Ontario’s Construction Act is intended to provide security to contractors and subcontractors in the event that they are not paid for their work on a construction project. A construction lien grants security in the form of a registered charge against the property that is the subject of the project.
However, in the event that the owner of the property goes bankrupt, contractors may not be the only parties looking to be paid out through the sale of the property. Other creditors, such as mortgagees or other lienholders, may also have a registered interest in the property. In that case, in what order will the competing creditors be paid out?
To determine the answer, the first step is to look at the timing of the registration of the competing security interests. If a lien arose prior to a mortgage, then it will take priority over the mortgage. If a mortgage was registered before a lien arose, then it will take priority over a lien, but only to up to the value of the property before it was improved through construction. The construction lien takes priority over even a prior mortgage to the extent of the increased selling value resulting from the improvement.
However, if the mortgage in question is a construction mortgage, advanced to finance the improvement itself, then a construction lien will always take priority over it to the extent of any deficiency in the holdback – even if the mortgage was registered before the lien arose. Importantly, the holdback will increase to the full value of the lien if the owner is properly served with written notice of the lien. This is an important and underutilized tool available to contractors.
If there are multiple lienholders, then they will generally not have priority over one another. They will all be paid out pro rata, as members of the same class of creditors. However, a lien held by a worker will take priority over a lien held by a non-worker up to the value of forty days’ wages.
While construction liens do provide a powerful form of security for contractors and subcontractors, these parties can face an unpleasant surprise in learning that they are not first in line in the event of a bankruptcy where there are claims by competing security holders. The best approach for any contractor, particularly for larger projects, is to obtain as much information as possible about any mortgages or other security interests registered against the property before beginning work. A simple PIN search in Ontario’s property registry can reveal most of this information.
Another tool for obtaining information about potentially-competing security interests is a “request for information” under section 39 of the Construction Act. This allows a lienholder to even request information from a mortgagee about the nature of the mortgage, as well as requesting a statement of the status of the mortgage. Requests for information are discussed in greater detail in another blog post.
As always, a brief consultation with counsel experienced in construction law before engaging in a major project will assist contractors in being aware of, and making the best use of, the tools available under the Construction Act.