In 2016, the Ontario government released Striking the Balance: Expert Review of Ontario’s Construction Lien Act, which proposed substantive changes to Ontario’s construction legislation. Ontario adopted the majority of the review’s proposed amendments and Ontario’s Construction Lien Act has since been renamed the Construction Act (the “Act”).
The Act’s first set of amendments became effective on July 1, 2018 and the second set of amendments are scheduled to take effect on October 1, 2019.
Interestingly, Striking the Balance recommended that no changes be made to the Act’s priority provisions. Section 78 of the Act sets out the general priority of construction liens and secured interests on a property. This section is focused on protecting holdback funds and takes into account the competing risks that mortgagees and construction trades face during a construction project.
The authors of the Act’s new provisions must have felt that the priority provisions already in place were satisfactory. Many of the changes to the Act serve to help funds flow more quickly in the construction pyramid and to increase the protection of trades that build our cities. Presumably, the existing priority provisions already “struck the balance” in this regard.
Despite there being no change to the priority provisions, lien claimants and lenders alike need to keep the priority provisions in mind, which are summarized as follows:
Priority Provisions Under the Act – Section 78
i) Building Mortgages (Section 78(2))
A “building mortgage” refers to a mortgage taken to secure the financing of an improvement. Building mortgages also include any mortgage obtained to repay the financing mortgage. Under the Act, construction liens are granted priority over a building mortgage to the extent of any deficiency in the holdback funds.
ii) Prior Mortgages and Advances (Sections 78(3) and 78(4))
Mortgages registered before the first construction lien arose will have priority over subsequent construction liens. However, a mortgagee’s priority is limited to the lesser of the premises’ value when the first construction lien arose, and the total amount advanced in the cause of the mortgage before the first construction lien arose.
In the absence of receiving written notice of a construction lien or the existence of a preserved or perfected lien on the premises, a non-building mortgage registered before the first construction lien arose will have an additional priority with respect to any advances made under the mortgage.
iii) Special Priority Against Subsequent Mortgages (Section 78(5))
This subsection gives construction liens priority over all mortgages registered after the first construction lien arose; however, this priority is limited to the extent of any deficiency in the holdback. This subsection is not limited to perfected or preserved liens, meaning that if there is a lienable service provided before a mortgage advance, the mortgagee will lose priority to the extent of a deficiency in the holdback.
It is important to note that, in most cases, a claim for priority by a lien claimant over a mortgage will not apply if a homeowner has received title to the property.