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Construction Liens: Obtaining Liens and Restrictions Placed on Them

We have discussed earlier one of the two methods by which a contractor working for a tenant is able to get a lien on the freehold of the property.  The second method will now be discussed.

The Freehold Owner Deemed  “Owner” Under the CLA

Within the meaning of the CLA, there are circumstances, when the owner of the freehold may be considered an “owner”, even if the work was performed on leased premises. The definition of “owner” given in Section 1(1) of the CLA is as follows:

“owner” means any person, including the Crown, having an interest in a premises at whose request and, (a) upon whose credit, or (b) on whose behalf, or (c) with whose privity or consent, or (d) for whose direct benefit, an improvement is made to the premises but does not include a home buyer;

Thus, in order to be an “owner” under the CLA, a person should have an interest in the premises, the improvement should have been performed at their “request”, and at least one of the conditions (a) through (d) must apply. For example, in order for a McDonald’s restaurant tenant to be considered an owner, it must satisfy the requirements to be an “owner” under the CLA in the following manner:  1) Interest in the Premises – the leasehold interest of the McDonald’s; 2) At whose Request – McDonald’s requested the contractor to do the work; and 3) With whose privity – the contract between the McDonald’s and the contractor.

There are a number of case laws dealing with situations in which owners of freehold premises are regarded as owners under the CLA.

Winnen Construction Group Conditioning Ltd. v. Oxford MRC Inc.

In this case, there was a proposal to build a Taco Bell store in the parking lot of Dufferin Mall. It was specifically mentioned in the lease agreement between the mall and the Taco Bell owner that the mall owner was responsible for providing a level construction pad and for connections to utilities and services, while the tenant was responsible for construction of the building.

The mall owner participated in the construction by approving the plans for the Taco Bell store, getting applicable development permits, and generally supervising and monitoring the construction. The contractor was engaged by the tenant. After the construction, the mall owner was to own the Taco Bell building to be leased by the Taco Bell franchise. In addition, a rent inducement was given by the mall owner to the tenant to partially fund the construction costs.

The contractor registered a claim for lien against both the leasehold and the freehold premises, when the tenant faced financial problems. The Court said that the mall owners were not “owners” within the meaning of the CLA, regardless of the fact that they had approved the plans, granted the tenant inducement, and provided general supervision. Their ultimate ownership of the building was not sufficient for this purpose. According to the Court, the mall owners did not make a “request” for the construction, nor had it been done for their “direct benefit” or with their “privity” because the contractor was not engaged by them.

It would be seen that whether or not a landlord could be taken as “owner” under the CLA is, therefore, highly fact-specific. Apparently the courts will look at the big picture to find out which party requested the construction and stands to benefit from it. Usually, it will be the tenant. In most standard landlord/tenant situations, a landlord will not be regarded as “owner” under the CLA if there is no contractual arrangement with the contractor, such as a joint venture with the tenant, or some major involvement in the construction itself.

Restrictions on Forfeiture/Termination of Leases Subject to Liens

According to the CLA, there are some restrictions on a landlord’s ability to deal with a leasehold subject to construction liens. Sub-sections 19(2)-(4) of the CLA reads as given below:

“Forfeiture or termination of lease, effect of”

19. (2) No forfeiture of a lease to, or termination of a lease by, a landlord, except for non-payment of rent, deprives any person having a lien against the leasehold of the benefit of the person’s lien. R.S.O. 1990, c. C.30, s. 19 (2). Notice to lien claimants

(3) Where a landlord intends to enforce forfeiture or terminate a lease of the premises because of non- payment of rent, and there is a claim for lien registered against the premises in the proper land registry office, the landlord shall give notice in writing of the intention to enforce forfeiture or terminate the lease and of the amount of the unpaid rent to each person who has registered a claim for lien against the premises. R.S.O. 1990, c. C.30, s. 19 (3).

“Payment of unpaid rent”

(4) A person receiving notice under subsection (3) may, within ten days thereafter, pay to the landlord the amount of the unpaid rent, and the amount so paid may be added by that person to the person’s claim for lien. R.S.O. 1990, c. C.30, s. 19 (4).”

The message of these sub-sections is that a landlord can forfeit or terminate a lease only for non-payment of rent, unless he wants the lease to continue to be subject to the tenant’s pre-existing liens.

Should the landlord want to terminate the lease for unpaid rent, the landlord has to first give notice to any lien claimant with a registered lien of its intention to terminate and a lien for the amount of the unpaid rent. Within 10 days, the lien claimant is to repay the unpaid rent to the landlord, which is then added to the amount of its claim for lien. The purpose is to allow the lien claimant to preserve the asset against which its lien is registered (the leasehold interest) from forfeiture by the landlord. Theoretically, the lien claimant can thereafter get an order for the judicial sale of the leasehold and recover its money from the proceeds of the sale. Regarding the difficulties in marketing leasehold interests, such a right is of no help in most cases.

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