Lien Claims and Private Project Financing18-Oct-11
It is possible to register a builders’ lien claim against the interest of a mortgagee, effectively giving the lien claim priority over the mortgage, even if the mortgage was registered prior to the lien. However, this requires that the mortgagee has some direct role in the construction process, so as to meet the statutory definition of an “owner”:
“Owner” means a person having an estate or interest in land at whose request,
express or implied, and i) on whose credit, ii) on whose behalf, iii) with whose
privity and consent, or iv) for whose direct benefit, work is done on or material
is furnished for an improvement to the land...”
For example, where a developer and a private lender are engaged in a joint enterprise to develop a project, the lender might meet the statutory definition of an “Owner.” In all of the circumstances, the court might come to the conclusion that the mortgagee expressly or impliedly requested and benefited from the work. The practical effect if the lien is valid as against the lender’s interest is to give the lien priority over the mortgage registered by the lender on the project lands.
In Arres Capital Inc. v. Greywood Mews Development Corp., 2011 ABQB 411 the project developer became insolvent, leaving numerous trade contractors and suppliers unpaid. As a result, various liens were registered against the project lands. The project lender brought a foreclosure action. There was insufficient equity in the project to pay out both the lender and the lien claimants.
The lien claimants asked the court to determine that the lien claims had priority over the mortgage, on the basis that the project lender was a related corporation to the project developer. There was some common ownership and management between the project developer and the project lender, and there was some evidence to support the argument that the lender had requested the work so as to meet the statutory definition of an “Owner.”
Unfortunately, none of the lien claimants were aware or took account of these facts at the time of lien registration. The court determined that the lender’s mortgage had priority, because none of the lien claimants had expressly registered their liens against the lender’s interest in the lands (the mortgage). The lien claimants had only registered their claims against the fee simple title (i.e. the developer’s interest in the lands). The liens were therefore wiped out by the mortgage foreclosure.
This case is a cautionary tale for trade contractors and suppliers involved in privately financed projects (where the lender and developer are related entities). The circumstances may support a lien against the mortgagee’s interest, effectively giving lien claims priority over a mortgage against the lands. However, it is necessary to address this issue at the time of lien registration. In such circumstances, consideration must be given to registering two liens, one against the fee simple title (the developer’s interest) and a second lien expressly claiming an interest in the lender’s interest in the lands (i.e. the prior registered mortgage).