Lien Times for Lenders: Plan with Care


From time to time, we receive questions about court decisions from other provinces. One Ontario case which has garnered some interest in British Columbia is Parkland Plumbing & Heating Ltd. v. Minaki Lodge Resort 2002 Inc. 2009 ONCA 256, a decision of the Ontario Court of Appeal. The question in this case was whether or not a company that had loaned monies and had secured them by way of a mortgage but was related to the developer was an “owner” within the meaning of the Ontario Construction Lien Act (the equivalent of our Builders Lien Act). The reason that this was an important question for the parties was because if the lender was an “owner”, it would rank lower in priority than the lien claimants and there were insufficient funds to pay the mortgage and the lien claims.

In the Parkland case, a Mr. Archer thought to develop the Minaki Lodge. He and his wife were owners and directors of various companies involved generally in land development. He caused a new company, Minaki Inc., to be incorporated for the purpose of purchasing and redeveloping the Minaki Lodge, a resort property in northern Ontario. Various funds were advanced by Mr. Archer’s companies, and were secured by a mortgage. That mortgage was eventually replaced by a $5 million mortgage in favour of Celestine Mortgage Corporation, of which Mr. Archer was the sole shareholder and director.

The project encountered financial difficulties, and $875,000 in liens were filed against the lands. The Lodge was closed in September 2003, and in October 2003, the Lodge was destroyed by fire. Despite the fact that the mortgage required fire insurance to be placed on the Lodge, there was no insurance in place at the time of the fire. As a result, there was insufficient equity in the lands to satisfy the lien claimants, if the $5 million mortgage to Celestine had priority. One of the lien claimants therefore brought this application to determine whether Celestine was an “owner” under the Ontario Act. The court found that it was, and accordingly, held that the lien claimants ranked in priority to Celestine, meaning they would be paid out first.

This is of particular concern because it is not uncommon for a related company to advance funds on a project, and to secure the debt with a mortgage.

What implications does this decision have for us in British Columbia? The short answer is there is no direct application to us, since the Ontario Construction Lien Act and our Builders Lien Act differ in the critical sections defining an owner, on which the Parkland case is based. However, it does remind us of some important concepts:

  • first, a lender who is advancing funds on a construction project in stages must be certain that there are no claims of builders lien filed at the time an advance is made. If there is a lien on title, then the claimant, and potentially any other lien claimants in the same class, will have priority over the new funds advanced. We therefore recommend registering with the Land Title Office to monitor title during construction, so that you receive email notification of any new charges registered on title;
  • second, while a related company who advances monies secured by a mortgage may not be found to be an “owner” under the BC Act, our courts are still wary of “sham” agreements whereby there is no actual difference between the developer and the lender. The courts will scrutinize the lending agreement and supporting documents carefully. It is therefore very important to seek legal advice and to properly document the agreement and the relationship between the two companies;
  • third, the courts in Parkland were critical of the way in which funds were “advanced” from Celestine to Minaki. In particular, they noted that while certain funds were treated as advances by Celestine, at no time did that company actually receive or pay out any funds; and
  • finally, there are some cases where the actions of the lender have caused the court to give a claimant priority over the lender. One example is where a lender made specific assurances to lien claimants that it would continue to make mortgage advances, in order to induce the claimants to continue work on the project.