Wednesday, 10 September 2014

Liening the Landlord for Tenant Improvements


When a tenant requests work from a contractor, there are two ways in which the registered owner of the lands in question can be called upon for payment, even though the registered owner was not the person making the direct request for the work done: the lien claimant can provide notice pursuant to s. 15(1) of the Builders’ Lien Act, RSA 2000, c B-7 (“BLA”) or the lien claimant can show that the registered owner is an owner as defined in s. 1(j) of the BLA.

Section 15(1) Notice
Section 15(1) of the BLA states as follows:
15(1) When the estate on which a lien attaches is a freehold estate for a life or lives or a leasehold estate then, if the person doing the work or furnishing the material gives to the person holding the fee simple, or that person’s agent, notice in writing of the work to be done or materials to be furnished, the lien also attaches to the estate in fee simple unless the person holding the estate, or that person’s agent, within 5 days after the receipt of the notice, gives notice that the person holding that estate will not be responsible for the doing of the work or the furnishing of the materials.

K & Fung Canada Ltd v NV Reykdal & Associates Ltd, [1997] AJ 741, aff’d 1998 ABCA 178 (“NV Rykdal”) is the leading case on the meaning of notice in writing for the purposes of s. 15(1). In NV Rykdal, a tenant entered into a contract with a contractor, who agreed to provide all work, labour, services and materials necessary for leasehold improvements and exterior renovations. All invoices were directed to the tenant. The tenant subsequently ceased carrying on business, leaving over $250,000 in invoices unpaid. The landlord terminated the lease and took possession of the premises. The contractor filed a lien against the premises without giving any written notice to the landlord under the BLA. It argued, however, that correspondence collectively received and sent by the contractor and its agent to and from the landlord and the tenant could be construed as requisite notice for the purposes of s. 15(1).

The court observed that while the notice requirement under s. 15(1) must be in writing, it is not necessary that the notice be in a specific form. As such, the statutory requirement may be satisfied by the delivery of certain documents, the cumulative effect of which is to put the landlord on notice. The court cited the Alberta Court of Appeal in Beyersbergen Construction Ltd v Edmonton Centre Ltd (1977), 78 DLR (3d) 122) as authority for the proposition that even the submission of detailed plans and specifications to the landlord will not constitute notice unless the necessary implication of giving such information is to give written notice that the landlord would be liable pursuant to s. 15(1). Courts will consider whether the notice in writing expressly or by necessary implication informs the landlord or its agent that the lienholder will claim a lien against the fee simple estate.

Landlord as Owner
The test for whether a landlord constitutes an owner for the purposes of s. 1(j) of the BLA was summarized by the court in Royal Trust Corporation of Canada v Bengert Construction Ltd, Coyes and Coyes (1988), 85 AR 210 (CA) (“Royal Trust Corp”) as follows:

To bring the person sought to be charged within the definition of owner, the lien claimant must establish three elements. First it must be shown that the person has “an estate or interest” in the land, and secondly that he has requested, expressly or impliedly, that the materials be furnished or the work done and finally at least one of the remaining elements must be present: the work must have been done or the materials furnished on his credit, on his behalf, with his privity and consent or for his direct benefit.

Whether the conduct of a landlord constitutes an implied request to have the work done has been canvassed extensively by Alberta courts. In Royal Trust Corp, the court observed that whether a request has occurred must be decided on the facts of each individual case. The court noted that a request does not necessarily involve direct communication by the owner to the contractor. It does, however, involve something more than mere knowledge or consent. The court observed that in ordinary language the word ‘request’ indicates the idea of an active or positive proposal, as contrasted with mere passivity or acquiescence.

In Lighting World Ltd v Help-U-Build (Edmonton) Inc, 1998 ABQB 930 the court observed that in order for there to be an implied request for the purposes of s. 1(j), there must be some active participation by the owner in the construction. In that case, the court noted that the parties to the agreement to lease had come to an understanding that the tenant would be responsible for the improvements that it required in order to utilize the premises in the intended manner. While the landlord was aware that the construction was ongoing and a representative of the landlord occasionally visited the premises to observe the state of construction, the representative did not provide any direction to any contractor or the tenant as to how the construction should be done. Neither the landlord nor its representative participated in in the drawing of any plans or the approval of any work. Though the landlord loaned money to the tenant for the purposes of the renovations, there were no terms or conditions attached to those loans dictating who was to perform the renovations or how they were to be done. The court concluded that the landlord was not an owner within the meaning of the BLA, observing at para 22 that

the mere fact of knowledge that construction will ensue when a landlord leases premises does not constitute an implied request that the construction be done by any particular trade, sub-trade or contractor.

Conversely, the Alberta Court of Appeal observed in Acera Developments Inc v Sterling Homes Ltd, 2010 ABCA 198 (“Acera Developments”) that active participation by a liened party in the work being done can operate to bring that liened party within the definition of “owner” through demonstrating an implied request to do work. In Acera Developments, the court found that there was sufficient interaction between the builder and the developer to support the conclusion that the construction proceeded at the owner’s implied request. The court found that the landowner was actively involved in the supervision of the construction and that the lien claimant was contractually bound to construct improvements to a specific standard and scope contractually determined by the landowner. Based on this involvement of the landowner, the court concluded that the work in question could be implied to have been performed at the request of the liened party.

Based on the foregoing, the determination of whether a landlord will constitute an “owner” for the purposes of the BLA will turn on whether it can be demonstrated that the landlord actively participated in the work performed by the lien claimant. The court can be expected to examine the extent to which the landlord approved plans, selected contractors and subcontractors, controlled funding, and provided supervision or inspection.

Conclusion
The contractor or supplier working for a tenant should consider its lien rights against the landlord as a routine matter of due diligence. There are lots of situations where the right to lien a lease (the tenant’s interest) provides inadequate security for payment. Since the right to lien the landlord’s interest is not automatic (unless the landlord is very actively engaged in the construction), the contractor or supplier should use a s. 15(1) notice when appropriate.

On the other hand, the landlord should be cautious regarding the extent of its involvement with contractors hired to perform work for their tenants. The landlord can unwittingly expose itself to lien liability, even though the landlord usually has no control over the risk (i.e. no control over the lien holdback).
 

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