Does a mortgagee or lien holder have priority over real property?

Overview: In this case, the Court considered an argument that a mortgage registered on title to a property had priority over all lien claims. The Court dismissed the mortgagee’s application, finding that the services and materials provided by the lien claimant were supplied prior to the registration of the mortgage. As a result, the lien claims had priority over the mortgage.

CS Capital Limited (“CS Capital”), a secured creditor and mortgagee, brought a motion for an order declaring that a mortgage (the “Mortgage”) registered on title to property at 1101 to 1125 Clarkson Road North, Mississauga (the “Property”) had priority over all lien claims to the extent of at least $20,055,136 plus interest and other expenses.

CS Capital was owned and controlled by Al Pace and his wife. Certain corporate entities and partnerships controlled and directed by Mr. Pace (the “Pace Entities”) first acquired part of the Property in 2013. During the period from 2013 through 2016, at the direction of Mr. Pace, the Pace Entities purchased the other parcels of land that were assembled into the Property. In 2018, the Pace Entities obtained a zoning bylaw amendment permitting the construction of 136 four-storey stacked townhouse dwellings and 2 three-storey commercial buildings on the Property. During this period, the Pace Entities hired the architectural firm KFA Architects and Planners Inc. (“KFA”) to work on obtaining zoning for 136 units, to do design work on the 136-unit condominium proposal, and to assist with a variance to permit 176 units. After a re-zoning change in September 2020, Mr. Pace directed that no other work be done on the Property, and the Pace Entities focused on finding a buyer for the Property.

CS Capital and other entities, as vendors, ultimately entered into a Unit and Share Purchase Agreement made as of March 30, 2021 with 2813427 Ontario Inc. (the “Purchaser”). After completion of the transaction, the Purchaser began the construction of a 176 unit stacked townhouse development. In September 2021, the Purchaser caused the hiring of Kenaidan Contracting Ltd. (“Kenaidan”) to manage this work, and the hiring of KFA to provide construction drawings, construction review, and as-built drawings for this work. Kenaidan hired all other trades and consultants.

Eventually, the Purchaser became insolvent, and in late 2023, corporations working at the Property, including Kenaidan, began registering liens on the Property. All of the liens were for Kenaidan’s work or for work done for Kenaidan.

Lien rights are created by s. 14 of the Construction Act (the “Act”). Section 15 of the Act provides that a lien created by section 14 arises and takes effect “when the person first supplies services or materials to the improvement”. Section 78(1) of the Act provides that the liens arising from an improvement have priority over all conveyances, mortgages or other agreements affecting the owner’s interest in the premises. Section 78(1) necessarily implies that in cases of conflict as to the determination of priorities, the burden must be on the mortgagee to persuade the court that it falls within a specified exception to the generalized priority of the liens.

In order to determine whether the Mortgage has priority over the Kenaidan lien (and the liens of entities contracting with Kenaidan) pursuant to s. 78(3) of the Act, CS Capital had to show that the first lien (in respect of the improvement under which the Kenaidan lien arose) arose after July 30, 2021, when the Mortgage was registered.

CS Capital submitted that the Kenaidan lien (and all other liens of entities contracting with Kenaidan) arose from work done at the request of the new owner, the Purchaser, after the Mortgage was registered. CS Capital described this improvement as the “Construction Improvement”. CS Capital submitted that the prior work done for the prior owner to obtain zoning and planning approvals and permissions was in respect of a separate improvement that it described as the “Development Improvement”. CS Capital argued that KFA, the architect that worked on the “Development Improvement” prior to July 31, 2021, and other consultants who provided services prior to that date, did not supply services or materials to the same improvement as did Kenaidan.

Kenaidan argued that the Act broadly defines an “improvement” to include any construction, erection or installation on the land. Kenaidan submitted that an improvement is the overarching project and not a discrete phase or scope of work in a project. The definition of “improvement” in the Act does not include language showing that services or materials supplied under separate contracts in relation to the same project must be treated as having been supplied in respect of separate improvements.

The evidence before the Court established that the work which CS Capital described as the “Development Improvement” was in respect of the same project as the work done in respect of what CS Capital described as the “Construction Improvement”. Extensive work was done for the project prior to July 30, 2021, including architectural work by KFA to support a planning application for zoning approval in 2017; demolition work in 2017; services provided by the mechanical and electrical contractor and the structural consultant, and preliminary shoring design by the geotechnical consultant. The fact that there were several contracts in respect of the project did not support the conclusion that the supply or services or materials under separate contracts, including construction contracts, were in respect of separate improvements. The Court found that the services and materials supplied by Kenaidan in respect of which its lien arose were in respect of the same improvement as the improvement in respect of which the KFA lien arose for services supplied prior to registration of the Mortgage.

Accordingly, the Court concluded that the Mortgage was not registered prior to the time when the first lien arose in respect of the improvement from which Kenaidan’s, and the other lien claimants’, liens arose. As a result of this conclusion, s. 78(3) of the Act did not apply. CS Capital had a mortgage that was registered after the time when the first lien arose in respect of this improvement. CS Capital had a subsequent mortgage which was governed by s. 78(5) and s. 78(6) of the Act. Under s. 78(5), the liens of Kenaidan and the other lien claimants would have priority over the Mortgage to the extent of the deficiency in the statutory holdbacks that should have been retained by the owner.

The Court dismissed CS Capital’s motion.

Judge: Cavanagh J.

Counsel: James Renihan, Megan Fougere and Evan Cobb of Norton Rose Fulbright for Kenaidan Contracting Limited

Howard Wise, Chris Armstrong and Jill Snelgrove of Goodmans for Delgant (T.O.) Ltd.

Heather Meredith of McCarthy Tetrault for Clarkson Road Developments GP Inc., Clarkson Road Holdings Inc. and 2813427 Ontario Inc.

Chris Reed of Laishley Reed for CS Capital Limited, assignee of the QRC Limited Partnership and Black Saxon QRC Inc.

Chris Burr of Blakes for PricewaterhouseCoopers Inc. in its capacity as Monitor of the Applicants

David Ward of Miller Thomson for the Stalking Horse Purchaser/Investor