Monday, 28 July 2014

Problems with Posting Security to Discharge Liens

Author: Corbin Devlin 

 Posting Alternate Security is Standard Practice
It is common practice for an owner or general contractor to put up cash or a lien bond in order to discharge a lien from the land title.  This is often required to be done quickly, as the registration of a lien can disrupt construction financing or hold up a transfer of the land.  Many contracts also specifically require the contractor to discharge subcontractor liens within a matter of days.

Posting alternate security is rarely a step that invites any controversy.  Generally, one would expect that security in the form of cash or a lien bond is as good or better than a lien against the land.  As a consequence, lien claimants usually consent to replacing the land with alternate security in the form of cash or a bond.  If lien claimants object, it is usually because they are getting leverage out of having a lien on title, and discharging that lien reduces their bargaining power.

Troubling Developments
Recent case law alerts us that, in the right circumstances, claims by both Canada Revenue Agency and Factors may have priority over lien claims – even in respect of money specifically paid into court as alternate security for the claims of lien.

For example, if security paid into court is subject to claims by Canada Revenue Agency (e.g. an Enhanced Requirement to pay issued by CRA to collect unremitted source deductions or GST) or subject to a prior factoring of accounts, then both the CRA and the Factor may claim priority over the lien claimants, effectively snatching that security away from the lien claimants.  The case law regarding the priority of CRA has been around for a while; the case law regarding the priority of Factors is relatively recent: Van T Holdings Inc. v. KCS Equipment Ltd., 2012 ABQB 335. (Discussing these priorities in greater detail is a subject for another day.)

A new practical problem for construction owners and contractors has arisen because of this priority issue.  The courts have recently shown a reluctance to remove liens from title (i.e. on applications to post alternate security).   It seems the courts have been persuaded that the reasoning of these recent cases (giving priority to CRA and Factors) is only applicable if the lien is discharged from title.  Lien claimants have argued they should not be required to give up their lien against the lands, because alternate security might be less secure (i.e. subject to these other claims).

Until the courts come to grips with this situation, owners and general contractors may face a significant practical problem.  A lien must often be discharged quickly for legitimate practical reasons, particularly to ensure continuing project financing.  There is an opportunity for mischief by a lien claimant who wants to delay the discharge of lien; i.e. objecting to the discharge of lien on the basis that alternate security is not so secure.  The courts have shown a willingness to delay the discharge of liens to address this issue.  Should the owner or general contractor be required to present evidence in court that its’ tax remittances are up to date, and that it has not factored its’ accounts, before it can get a lien discharged from title?

Practical Resolutions
For the moment, there is a risk that routine discharges of lien could be delayed.  But the courts must eventually accept that fairness and practicality requires a mechanism for quick discharge of liens.  If there is to be any objection to discharging a lien based on allegations of priority issues, surely the lien claimant has to show some facts to support the allegations; i.e. a factoring of accounts, or a debt to CRA, or at least a hint of insolvency.

More significantly, I doubt the premise that a lien against the land is more secure than cash security or a lien bond.  After all, the ultimate remedy for a lien claimant is to have the court foreclose and sell the land to realize on the lien.  If there is a debt owed to CRA or a Factor, these priority creditors would exert their claims against the proceeds of sale of the land, if necessary to realize their claims.  In my view these priority cases provide no basis for the court to balk at discharging liens from title.

(Factoring is a sale of accounts receivable to a party known as a Factor.   The seller obtains a cash advance on the accounts receivable from the Factor, and the Factor pays the seller a discounted price relative to the face value of the receivables.  The Factor then owns the accounts receivable and collects from the account debtors.)

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