A Refresher on Lien Priorities: Case Brief on Clarkson Road Developments GP Inc. and Others, 2024 ONSC 4625
The decision in Re Clarkson Road Developments GP Inc., (“Clarkson Road”)1 offers a helpful review on the issue of lien priorities versus mortgage priorities under the Construction Act (the “Act”).
Facts:
A mortgagee, CS Capital Limited (“CS Capital”), brought a motion for an order declaring that its mortgage registered on title to a property at 1101 to 1125 Clarkson Road North in Mississauga (the “Property”) had priority over all lien claims.
A brief overview of the timeline is as follows:
- Between 2013-2015, Pace Entities purchased parcels of land that were assembled into the Property.
- In 2018, Pace Entities obtained a zoning by-law amendment permitting the construction of a four-story stacked townhouse dwelling and two three-story commercial buildings on the Property.
- Between 2018-2020, Pace Entities hired architectural firm, KFA Architects and Planners Inc. (“KFA”) to work on obtaining zoning for the project and to do design work.
- In September 2020, Pace Entities shut down all work by the consultants and prioritized finding a buyer for the Property.
- On July 30, 2021, a sale and purchase transaction was completed between Pace Entities and 2813428 Ontario Inc. (the “Purchaser”) and a mortgage was registered. The Purchaser began constructing the townhouse development.
- In September 2021, Kenaidan Contracting Ltd. (“Kenaidan”) was hired to manage the work, and KFA was hired to provide construction drawings, construction review and as-built drawings.
- In late 2023, the Purchaser became insolvent. Various corporations, including Kenaidan, began registering liens on the Property.
Generally, under section 78(1) of the Act, lien claims have priority over mortgages registered after the first lien related to an improvement on the property. However, there are exceptions to this rule. Specifically, mortgages registered before the first lien arises in relation to an improvement take precedence over subsequent liens, but only to the extent outlined in section 78(3) of the Act.
In order to determine whether CS Capital’s mortgage had priority over the lien claims, it was necessary to determine whether CS Capital could show that the first lien arose after July 30, 2021, when the mortgage was registered. In other words, did the first lien arise under KFA’s work that began in 2018 or did the first lien arise when the Purchaser began its construction in September 2021. If the latter, then the mortgage would have priority over the liens.
CS Capital drew a clear distinction between work completed before and after July 30, 2021, arguing that providing services and materials for a project does not necessarily mean they all contribute to the same improvement. According to CS Capital, the work performed before July 30, 2021, was undertaken for the previous owner to secure zoning and planning approvals, classifying it as a separate “Development Improvement.” In contrast, work completed after that date constituted a distinct “Construction Improvement.”2
CS Capital further submitted that the Kenaidan lien, along with all other liens, arose from work related to constructing the townhouse development at the request of the new Purchaser—after the mortgage had been registered.
In response, Kenaidan submitted that the Act broadly defines an “improvement” to include any construction, erection or installation on the land. Kenaidan submitted that an improvement is the overarching project and not a discrete phase or scope of work in a project.3
Is the Mortgage a Prior Mortgage such that s. 78(3) of the Act applies?
Justice Cavanagh determined that sufficient evidence existed to show that the work CS Capital referred to as the "Development Improvement" was part of the same project as the work described as the "Construction Improvement"4 i.e. the creation of a four-story stacked townhouse development, two commercial buildings and two levels of underground parking.
As a result, Justice Cavanagh found that the mortgage was not registered prior to the time when the first lien arose in respect of the improvement, from which Kenaidan and all other lien claimants’ liens arose. Thus, section 78(3) of the Act did not apply. CS Capital’s mortgage was deemed a subsequent mortgage governed by s. 78(5) and s. 78(6) of the Act.5
CS Capital’s motion was dismissed on the grounds that the services and materials provided by the lien claimants were supplied prior to the registration of the mortgage.