of "good guys", the Mortgagee and the Subcontractors.  To the extent that the Mortgagee can achieve legally enforceable priority over the Subcontractors, the Mortgagee "wins", and, to the extent that the Subcontractors can achieve legally enforceable priority over the Mortgagee, the Subcontractors "win".  It will be appreciated that in most situations, nobody really "wins", so it's a matter of which of the competing secured creditors can get the most out of the collateral.

The Act spells out differing rights and obligations of each of the Owner, the Subcontractors (and the General Contractor) and the Mortgagee.  Generally speaking, the Subcontractors' and the Mortgagee's interests are both protected , provided that each of them follows the rules set out in the Act.  For the reasons aforementioned, the Mortgagee's position is better protected (under the Act) than the Owner's.  Thus, where unpaid Subcontractors are able to legally establish that a Mortgagee has been acting like an Owner, a Court may hold that the Mortgagee is an "Owner" under the Act.  If this happens, the Mortgagee's position under the Act, including with respect to its security, may end up being subordinated to that of the Subcontractors.

"Owner" is defined in the Act to mean: "…any person having any estate or interest in the structure and the land occupied thereby or enjoyed therewith, or in the land upon or in respect of which work is done or services are provided or materials are supplied, at whose request:

  1. upon whose credit, or
  2. on whose behalf, or
  3. with whose privity or consent, or
  4. for whose direct benefit,

the work is done or the services are provided or the materials are supplied, and all persons claiming under or through him whose rights are acquired after the work or services were commenced or after the materials were supplied."

An Owner (as so defined) and a Mortgagee clearly both each have an estate or interest in the realty and the improvements forming part thereof.  Also clearly, both the Owner and the Mortgagee benefit from the creation of the improvements on the Owner's realty.  The Owner gets a more valuable parcel of realty and the Mortgagee's security attaches to a more valuable parcel of realty.  But is the benefit so flowing to the Mortgagee a "direct" benefit?  While the Subcontractors are not being extended credit directly by the Mortgagee ("credit", in the usual sense of the word, is provided by the Mortgagee to the Owner), could one argue that the creditworthiness of the Mortgagee enhances the creditworthiness of the Owner, thereby inducing the Subcontractors to provide their inputs?  Again, while there is no "privity of contract" (a contract between parties) between the Subcontractors and the Mortgagee, in providing financing to the Owner, the Mortgagee desires - and contractually obligates the Owner to - effect the improvements, so could it be argued that the Mortgagee, in so requiring, has given its "consent" to the Subcontractors providing their inputs?

Whenever a Mortgagee's loan agreement with an Owner specifies (typically in great detail) the Mortgagee's requirements of the Owner in connection with the improvements which the Mortgagee is financing, and where the Mortgagee takes an active role in overseeing and monitoring completion of the improvements, there is a danger that the Mortgagee will end up being "too close" to the Owner (and the effecting of the improvements).  This may result in the Mortgagee being held to have acted so as to be deemed to be an "owner" under the Act.  That would then put the Mortgagee at a distinct disadvantage vis-à-vis the Subcontractors.

A recent judgement of the Alberta Court of Queen's Bench (Westpoint Capital Court v. Solomon Spruce Ridge Inc., judgement issued April 6, 2017, hereinafter, the "Westpoint Case") is an example of priority dispute in which a mortgagee (Westpoint) was alleged to have acted so as to be deemed to be an "owner" under the (Alberta) version of the Act.  In the Westpoint Case, S acquired a parcel of realty, entered into a loan agreement with Westpoint whereby Westpoint undertook to finance improvement of the realty, and S (as required by the loan agreement) provided a mortgage on the property to Westpoint.  Work on the project started, but in fairly short order, S defaulted in the performance of its obligations owed to Westpoint.  Westpoint commenced to enforce its security, and in the realization proceedings, B purchased the property.  B filed a caveat against the property's title giving notice of its purchase rights.  Subsequently, P (a subcontractor) filed a builder's lien claim against the title.  B's purchase money was paid into Court, and each of Westpoint, B and P claimed those monies, Westpoint as mortgagee, B as purchaser and P as a builder's lien claimant.

As between B (as purchaser) and P (as builder's lien claimant), although P's input to the Project predated B's contracting to Purchase the property, P did not register its lien claim until after B had registered its purchase notice. Thus as between those two, B had priority.  As between P (as builder's lien claimant) and Westpoint (as mortgagee), "normally", Westpoint, having registered its mortgage and made its advances before P registered its lien claim, Westpoint would have priority.  However, if it could be established (to the Court's satisfaction) that Westpoint had acted as, or was in substance, an "owner", then (arguably) Westpoint's mortgage interest would be merged or subsumed into its ownership interest.  Then, as between P and Westpoint, P's lien claim would hold priority over Westpoint's interest (such interest having started out as a mortgage interest, and then becoming "converted" to an ownership interest).  If P's claim interest held priority over Westpoint's interest, and, B's purchase interest held priority over P's lien claim interest, then B would hold priority over Westpoint's interest.  The result would be that B would be entitled to acquire ownership of the property "free and clear" of Westpoint's (mortgage) interest.

It was alleged that Westpoint was an "owner", essentially on these basis, namely:

(i)         because of its interest or "stake" in completion of the project, it was or became a "beneficial" owner (although clearly, not the titleholder);

(ii)        Westpoint benefitted from having the property improved to such a degree that it could be said that P's input was provided "on behalf of" Westpoint; and

(iii)       S had no realistic ability to effect the improvements without Westpoint's credit (in other words, P and the other parties inputting did so, only because of Westpoint's - as opposed to S's - creditworthiness).

The Court held that, on the basis of the evidence before it, Westpoint was not an "owner".  In so concluding, the Court noted the following:

(a)        The protections given under the Act (in particular, the right of lien) are extraordinary remedies in that they advantage persons (lien claimants) who have no (direct) contractual dealings with the Owner.  As such, it is proper for Courts to interpret (and they have traditionally done so) such rights and remedies "strictly";

(b)        The assertion that Westpoint had acted as an "owner" was a substantially "bald" assertion, with no adequate evidence having been presented to back it up.  In particular, there was no evidence of the following:

  1. that there were non-arm's length dealings between Westpoint as mortgagee and B as purchaser on the one hand, and S on the other hand.  The same individual person controlled both Westpoint and B, but there was nothing "particularly sinister or suspicious" about this.
  2. that S left a "wake of creditors behind", given the purchase price that B paid to acquire the property in mortgage realization proceedings.  This did not appear to be an "engineered insolvency" whereby the debtor intentionally "stiffed" the Subcontractors and then colluded with the mortgage realization purchaser to acquire the property at a "cheap price".
  3. that there were any direct dealings between Westpoint and any of the General Contractor and/or the Subcontratcors.  In particular, there was no evidence that P had any dealings with Westpoint until after it filed its lien.
  4. that Westpoint paid any of the General Contractor and/or the Subcontractors directly.  "Westpoint had no involvement with the construction on the lands, other than to release monies…after it was satisfied that certain work had been completed".
  5. that at any time prior to when S defaulted in its obligations owed to Westpoint, Westpoint had any intention of acquiring an interest in the lands, "other than as mortgagee".
  6. that any request was made by Westpoint, "express or implied, that any (General Contractor) or Subcontractor (do) any work on the property".  As the Court stated, privity and consent are not made out, and "direct benefit" is at best doubtful.

Additionally, the Court held that:

  1. There was nothing in the builder's lien claim document, or even in P's statement of claim, to indicate that it was taking the position that Westpoint should be treated as an owner for the purposes of the Act.  "Indeed, Westpoint is named in the statement of claim as a prior encumbrancer".
  2. Any builder's lien claim against Westpoint (itself) would be well past the filing deadline.  "Not by a few days or weeks, but rather years".  In fact, Westpoint did not make its lien claim against Westpoint's interest in the land (rather, the claim was recorded against S's interest in the land).
  3. B's position is "curious".  It would "have a purchaser's lien caveat improve its "priority" position because of the filing of an unrelated builder's lien by a claimant who is unable to prove that the mortgagee acted as "owner" within the meaning of the Act.  As the Court rhetorically asked, "Why would a mortgagee lose priority (for) its bona fide advanced mortgage to a subsequent encumbrancer with whom it had no dealings?".  And the Court concluded that "There is no legal or equitable theory that supports the notion of a subsequent encumbrancer improving its priority position against a mortgagee simply because a builder's lien claimant is able to show that the mortgagee acted in the position of an owner with respect to its builder's lien claim".
  4. B's alternative argument that even if Westpoint was not an "owner" within the meaning of the Act, it was a beneficial owner of the property, and thus, should be held to be an "owner" under the Act, is simply wrong.  The Court held that "The Act and the cases in this area do not support an argument that if a mortgagee (or a landlord) has become an "owner" for the purposes of a particular claimant's builder's lien, that mortgagee (or landlord) becomes an "owner" for the purposes of every other claimant's lien claim (or for that matter, any other interest claimant who doesn't hold a lien).".

Somewhat incidentally, the Court also observed that "There is no authority to the effect that a lien claimant can piggy-back on another claimant's lien…".  Each lien claimant's claim "must be perfected by proper registration and the filing of a certificate of lis pendens".  A lien claimant may (in fact) shelter under another lien claimant's law suit, but that "is only to avoid a multiplicity of actions and reduce costs and complexity in managing builder's lien actions, especially when a project fails and there are multiple lien claims at various levels".  This last statement - although not really required in order for the Court to have reached its other conclusions concerning the law in this particular case - should be kept in mind by those attempting to understand the relationship between an Owner, a General Contractor, the Subcontractors under a General Contractor and other persons having an interest in an improved (or being improved) parcel of real estate.