Regardless of the fact that the individual is a landlord, a tenant, or a lien claimant, it is important for each of them to be aware of the unique issues raised when construction liens are registered against leasehold premises. Firstly, there is the need to determine for whom the construction work has been carried out, either the landlord or the tenant, and whether or not the landlord, the tenant, or both are the owner” within the meaning of the Construction Lien Act (“CLA”), R.S.O. 1990. Secondly, it is necessary to review the possibility of binding the landlord for work performed for tenants through service of a Notice under Section 19 of the CLA. Thirdly, the restrictions placed on the ability of landlords to terminate or enforce forfeiture of leases where liens are registered are to be examined. Finally, to be considered is the contrasting approach the courts have taken to the requirement of naming the owner of the leasehold interest, depending upon whether the lease is registered on title or not.
When the Leasehold Interest is to be Liened
Generally, it is for the owner of the freehold that the construction work is performed. It follows from there that the “owner” of the land is also the “owner” within the meaning of the CLA. But, the situation becomes more complex when the construction work is performed for the owner of leased premises.
Thus, it is imperative to fill in the box marked “Name and Address of Owner” when putting up a Claim for Lien on behalf of a client. The point to note is that the “Owner” in this context means the “Owner” within the meaning of the CLA, which may not be the same as the registered owner of the property.
If the contractor has done work for the registered freehold owner of the land, it is easy to identify the owner; one has to simply look up the “Owners Names” box on the Abstract of Title.1. When the contractor’s work is done for a tenant, instead of the freehold owner, the matter becomes more complicated. Take, for instance, a client who has done work for a store in a shopping mall, such as a McDonald’s store in a food court. The owner of the mall will have leased the premises to the owner of the McDonald’s restaurant. If the contractor, who happens to be a client, does the drywall in the McDonald’s, his lien rights will normally be against the leasehold interest of the McDonald’s restaurant and not against the freehold interest of whoever owns the mall, for example, Boulevard Development.
When Tenant is named as Owner in Claims for Lien
It is essential to check carefully that all Transfers registered on title have been “certified”. Otherwise, the “Owners’ Names” box will not show the new owner’s name.
When a leasehold premises is liened, it is important to write the name and address of the tenant (McDonald’s) in the “Name and Address of Owner” box in the Claim for Lien. Some people will also list the freehold owner (Boulevard Development) for good measure, because they are not very familiar with the facts when registering a claim for lien and it is quite likely that their client may also have a claim against the freehold owner, as would be seen later.
It is also possible to register at a subsequent date, a partial discharge of lien against the freehold premises if it turns out that the lien claimant has no claim against the freehold. Therefore, when registering a construction lien, it is essential to know if the client is engaged in work on leased premises and to adjust the Claim for Lien appropriately. The Abstract of Title is to be checked to find out if any leases have been registered on the premises. Lastly, if the client does not know whether or not a lease exists, a request for this information could be made according to Section 39 of the CLA, through which the names of the parties to the contract between the owner and general contractor could be known. It could well be that the name of the owner (the party who contracted with the general contractor) is not the same as the registered owner. In that event, a leasehold situation would exist, and the best practice is to name the leasehold owner. It is also not uncommon to find instances in which a claim for lien may still be held to be valid against a leasehold interest, even if the owner of the leasehold is not named as an owner.
When is Freehold Interest to be Liened
Even though work is done for a tenant, the client may still wish to get a lien in the freehold interest. Liening the freehold offers the opportunity to secure the lien claim against not only the lease, but also the freehold on which it is based. Two methods by which a contractor working for a tenant can still be able to get a lien on the freehold of the property are: 1) A Notice under Section 19(1) of the CLA is served; and 2) Under Section 1(1) of the CLA, the freehold owner is brought within the definition of “owner”.
Notice Under Section 19(1) of the CLA
There is a provision in Section 19(1) of the CLA for contractors to serve written notice of the construction project or “improvement” to the Landlord, when the freehold interest of the Landlord will also be subject to the lien. Such a notice must be served before the start of the work on the project in the following manner:
“Where owner’s interest leasehold”
19. (1) Where the interest of the owner to which the lien attaches is leasehold, the interest of the landlord shall also be subject to the lien to the same extent as the interest of the owner if the contractor gives the landlord written notice of the improvement to be made, unless the landlord, within fifteen days of receiving the notice from the contractor, gives the contractor written notice that the landlord assumes no responsibility for the improvement to be made. R.S.O. 1990, c. C.30, s. 19 (1).”
The only problem with Section 19(1) a contractor faces, namely the clause that if the Landlord replies within 15 days indicating that it assumes no responsibility for the improvement, then the freehold interest cannot be liened. Due to this, contractors do not usually serve notices under Section 19 of the CLA. Nonetheless, if a client is going to do contractual work on a leased premises, it is prudent to serve the Section 19 notice, regardless of whether the Landlord replies to it or not.
Its converse is a Landlord with a tenant or tenants who are undertaking construction work. Such a landlord has to be on the lookout for Section 19 notices, ensuring that a response is made within 15 days. It is like a client who had just built a shopping mall or other retail area, having a number of tenant fit-out projects proceeding at the same time. Such a client/landlord should be on the lookout for Section 19 notices from contractors working on tenant improvements.
Don’t make a move before fully understanding your rights and obligations. For more information and assistance regarding commercial leasing in Ontario contact Levy Zavet PC (Levy Zavet) in Toronto, Ontario today.