Priority Contest between Liens and Building Mortgages: Court of Appeal Resolves Dispute over Interpretation of Section 78(2) Of the Construction Act

Published on: January 2023 | What's Trending

Priority disputes are common between construction lien claimants and mortgagees when the owner of a construction project becomes insolvent.

These contests arise whenever premises are sold in circumstances where the proceeds of sale are not sufficient to cover all liens and all mortgage balances. Part XI of the Construction Act, R.S.O. 1990, c. C.30 (the “Construction Act”) contains a comprehensive set of rules applicable to priority disputes.

On January 3rd, the Ontario Court of Appeal released its decision in BCIMC Construction Fund Corporation v. 33 Yorkville Residences Inc., 2023 ONCA 1. The Court heard and dismissed an appeal brought by certain lien claimants involving the statutory interpretation of one of these rules – section 78(2) of the Construction Act.[1] Where multiple building mortgages are taken to finance a construction project, liens have priority over the aggregate of the building mortgages to the extent of any deficiency in the owner’s holdbacks (limited to 10% of the price of services supplied by the lien claimants).

The Appellants were three of many unpaid lien claimants who provided services or materials to a condominium project at 33 Yorkville Avenue in Toronto (the “Property”). The owners went into Receivership. PricewaterhouseCoopers Inc. (“PWC”) became the Court-Appointed Receiver. [2] The Receiver sold the Property pursuant to a Court Order.[3] The crux of this case concerned the proper calculation of the lien claimants’ priority over the building mortgages pursuant to section 78(2) of the Construction Act.

The Construction Act

Section 22(1) of the Construction Act required the owner to retain a basic holdback equal to 10% of the price of the services supplied by the Appellants.[4] The owner neglected to do so.

Section 78(2), deals with the priority of lien claimants over “building mortgages”:

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.[5]

It was agreed that all lien claimants, including the Appellants, only had priority to the extent of any deficiency in the holdbacks. This case turned on the method of determining the amount of this deficiency.

Motion Judgment

It is not uncommon to find multiple mortgages securing the financing of a large construction project. In this case, there were six mortgages, two of which were building mortgages.[6] To some, section 78(2) of the Construction Act is ambiguous as to its application where multiple building mortgages exist. All but three lien claimants accepted the Receiver’s distribution of their respective holdback priority.

Three of the lien claimants brought an application to the Court to resolve this question of how to interpret and apply section 78(2) where more than one building mortgage exists.

The lien claimants took the position that their entitlement to receive the holdback applied to each building mortgage separately. The lien claimants reasoned that a plain reading entitled them to a priority of 20%, not 10%, because there were two building mortgages, not one. They argued as follows:

Each building mortgagee knows going in that its risk is 10% of any deficiency in the holdback. If each mortgagee is not in fact subject to the consequences of that risk where there is a deficiency and more than one building mortgage, but is subject to only one priority claim of 10% over all building mortgages, the risk of those mortgagees is being “diluted” and they are receiving a “windfall”.[7]

The modern test for statutory interpretation, in compliance with the Legislation Act, 2006, S.O. 2006, c. 21, Sched. F (the “Legislation Act”), requires that the words of a statute “be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of the legislature”.[8]

The lien claimants pointed to the specific words of the provision, which gave priority to lien holders over “that mortgage”, not “a mortgage” – the motion judge disagreed.

The expression “that mortgage” is simply a means of expanding the priority to include, not only the mortgage taken with the intention to secure the financing of an improvement, but the other alternative as well, “any mortgage taken out to repay” the mortgage taken to finance an improvement.[9]

The Receiver relied on the case of GM Sernas & Associates Ltd v. 846539 Ontario Ltd, [1999] O.J. No. 3714 (S.C.), where there were two mortgages (a building mortgage and a “subsequent mortgage” under section 78(5)), and the Court considered whether the Construction Act granted lien claimants two different priority claims, such that the total priority claim would be 20%.[10] The Court in the GM Sernas case found the maximum priority claim for a lien over mortgages to be 10%, representing the full holdback figure.[11]

The lien claimants argued that the issue of whether the priority was to be measured against each mortgage separately was not at issue in the GM Sernas case, and besides, that case was a decision of the Superior Court, thus not binding on the Court hearing the motion.

The motion judge dismissed the applicants’ motion, and restricted their priority to the extent of the deficiency in the owner’s holdback over all building mortgages combined. The Court adopted the GM Sernas decision, holding that “there is one pot of money, one 10% holdback deficiency which is available for the priority payment”.[12] The applicants sought leave to appeal to the Court of Appeal.

Appeal Decision

The Court of Appeal permitted the applicants to appeal the decision because it concerned “a matter of statutory interpretation of some importance”.[13] The Court of Appeal applied the correctness standard of review and found that the motion judge correctly interpreted section 78(2) of the Construction Act.[14] The appeal was dismissed with costs payable by the Appellants of $30,000.

This appellate decision resolves the question of how to apply the priority given to lien claimants by section 78(2) in circumstances where there are multiple building mortgages.

[1] BCIMC Construction Fund Corporation v. 33 Yorkville Residences Inc., 2023 ONCA 1, at paras 11 and 15.

[2] Ibid, at para 1.

[3] BCIMC Construction Fund Corp. et al. v. 33 Yorkville Residences Inc et al., 2022 ONSC 2326, at paras 1 and 4

[4] Construction Act, R.S.O. 1990, c. C.30 s. 22(1)

[5] Ibid, s. 78(2)

[6] Supra note 3, at para 5

[7] Supra note 3, at para 14

[8] Supra note 3, at para 11; Legislation Act, 2006, S.O. 2006, c. 21, Sched. F

[9] Supra note 3, at para 24

[10] Supra note 3, at paras 15-16; GM Sernas & Associates Ltd v. 846539 Ontario Ltd, [1999] O.J. No. 3714 (S.C.),

[11] Supra note 3, at para 16

[12] Supra note 3, at para 21

[13] Supra note 1, at para 12

[14] Supra note 1, at paras 12-15


Co-Author: Ashley Landesman, Articling Student