CONSTRUCTION LIENS: Electronically Liening Registered Leases

It would appear that when registered leases are liened electronically, adherence to the rules is not as strict, sort of relaxation of rules is practiced, as would be seen from the case history below:

Petroff: Liening Registered Leases Electronically

Registration of title documents electronically has made it easier for lawyers to representing lien claimants wishing to lien leasehold premises where the lease is registered on title.  Petroff Partnership Architects v. Mobius Corp is a lawsuit based on the applicability of the curative provision in Section 6 of the CLA for the failure to name the lessee as owner when liening the leasehold electronically. Petroff Partnership Architects (“Petroff”) did architectural work for Mobius Corp. (“Mobius”) and a related company, Commerce-Seven Developments Inc. (“Commerce-Seven”), who leased the premises from Wemat Two Limited (“Wemat”), the freehold owner. As Commerce-Seven’s lease was registered on title, Petroff acknowledged that the lease did not apply to Wemat. As well, it was evident that no notice under Section 19(1) of the CLA had been served on Wemat, who was simply listed as the freehold owner. Thus, Wemat appeared as the “owner” when the PIN was searched and automatically became an owner of the premises described in Schedule A of the claim for lien.

Deliberating on the matter, Master Sandler said that, due to this distinction, the electronic claim for lien had effectively liened the interest of any party described as an owner in the PIN, even when that party was not named as an owner “above” in the claim for lien. As the lease was registered on title, the Master maintained that the leasehold interest had, in fact, been liened. He stated that the error in not listing the owner of the leasehold in the “owner” field was curable as a minor and technical irregularity under Section 6 of the CLA because no one would be prejudiced by the change.

According to Section 6: Minor irregularities

6. No certificate, declaration or claim for lien is invalidated by reason only of a failure to comply strictly with subsection 32 (2) or (5), subsection 33 (1) or subsection 34 (5), unless in the opinion of the court a person has been prejudiced thereby, and then only to the extent of the prejudice suffered. R.S.O. 1990, c. C.30, s. 6.”

As the electronic registration system was intended to change the procedure and not the substantive law, the change in the wording of the Claim for Lien appears to go beyond mere procedure. Previously, it was questionable if a lien claimant would have been viewed as having liened the leasehold interest in the absence of due process. Admittedly, Master Sandler noted that, had the wording of the new electronic claim for lien exactly tracked the wording of the paper document, the result might have been different. Moreover, the result would clearly have been different if the lease had not been registered on title. In holding that claim, Petroff implemented the results of a questionable Ministry change in the wording of the electronic claim for lien as also a substantive change, which perhaps had not been foreseen by the E-Reg system administrators. Thus, Petroff gave a break to lawyers liening registered leasehold interests, but ignored those registering liens against unregistered leases. In the Williams & Pryor decision discussed below, this outcome is further confirmed.

Williams & Pryor: The Unforgiven

The lien claimant (in the lawsuit Williams & Prior Ltd. v. Taskon Construction Ltd. ) worked for a Hugo Boss store on Bloor Street in Toronto, but neither name Hugo Boss nor the owner of the franchise appeared anywhere in the claim for lien. In fact, Oxford Properties and Patria, each holding 50% of the head tenancy, were named as owner and neither of them was served with a Section 19 notice. As the Hugo Boss lease was not registered on title, the reasoning in Petroff could not be applied.

In the opinion of Master Sandler, the lien claimant had failed to lien the leasehold interest of the Hugo Boss franchise, and so, the lien must be discharged. The Master maintained that Section 6 will only cure minor and technical irregularities and an evaluation of the prejudice likely to be caused by altering the claim for lien must be completed. Nevertheless, Section 6 will not be applied, nor the prejudice analysis entered into, if the defect is a serious and fatal one, such as the complete failure to name the owner, as in this instance. Simultaneously, the Master held that if the lien claimant had simply stated “The Hugo Boss store at Suite 108, 130 Bloor St. West” as one of the “owners” in the claim for lien, that would likely have been sufficient, especially for the curative provision of Section 6.

Petroff shows a more relaxed approach to contractors liening leasehold interests electronically where the lease is registered on title. Williams & Prior demonstrates that if the lease is not registered, lien claimants have to name the owner of the leasehold as an “owner” in their claim for lien or the lien would be discharged.

Value of a Lien on Leasehold Premises

It seems the ultimate remedy of a construction lien claimant is the judicial sale of the lands against which the lien is registered, when it is paid out of the proceeds of the sale, subject to the claims of competing creditors. For a lien on leasehold premises, theoretically, the remedy is the same. However, the remedy is only an illusion in the practical world. Only long-term leases at preferential rents in a rapidly escalating property market are saleable; others are not.

Such a remedy is more useful in instances when a covenant exists in the lease requiring liens to be vacated by posting security with the court. There, the lien claimant would be able to realize his security against the funds in court and will have no need to wait for the judicial sale of the leasehold premises. However, if the tenant is insolvent and hence unable to post security to vacate the lien, the remedy is invalid considering the problems with selling leasehold premises.

Summary

Leaseholds on liens are a major source of unique problems for landlords, tenants, and lien claimants. It is imperative to know who the “owner” is, according to the meaning put forth in the CLA. The owner may be the landlord, tenant, or both, depending on the situation. Should a notice be served under Section 19 of the CLA, landlords need to respond quickly to deny responsibility for the improvement on the part of the landlord. It is true that caselaw has made the CLA more forgiving for lien claimants failing to name the leasehold owner for registered leases, but simultaneously it has made the law even less forgiving in the case of unregistered leases.

Don’t make a move before fully understanding your rights and obligations. For more information and assistance regarding liens or commercial leasing in Ontario contact Levy Zavet PC (Levy Zavet) in Toronto, Ontario today.