On December 2, 2021, the Ontario Court of Appeal released its decision in Bianco v. Deem Management Services Limited, 2021 ONCA 859. The underlying issue was a priority dispute between lien claimants and a mortgagee of a registered third mortgage over the proceeds of sale from a receivership process. The receiver had paid out the first and second mortgages, but continued to hold over $5.4 million in trust from the proceeds of sale due to the competing priority claims.
In the lower court, the motion judge found that the lien claimants had priority over the registered mortgagee. (To read about the lower court’s decision and analysis, you can find our previous article here)
The registered mortgagee went on to appeal the lower court’s decision. The Ontario Court of Appeal dismissed the appeal. In effect, the Court’s ruling is a further reminder that the Construction Act is generally drafted to protect the rights of lien claimants. Section 78 is particularly designed to give lien claimants general priority over other secured interests, subject to certain exceptions. Mortgagees who want to usurp a lien claimant’s priority bear the onus of satisfying the court why a particular exception to this general rule applies. In this case, the registered mortgagee was unable to do so.
The underlying project over which the dispute arose involved the redevelopment of a property as a seniors’ retirement residence. At some point, the general contractor ceased construction, and various parties registered construction liens against title to the project lands. The project went into receivership, and, in the summer of 2018, the receiver sold the land and applied the proceeds of sale to pay back the first and second mortgages on the property. A dispute ensued between the lien claimants and a third mortgagee, Dal Bianco, over the remaining proceeds of sale.
As a result of competing priority claims between the lien claimants and Mr. Dal Bianco, the receiver had not been able to distribute these remaining funds. The receiver brought a motion asking the court to declare who had priority between the registered lien claimants and the subsequently registered third mortgage.
The Lower Court Decision
The motion judge relied on an agreed statement of facts between the parties. The parties agreed that the third mortgage given to Mr. Dal Bianco was registered on title after the first construction lien arose and years after the advances being secured by the third mortgage were made. That is, the funds under the third mortgage were advanced between 2012 and 2015, however, the mortgage was only taken and registered on title in February 2018. It was also agreed that the advances secured by the third mortgage were intended to, and did, finance the improvement.
The motion judge focused the bulk of her analysis on section 78 of the Construction Act. In doing so, she opined that the general intention of section 78 is to give priority to lien claimants over mortgages, subject to certain defined exceptions, and held that the onus is on the mortgagee to prove that its mortgage falls within one of those exceptions to gain priority over the lien claimants.
In the result, the motion judge dismissed the arguments put forth by the third registered mortgagee, Mr. Dal Bianco. Specifically, the motion judge denied that the mortgage had priority over the lien claimants because it was a building mortgage under section 78(2) or a subsequent mortgage under section 78(6). (As discussed below, the Court of Appeal agreed with the motion judge’s reasoning).
In reaching her conclusion, the motion judge also explained that the mortgagee’s position, if accepted, would be contrary to the proper functioning of the Construction Act. The motion judge said, at para. 42 of her decision:
If mortgagees are entitled to "lie in the weeds" while advancing funds for the project and then attempt to gain priority later by registering mortgages after liens arise, this would be unfair to lien claimants and contrary to the overall protection intended by the Act.
A Procedural Aside
After the mortgagee appealed, the receiver brought a motion for directions as to the proper venue for the appeal.
Normally, an appeal from an order made under the Construction Act lies to the Divisional Court under section 71(1) of the Act. However, because of the underlying receivership process, the court ruled that the appeal lay to the Ontario Court of Appeal because the impugned order was granted, at least partly, in reliance on jurisdiction under the Bankruptcy and Insolvency Act. The court held that the operative question to determine the appeal route in this case is “whether the order under appeal is one granted in reliance on jurisdiction under the Bankruptcy and Insolvency Act. Where it is, the appeal provisions of that statute are applicable.”
The construction lien claimants responded by bringing their own motion to quash the appeal on the basis that the mortgagee failed to seek leave to appeal and for other irregularities with the appeal.
The Ontario Court of Appeal’s Decision
The court first granted leave for the mortgagee’s appeal and in turn dismissed the construction lien claimants’ motion to quash the appeal. Ultimately, the mortgagee’s appeal was dismissed. In dismissing the appeal, the court considered the mortgagee’s arguments in the same order as the motion judge.
Beginning with subsection 78(6) of the Construction Act, the third mortgagee argued that his mortgage was a “subsequent mortgage” and therefore the mortgage had priority over any lien claims, subject to any deficiency in holdback. Subsection 78(6) reads as follows:
(6) Subject to subsections (2) and (5), a conveyance, mortgage or other agreement affecting the owner's interest in the premises that is registered after the time when the first lien arose in respect to the improvement, has priority over the liens arising from the improvement to the extent of any advance made in respect of that conveyance, mortgage or other agreement, unless,
(a) at the time when the advance was made, there was a preserved or perfected lien against the premises; or
(b) prior to the time when the advance was made, the person making the advance had received written notice of a lien.
This argument failed because the mortgage in question was taken by Mr. Dal Bianco and registered in 2018, more than three years after the last advance was made in 2015. The court held that subsection 78(6) granted priority to mortgagees over “any advance made in respect of that … mortgage”. Here, because the funds were advanced first, and then secured years later by the taking and registering of a mortgage, the funds were not made “in respect of” the mortgage.
The third mortgagee’s further argument relying on section 78(2) of the Construction Act also failed. Section 78(2) reads as follows:
(2) Where a mortgagee takes a mortgage with the intention to secure the financing of an improvement, the liens arising from the improvement have priority over that mortgage, and any mortgage taken out to repay that mortgage, to the extent of any deficiency in the holdbacks required to be retained by the owner under Part IV, irrespective of when that mortgage, or the mortgage taken out to repay it, is registered.
The court found that the mortgagee could not rely on this subsection for the very same reason he could not rely on subsection 78(6): the wording of subsection 78(2) is such that for a mortgagee to bring themselves within this exception, they need to first take the mortgage and then lend funds to finance the improvement. This subsection does not contemplate granting priority to mortgagees over lien claimants by allowing the mortgagee to first finance the improvement and then take a mortgage thereafter. Mortgagees are not entitled to “lie in the weeds”, wait until lien claims surface and then move to take a mortgage and register their mortgage on title to assert priority over the lien claims.