Introduction
These challenges are illustrated by the Superior Court of Justice’s treatment of two recent cases – Kingsett Mortgage Corporation v. Mapleview Developments Ltd., 2024 ONSC 6477, and Peoples Trust Company et al v. Vandyk-Backyard Queensview Limited et al., 2024 ONSC 6648. In these decisions, the court provides important insight into the conditions determining the priority relationship between:
Factual Background
Mapleview Developments Ltd. (“Mapleview”), along with others, was developing a residential townhome project. To finance the development, Mapleview arranged for Kingsett Mortgage Corporation (“Kingsett”) to provide funding. Kingsett agreed to finance the project’s land servicing, development, and construction and later advanced funds for these purposes, which were secured by two registered mortgages.
Kingsett later registered a new mortgage – which secured all funds advanced under the two prior mortgages and charged additional lands – and, shortly after, deleted the prior two mortgages. Essentially, Kingsett consolidated its debts under this new mortgage to avoid a multiplicity of registered mortgages and simplify certain subordination agreements. At the time Kingsett advanced funds, there were no preserved or perfected liens.
Priority Issue and Analysis
When the project entered receivership, the lien claimants asserted that their construction liens had full priority over Kingsett’s mortgage, principally arguing that it did not satisfy the exceptions to the Act’s general priority rule for liens.
Justice Cavanagh held that s. 78(2) applied to Kingsett’s mortgage, meaning that it had priority over the liens except for any deficiency in the holdback.
Following the Court of Appeal’s reasoning in Bianco v. Deem Management Services Limited, 2021 ONCA 859, Cavanagh J. held that s. 78(2) is an exception to the general rule under s. 78(1) and explicitly rejected the lien claimants’ argument that s. 78(2) creates a super-priority in addition to the priority given under s. 78(1).
Section 78(6) Analysis
Justice Cavanagh also held that s. 78(6) applied to Kingsett’s mortgage, which has the same effect as s. 78(2) by virtue of the application of s. 78(5).
While the Kingsett mortgage was registered after the first lien arose on the project, making it a subsequent mortgage, the lien claimants argued that no advance was made “in respect of” that mortgage, relying on caselaw interpreting s. 78(6) to support their position.
However, Cavanagh J. distinguished these cases, noting that they involved mortgages securing a guarantee of debt owed by a separate entity, where no advance was ever made by the guarantor. Rather, the evidence showed a direct connection between the advances made under Kingsett’s original mortgages and its new mortgage, which secured repayment of the same debt. As a result, Cavanagh J. concluded that the advances were made “in respect of” the Kingsett mortgage, satisfying the requirements of s. 78(6).
Case 2: Peoples Trust Company et al v. Vandyk-Backyard Queensview Limited et al., 2024 ONSC 6648
Following shortly after Kingsett v. Mapleview, Peoples Trust v. Vandyk-Backyard does a deeper dive into s. 78(6).
Factual Background
Vandyk-Backyard Queensview Limited developed a condominium project but was left with 21 unsold units after construction. To finance these remaining units, Vandyk-Backyard secured a condominium inventory term loan from Peoples Trust. Under the term loan, Peoples Trust advanced funds after the project’s completion and registered a corresponding mortgage. However, after the advance and mortgage registration, various lien claims were registered against the unsold units, triggering a default under the mortgage.
Priority Issue and Analysis
In this case, similar to Kingsett v. Mapleview, when the project entered receivership, two of the lien claimants asserted that their construction liens had full priority over Peoples Trust’s mortgage.
Section 78(6) Analysis
Similar to the Kingsett mortgage, Osborne J. found that s. 78(6) applied to People Trust’s mortgage. Additionally, he rejected the lien claimants’ arguments that a mortgagee has a duty to make further inquiries that could override the Act’s clear priority rules.
At the outset of his reasons, Osborne J. described s. 78 as a complete code for resolving lien priority disputes with mortgagees. He found that s. 78(5) and (6) are largely determinative when applied to the facts. In this case, it was undisputed that the Peoples Trust mortgage was a subsequent mortgage, and, at the time funds were advanced, neither lien claimant had preserved or perfected their liens (through registrations on title), nor had Peoples Trust received any written notice of lien.
Under a plain reading of the Act, Peoples Trust had priority over the lien claimants due to the lack of registered liens on title. Justice Osborne affirmed this interpretation, holding that the Act does not require mortgagees to conduct additional inquires beyond a title search to secure priority over unregistered liens, emphasizing that s. 78(6) “provide[s] a complete, fundamental, yet easily understandable code.” Ultimately, lien claimants or mortgagees can protect their position through actively registering their respective interest on title.
While Osborne J. affirmed the Act’s plain reading, he also found that even if Peoples Trust had conducted further inquiries, it would not have discovered any pending liens. At the time, both lien claimants were still considering whether to assert their lien rights and had consciously chosen not to do so.
Finally, Osborne J. found that the funds advanced were made “in respect of” Peoples Trust’s mortgage, noting that for s. 78(6) the advanced funds do not need to be used on the improvement in contrast to s. 78(2).
Equitable Liens and Section 78
Briefly, Osborne J. reviewed and rejected the lien claimants’ arguments that they could assert an equitable lien with priority over Peoples Trust’s mortgage. Citing Talbot v. Pawelzik, 2005 CanLII 4844 (Ont Sup Ct), he noted that equitable liens should not be created when a statutory lien regime already exists. Further, he stated that any equitable lien would not have priority over a prior-registered mortgaged: equitable liens arise when imposed by the court, and s. 93(3) of the Land Titles Act states that a mortgage, when registered, takes priority over all unregistered interests in the land, which includes an equitable lien.
Takeaways from the Cases
- Despite unclear wording, s. 78(2) is an exception to the general priority rule for liens under s. 78(1).
- Consolidation of prior-registered mortgages, which secure funds advanced for the improvement, into a single mortgage will satisfy the statutory conditions for priority under s. 78(2) if the consolidating mortgage is registered prior to the discharge of the prior-registered mortgages.
- Under s. 78(6), the words “in respect of” should be interpreted broadly. However, the interpretation does not extend to mortgages where no advance is made by the mortgagee, which can include mortgages guaranteeing other debts (known as “collateral mortgages”).
- Subsections 78(5) and (6) do not require mortgagees to conduct additional inquiries beyond a title search; both lien claimants and mortgagees can protect their priority position through registration of their respective interest on title.
- Courts will be hesitant to impose an equitable lien in light of the Construction Act’s lien regime. Additionally, equitable liens will not take priority over prior-registered mortgages.