Ontario Court of Appeal Interprets Section 78(2) of the Construction Act: Decision provides useful guidance for priority disputes among lien claimants and building mortgagees
When a real estate developer becomes insolvent, priority disputes often arise among construction lien holders, mortgagees and other creditors seeking to recover against the developer. The stakes of such a dispute can be high, and the application of the Construction Act, R.S.O. 1990, c. C.30 (“Act”) priority scheme in such a context can be complex.
In BCIMC Construction Fund Corporation v. 33 Yorkville Residences Inc, 2023 ONCA 1, the Court of Appeal for Ontario upheld a motion decision (2022 ONSC 2326 (the “Decision”)) that, among other things:
- clarified that lien claimants have priority over building mortgagees pursuant to section 78(2) only to the extent of any holdback deficiency (in this case, 10% of the unpaid contract amounts owing) regardless of the number of building mortgages registered on a property; and
- provided useful guidance with respect to statutory interpretation of the Act.
The Decision was issued in the context of the ongoing receivership proceedings of 33 Yorkville Residences Inc. and 33 Yorkville Residences Limited Partnership (“33 Yorkville”). The 33 Yorkville entities were developing a high-rise residential condominium project at 33 Yorkville Avenue in Toronto when they, and other Cresford Development entities, ran into financial difficulties. PricewaterhouseCoopers Inc. was appointed receiver (in such capacity, the “Receiver”) over the assets, undertakings, and properties of 33 Yorkville in March, 2020. At that time, a deep construction pit for the foundation and underground structure of the condominium tower had been started but not yet finished on the 33 Yorkville site (the “Property”).
In March 2021, the Receiver successfully sold the Property, pursuant to a sales process. The Receiver then conducted a Priority Claims Procedure to identify and resolve all claims against the Property that ranked ahead of the claims of secured creditors, so the Receiver could distribute the sale proceeds to creditors in order of priority.
The sale proceeds were insufficient to satisfy all priority and secured claims. This meant that, to the extent a contractor had completed work on the project and remained unpaid, its claims would only be paid from the sale proceeds to the extent its claims were “priority claims” that ranked ahead of the claims of the secured creditors.
Certain contractors who performed excavation, shoring and de-watering work on the Property and registered liens in respect of their unpaid work (together, the “Lien Claimants”) advanced claims in the Priority Claims Procedure. The Receiver accepted that the Lien Claimants had priority claims equal to the deficiency in the holdbacks that 33 Yorkville, as owner, had been required to retain. This amounted to 10% of the unpaid contract amounts owing to each Lien Claimant. In so finding, the Receiver relied on section 78(2) of the Act, which reads as follows:
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 Lien Claimants disputed the Receiver’s determination. While they agreed that section 78(2) applied to their claims, they argued that the use of the singular language, “a mortgage”, and the reference to priority being over “that mortgage” in the section should be read as entitling them to a claim equal to the deficiency in the holdback over each building mortgage registered on the property. Since there were two building mortgages registered, the Lien Claimants asserted that they had a priority claim against the sale proceeds equal to 20% of their unpaid contract amounts.
Justice Penny rejected the Lien Claimants’ interpretation and approved the Receiver’s proposed scheme of distribution, which calculated the Lien Claimants’ priority claims at a total of 10% rather than 20% of the unpaid contract amounts.
Justice Penny found that the Lien Claimants’ interpretation:
“limits the meaning and effect of key words in the section, over-weights the use of the singular form, implicitly reads in additional language which is not actually there, and produces a result which is inconsistent with the scheme and purpose of the Act.”
The legal test to be applied to the statutory interpretation of section 78(2) was not in dispute. The Court was required to read the words of the statute, “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 legislature,” with all legislation to be, “interpreted as remedial and given such fair, large and liberal interpretation as best ensures the attainment of its objects.”
In reviewing the wording of the statute, Justice Penny made it clear that the Lien Claimants’ interpretation:
- was not consistent with the words of the Act referencing priority for the “deficiency in the holdbacks.” Justice Penny noted that there is only one holdback deficiency. Once the holdback deficiency is paid in priority to the first building mortgage, there is no more deficiency. The priority against the first building mortgage fully satisfies the deficiency and the situation is restored to what it would have been had the owner held back funds as required under the Act. Once those funds are paid in priority, if section 78(2) were applied to the second building mortgage, there would no longer be any deficiency in the holdback that could take priority. The holdback fund has been “effectively replenished, the deficiency has been satisfied and the priority claim has become nil;”
- read in the word “each” (i.e. the deficiency has priority over “each” building mortgage), which does not appear in the section; and
- put too much weight on the use of the singular language in section 78(2). Section 67 of the Legislation Act, 2006, O. 2006, c. 21, Sched. F provides that, “words in the singular include the plural.” In addition, the reference to “that mortgage” was simply meant to reference the building mortgage and “any mortgage taken out to repay” the building mortgage.
The Decision also provided helpful guidance with respect to the scheme and purpose of the Act, including that:
- there is no broad principle that the Act should be interpreted to favour the interests of lien claimants above the interests of mortgagees, “beyond the value of the holdbacks the legislation requires.” Rather, “the true object and purpose of the Act is to balance the interests of the various parties in the construction process and to fairly allocate risk and benefit between those who fund construction and those who provide services and materials;” and
- it is important that there be consistency in the application of the Act and the results any interpretation produces.
In the Decision, Justice Penny held that the Lien Claimants’ interpretation:
- would arbitrarily diverge from the general scheme that requires owners to maintain a 10% holdback fund;
- would provide different priority recoveries depending on the number of building mortgages, which is “an entirely arbitrary criterion over which neither the individual lien claimant nor the building mortgagee has control;”
- would result in a larger shortfall to the fulcrum creditor in the waterfall of secured creditor priorities, rather than resulting in a shortfall to either of the building mortgagees; and
- was not necessary to prevent building mortgagees from diluting their risk or receiving some kind of windfall (as the Lien Claimants argued) since the loss is borne entirely by the fulcrum creditor in the priority waterfall regardless of the number of building mortgages.
The Lien Claimants appealed the Decision, largely re-iterating the arguments made on the motion, and disagreeing with Justice Penny’s interpretation. The Court of Appeal dismissed the appeal, approving of Justice Penny’s interpretation of the statute and his application of that interpretation to the facts of the case.
To the extent there had been uncertainty regarding the application of section 78(2) of the Act in circumstances involving more than one building mortgage, the Decision and the subsequent appeal make clear that the priority afforded to lien claimants under section 78(2) of the Act is limited to the extent of any deficiency in the holdbacks only once, regardless of the number of building mortgages registered against a property.
More broadly, this decision also provides a helpful roadmap for statutory interpretation of the Act, which may be useful in interpreting other provisions of the Act in the future.
 McCarthy Tétrault LLP was counsel for the Receiver in this matter.