Get Your Priorities Straight – What is the extent of lien claimants’ priority over mortgages?

The first decision of 2023 from the Court of Appeal for Ontario deals with the priorities between construction liens and building mortgages when a developer becomes insolvent.

In an insolvency situation, there are often many creditors seeking to recover from a limited pool of assets and determining priorities can be complex. This is also true for construction projects. Contractors, subcontractors, trades, and suppliers all need to know their rights (and limitations) on collecting for services and materials from an insolvent developer.

Background

Those who supply services and materials to a construction project generally have the right to lien for unpaid amounts, although there are some exceptions. For a detailed look at the types of work that gives rise to lien rights, please see our previous post in our “Lien on Us” series.

The Construction Act requires payers on a construction project to retain a holdback of 10% of the price of the services and materials supplied to the project. This holdback acts as a form of security for potential lien claimants. Section 78(2) of the Construction Act provides lien claimants with a priority over a building mortgage taken to finance the project, to the extent that the 10% statutory holdbacks were not retained. This helps to ensure that some funds remain available to pay lien claimants before a lender.

Decisions of the Courts

The recent case of BCIMC Construction Fund Corporation v 33 Yorkville Residences Inc., 2023 ONCA 1 dealt with a situation where a developer became insolvent, the developer did not retain the 10% holdback, and there were two mortgages taken out to finance the project. The lien claimants argued that since there were two building mortgages, the lien claimants should have priority for the 10% holdback over each mortgage separately, for a total priority of 20%.

The court disagreed with the lien claimants, and held that the lien claimants only had a priority over the mortgages for a total of 10%, rather than 10% for each mortgage. The decision was appealed to the Court of Appeal, which also held that the lien claimants only had a total priority of 10% over the mortgages.

Key Take-away

When a developer becomes insolvent, lien claimants are entitled to priority over building mortgages to a maximum of 10% of the price of services and materials supplied, regardless of the number of building mortgages taken to finance the project.

However, in order to have a priority claim for the holdback, you must have preserved your lien within the time allowed by the Construction Act or else you could be in the position of an unsecured creditor without holdback priority.