Construction financing: The lender’s role & priority under the Construction Act (part 2)
Please see part 1 of this article, on holdback obligations, here.
The Construction Act (the “Act”) protects general contractors, subcontractors, and suppliers on construction projects against the default, insolvency, or bankruptcy of those above them in the construction pyramid by allowing them to register construction liens against the property to which they provided services, labour or materials.
In the case of an insolvency or bankruptcy situation, where the sale of the property is necessary to satisfy lien claims, section 78 of the Act sets out the general priority of construction liens and other secured interests on a property.
The priority regime under the Act differs based on the timing of registration of the mortgage. Mortgages registered prior to the date when the first services and materials were provided have priority over a lien. This priority is limited to the lesser of the value of the premises before the work commenced or the total amounts advanced under the mortgage before the work commenced. In the absence of receiving written notice of a construction lien or the existence of a preserved or perfected lien on the property, a mortgage registered prior to the date when the first services and materials were provided will have an additional priority with respect to any advances made under the mortgage.
However, liens will have priority over all mortgages registered after the first services and materials were provided, to the extent of any deficiency in the owner’s holdback account. This is not limited to perfected and preserved liens, which means that if a lienable service is provided before a mortgage advance (even if the lien is not registered on title), the mortgagee will lose priority to the extent of a deficiency in the holdback.
A lien will also have priority, to the extent of any deficiency in the holdback, over mortgages taken to secure the financing of an improvement (construction mortgages), regardless of whether the mortgage is registered before or after work is first done on the project. The intention of the mortgagee is decisive in determining whether a mortgage has been advanced to fund a project and is therefore a construction mortgage.
The holdback and priority provisions under the Act are an attempt to recognize and balance the competing risks that mortgagees and unpaid trades face during a construction project. We would be happy to assist stakeholders before, during and after a construction project in understanding and making the best of their rights and obligations under the Act.
This publication is intended as a general discussion of certain legal issues and/or developments and should not be relied upon as legal advice. Should you require legal advice, please kindly contact a member of our law firm.