The Ontario Superior Court recently held that a mortgagee who advances funds to a project prior to construction liens arising but only registers its mortgage after the construction liens arise will not have priority over the construction liens under section 78 of the Construction Act. As the Court put it, mortgagees are not entitled to “lie in the weeds” while advancing funds for a construction project and then attempt to gain priority over lien claimants by retrospectively registering mortgages.
In Dal Bianco v Deem Management Services et al, (“Dal Bianco”) Justice Gilmore was asked to determine competing priorities between a mortgagee and lien claimants pursuant to section 78 of the Construction Act (the “Act”). The determination was necessary to distribute approximately $5 million in proceeds from the sale of a land redevelopment corporation (“Uptown”) under receivership.
The mortgage in question was registered on February 23, 2018, but the amounts secured by the mortgage had been all advanced between 2012 and 2015, without security having been registered. The amounts advanced during this time were used by Uptown in a construction and development project (the “Uptown Project”) for the improvement of a parcel of vacant land. The registered lien claimants were various construction companies who had begun to work on the Uptown Project after 2015 but prior to February 23, 2018 and registered their construction liens beginning on March 7, 2018.
There was no dispute between the parties that the mortgage in question was registered after the time when the first construction lien arose. As a result, the registered mortgage was a “subsequent mortgage” and the lien claimants had prima facie priority under section 78 of the Act. However, in part because the mortgagee’s advances to the project preceded the construction lien arising, the mortgagee argued that the registered mortgage should be granted priority under one of the exceptions set out in section 78(2) or section 78(6) of the Act.
In considering the mortgagee’s arguments, Justice Gilmore first emphasized that the purpose of section 78 of the Act is to protect lien claimants and allow sub trades to adequately assess their risk before undertaking work. The onus therefore falls upon the mortgagee to prove to the Court that its mortgage falls within an exception to the general priority of lien claimants under section 78.
SECTION 78(6) OF THE ACT: ADVANCES IN RESPECT OF THE MORTGAGE
Justice Gilmore first considered the mortgagee’s argument under section 78(6) of the Act. Section 78(6) states:
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.
Case law related to section 78(6) had thus far recognized that a pre-existing mortgage has priority over lien claimants only to the extent that advances in respect of the mortgage were made prior to the lien claims arising, but had not dealt with instances (such as this one) where the mortgage was only registered after the lien claims arose. However, the mortgagee argued that section 78(6) should apply to his advances since the advances he made between 2012 and 2015 were in relation to, and for the benefit of, the Uptown Project. The mortgagee argued that the registered mortgage should be given priority under section 78(6).
Justice Gilmore recognized that the amounts advanced by the mortgagee were used for an “improvement” within the meaning of section 78 of the Act, but disagreed that the advances were made “in respect of the mortgage”. Justice Gilmore held that when amounts are advanced under a different financial arrangement and then subsequently secured by a mortgage, section 78(6) does not apply. In other words, in order for a mortgage to be granted priority under section 78(6), both the advances and the registration of the mortgage must have been made prior to the lien claims arising. In the mortgagee’s case, the amounts advanced in 2012-2015 could not be considered as advanced in respect of the mortgage since the mortgage was only registered in 2018 to retrospectively secure the amounts.
SECTION 78(2) OF THE ACT: HOLDBACKS PRIORITY FOR BUILDING MORTGAGES
Justice Gilmore then turned to the mortgagee’s argument under section 78(2) of the Act, which states:
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 mortgagee argued that his mortgage was a “building mortgage” and therefore loses priority only to the extent of any deficiency in the holdbacks.
Justice Gilmore again disagreed. Since the Act did not contain a definition for the term “building mortgage”, the construction of section 78(2) to find that “when a mortgagee takes a mortgage with the intention to secure the financing of an improvement” implies a mortgagee must have a future intention to secure financing. Similar to section 78(6), section 78(2) only applies when a mortgagee first registers a mortgage and then advances the funds. What had happened in the mortgagee’s case was the reverse, which was contrary to the intention of section 78(2).
Based on these findings, Justice Gilmore granted priority to the lien claimants over the registered mortgage in question. Dal Bianco ultimately provides clarity on when mortgages have priority over lien claimants and encourages mortgagees to register mortgages promptly when advancing funds, lest they lose priority to later lien claimants. On the other hand, lien claimants can continue to seek protection for work undertaken prior to a receivership and claim priority over subsequent mortgages by relying on section 78 of the Act.
Mortgagees providing construction financing should ensure that advances are made only after: (i) the mortgage is registered on title to the property before advancing funds; and (ii) there is a clear understanding of what lien claims have arisen before advances are made on account of the registered mortgage.
 Construction Act, RSO 1990, c C 30.
 Infra note 3 at para 42.
 2020 ONSC 1500.
 Ibid at paras 26, 30.
 Ibid at para 42.
 Ibid at para 35.
 Ibid at para 38.
 Ibid at para 39.
 Ibid at para 40.