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In a recent decision called BCIMC Construction Fund Corporation v. 33 Yorkville Residences Inc., the Ontario Court of Appeal clarified the proper approach for determining lien claimants’ holdback priority when there are multiple building mortgagees in place.

Three lien claimants had provided excavation and dewatering services for the owner of a condominium development.  In the very early stages of construction, the owner became insolvent and went into receivership.  After the Receiver completed a court-ordered sale of the property, a dispute arose with the lien claimants over how to distribute the proceeds. 

It was common ground that under s. 78(1) and (2) of the Ontario Construction Act (“CA”) the lien claimants were entitled to a priority payment out of the proceeds of sale – to the extent of any deficiency in the owner’s mandated 10% holdback.   In this case, however, the owner did not hold back any of the required funds, so the parties differed sharply on how the deficiency and priority amount was to be calculated.  The complicating factor was the presence of two building mortgages over the property.

The lien claimants pointed to the wording of s. 78(2), which confirmed they had priority over “a mortgage” (singular); they argued this gave rise to a separate priority right each time “a mortgage” was found to exist – in this case, once for each of the two building mortgages.  They accordingly claimed the proper calculation for their priority liens, to the extent of any deficiency in the owner’s holdback, was doubled, i.e. 10% x 2 building mortgages.

The Receiver disagreed, arguing that under the CA scheme, there was only one holdback regardless of the number of building mortgages, and the lien claimants’ priority was thus limited to the extent of any deficiency in the owner’s holdback over all the building mortgages combined.

At a lower court hearing, judge ruled that the Receiver’s approach was correct. The lien claimants appealed, unsuccessfully. 

In its brief reasons, the Court of Appeal wholly endorsed the trial judge’s approach, finding no errors in how the CA was interpreted and applied. 

The CA’s basic scheme is this: Lien claimants have priority in connection with the price of services and materials they supply (s. 14). The owner must retain a 10% holdback of that price (s. 22).

Section 78(1) adds that – subject to stated exceptions – a lien arising from these kinds of improvements has priority over all mortgages. One of those exceptions is found in s. 78(2), which deals with “building mortgages”; importantly it stipulates that such liens have priority “to the extent of any deficiency” in the owner’s required holdback.

On plain meaning, this was a single figure – not a multiple of the number as the lien claimants said. There was one pot of money from the owner’s holdback, one 10% holdback deficiency, and one opportunity for a priority payment out of those funds. It was irrelevant whether there was one building mortgage, or many. Nor was it a “contest” between each priority claimant and each building mortgage. Otherwise, there might be different treatment given to different lienholders, depending on how many building mortgages happen to be in place on a particular construction project. This would result in unfairness.

This interpretation of s. 78(2) best achieves the goals of the CA, which is to help contractors and subcontractors obtain payment for their labour and materials supplied to a property, while still balancing the interests of various parties in the construction process. See BCIMC Construction Fund Corporation v. 33 Yorkville Residences Inc., 2023 ONCA 1; aff’g 2022 ONSC 2326.