The priority of liens and mortgages under section 78 of the Construction Act.

Date: May 2022

Section 78 of the Construction Act, which discusses the priority of liens and mortgages, can be extremely confusing, especially for parties that do not deal with this section often.

For example, s. 78(2) discusses the priority of liens over building mortgages. This section states, in part, that where there is a mortgage taken with the intention to secure the financing of an improvement, the liens arising from the improvement have priority over that mortgage (and any mortgage taken out to repay that mortgage) to the extent of any deficiency in the owner’s 10% holdback requirement.

The Superior Court recently released a motions decision that does a good job interpreting this section using well-known principles of statutory interpretation, in a way that I found easy to understand.

On the motion, the lien claimants argued that they were, under the language of s. 78(2), entitled to a priority of up to 10% of the owner’s holdback per building mortgage. This interpretation would mean that the lien claimant’s priority could be up to 20% of the owner’s holdback in the event there were two building mortgages.

The Superior Court dismissed the lien claimants motion based on several reasons, including the following:

  1. There is no broad principle that the Construction Act should be interpreted to favor lien claimants.
  2. The lien claimants’ proposed interpretation of s. 78(2) would arbitrarily diverge from the general scheme which requires an owner to create and maintain a 10% holdback fund.
  3. The lien claimants’ interpretation would introduce an element of arbitrariness and unfairness into the cascade of mortgage priorities. For example, a non-building mortgagee would be subordinated to a multiple of the owner’s holdback because there happened to be more than one building mortgage.

Click here for a link to the decision.

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