Mortgages and Construction Liens – Navigating Priorities
Determining who has priority as between competing construction liens and mortgages can be very confusing. The following is an overview of the priorities established by the Construction Act. Please note, many of these priorities do not apply to a mortgage given or assumed by a home buyer as defined by the Construction Act.
Construction liens have priority over a building mortgage (a mortgage taken out to improve the property) to the extent of any deficiency in the holdbacks required to be maintained by the owner.
This is best illustrated by an example. An owner has taken out a building mortgage in the amount of $700,000 (and it is the only mortgage on title). In our example, the owner was required to maintain a holdback of $100,000, and altogether the various lien claimants are owed $500,000. If there is a power of sale proceeding and the building sells for $1,000,0000, then the first payout is the $100,000 holdback. This will be shared pro-rata amongst the lien claimants. Then the building mortgage will be paid out in the amount of $700,000. That leaves $200,000 more which will go towards the remaining $400,000 in liens (again shared pro-rata).
Prior Non-Building Mortgage
If there is a prior non-building mortgage this will have priority over construction liens. Mortgages registered before the first construction lien arose[i] will have priority over the subsequent liens. This priority is limited to the lesser of the property’s value when the first construction lien arose and the total amount advanced before the first lien arose. The liens have priority over the prior mortgage to the extent of the increased selling value of the land resulting from the materials supplied or the work performed.
A non-building mortgage registered before the first construction lien arose also has priority over liens to the extent of any advance made after the first construction lien arose, provided that: (a) there was no preserved or perfected lien against the property when the mortgage advance was made; and (b) and no notice of lien was received prior to making the advance.
Normally, where a mortgage is registered after the time when the first lien arose, liens arising from the improvement have priority to the extent of any deficiency in the holdback.
Every situation is unique and generally requires a lawyer to search title in order to determine when the various construction liens and mortgages were registered, and often to prepare a request for information from the owner. If you have a question regarding construction lien priorities, please contact our Kanata office for a no obligation consultation.
[i] It is very important to note that a lien “arises” when materials and services are first supplied to an improvement. This is different from the date a lien is registered.