Our Court of Appeal in Bank of Montreal v. Peri Formwork Systems Inc., 2012 BCCA 4 recently had its first opportunity to consider whether builders lien claims take priority over monies advanced to a receiver after the lien claims are filed.
The determinative issue in the case was the interpretation of sections 32(2),(5) and (6) of the Builders Lien Act (the “Act”). Section 32(2) of the Act says that any monies advanced by a lender on a mortgage after a lien has been filed, rank in priority after the amount secured by the lien.
Sections 32(5) and (6) address the common situation where a debtor defaults on a mortgage before the construction project is complete but if further monies are advanced there is hope of completing the project, realising upon the value of the lands, and increasing the likelihood of full repayment of the debt. These sections say that a lender can apply to the court for an order that further advances on a mortgage are to have priority over claims of lien. If:
- the advances will be applied to complete the improvement, and
- the advances will result in an increased value of the land at least equal to the amount of the proposed advances,
then the Act says that the court must make the order granting the advances priority to the lien claims.
In Peri Formwork the Bank of Montreal (“the Bank”) chose to continue to advance funds to complete a project but the twist in the case was that the Bank also appointed a receiver (the “Receiver”) to complete the construction project. The advances made by the Bank were not made to the original insolvent debtor, but to the Receiver, and the loan was a new loan on different terms than the existing mortgage security.
In chambers the Bank was granted an order giving the $21 million advanced to the Receiver priority over the lien claims totalling over $2 million. Peri Formwork’s lien was one of those liens and it appealed the decision of Mr. Justice Rice.
Peri Formwork argued that the words “further advances” in section 32(5):
- must be a reference to the original loan and do not include a new loan that is secured by a different charge on different terms than the original mortgage; and
- do not include a loan to a receiver – i.e. it only refers to a loan to the same borrower.
The Court of Appeal said that the determinative issue on the appeal was the question of what constitutes a “further advance” under s. 32(5).
The Bank argued that there is nothing in section 32(5) that requires “further advances” to be either from the original mortgagor or pursuant to the original mortgage. The Bank said that this restrictive interpretation of the section would defeat the section’s purpose. Usually when an owner/developer defaults there will not be sufficient room in the existing financing arrangement, on the existing terms to complete the construction, as was the case here. Further, it is unlikely that a mortgagee would be prepared to allow the defaulting owner to remain in control of the project’s completion in circumstances where the project runs into difficulty.
The court considered the plain meaning of the words “further advances” and held that the section read as a whole favours an interpretation that “further advances” relates to an original mortgage. The court was not convinced that the plain meaning of section 32(5) could be stretched to include advances under a new mortgage.
Before the Receiver was appointed the Bank decided to cease making advances under its existing mortgage. This crystallized the owner’s inability to complete the project. Peri Formworks argued that the Bank could have chosen at that time to maintain its existing loan facility and apply for priority to the lien claims pursuant to s. 32(5) but chose rather to petition for foreclosure on the existing mortgage and obtain an order authorizing a new loan, not the foreclosed mortgage. If, instead, the Bank had made the further advances under the existing loan, then the Court could have awarded priority for these further advances. These further advances could have included the undrawn portion of the original credit facility, and possibly also (this is an argument for another day) further advances under the existing mortgage made “to preserve the security”.