Friday, 4 January 2019

Lien Rights – When the Developer Doesn’t Have an Interest in the Land

Lien Rights –When the Developer Doesn’t Have an Interest in the Land

In an earlier article, we warned of the risk of loss of lien rights if a transfer of land occurs during construction.  A 2018 court decision reminds us that there is also a risk of loss of lien rights if the party contracting the work doesn’t have a legal interest (ownership) in the land, such as when (for example) an expected transfer of land doesn’t go through. 

The Recent Example

In Georgetown Townhouse GP Ltd v Crystal Waters Plumbing Company Inc, 2018 ABQB 617, the developer/owner Georgetown agreed to sell 48 lots to ReidBuilt Homes.  The contract between Georgetown and Reidbuilt allowed ReidBuilt to occupy the lands and begin construction.  However, the lands would be transferred by Georgetown only upon sale of the lots to individual homebuyers. 

When ReidBuilt came into financial problems, many trades registered liens against the lots in question.  The problem is, the trades were working for ReidBuilt but the lands were owned by Georgetown.  On a court application to determine if the liens (against the lands owned by Georgetown) were valid, Master Prowse determined that Georgetown was not “sufficiently involved” in the construction process to make Georgetown an “owner” as defined in the Builders’ Lien Act (BLA).  The liens were all invalid.

That Quirky Legislation

This issue arises in large part because the BLA has a unique definition of “owner,” and it is only the interest of an “owner” as defined that is subject to claims of lien.  Section 1(j) of the BLA defines an owner as follows:
“owner” means a person having an estate or interest in land at whose request, express or implied, and
(i)   on whose credit,
(ii)   on whose behalf,
(iii)   with whose privity and consent, or
(iv)   for whose direct benefit,
work is done on or material is furnished for an improvement to the land and includes all persons claiming under the owner whose rights are acquired after the commencement of the work or the furnishing of the material.

There is now a substantial body of case law around the question what it means to expressly or impliedly request the work.   Mere knowledge by the registered owner that the work is being done is not sufficient.  Rather, the courts have decided the registered owner must be actively involved in the building process for lien rights to exist.

What is Sufficient Involvement to Trigger Lien Rights?

In the Georgetown case, the lien claimants argued that the registered owner Georgetown expressly or impliedly requested the work based on the following facts:
- Georgetown had the right to approve the style and colours of the homes to be constructed.
- ReidBuilt was required to obtain Georgetown’s approval for the plans for the house before applying for a building permit.
- ReidBuilt was to provide utility servicing within the lot boundaries but only with contractors approved by Georgetown, and the work was to be supervised by Georgetown’s engineers.
- ReidBuilt was required to keep the lots with an orderly and tidy appearance to the satisfaction of Georgetown.
- Georgetown was to provide marketing support to ReidBuilt for the sale of homes on the lots.
- Georgetown’s approval was required for ReidBuilt’s onsite signage and advertising.

However, despite all of these obligations, there was no evidence that Georgetown in fact gave any of the approvals, or participated in any of the ways contemplated in the agreement between Georgetown and ReidBuilt, aside from Georgetown setting up and maintaining a website that referred to ReidBuilt as the builder for the subdivision.  The court concluded that Georgetown’s contractual authority over the development is a relevant factor to consider, but not as significant as what in fact happened.  With no evidence of Georgetown’s active involvement in the building process, the liens were invalid.

Not An Isolated Case

Similar situations have led to similar conclusions by the court in the past. 

In Stealth Enterprises Ltd. v Hoffman Dorchik, 2000 ABQB 311 (CanLII), S & U Homes Ltd. was the registered owner of an apartment building. They made an agreement to sell the building to the developer (632766 Alberta Ltd.) who intended to convert it into condominiums. 632766 refinished four of the apartment suites into show suites and spent other money on refreshing the lobby, before the land transfer was completed. The deal collapsed and an unpaid contractor (hired by 632766) registered a lien against S&U’s title.  The only evidence of active participation by S &U related to some directions regarding cleaning the apartments for rental.  The court determined the lien was not valid. 

In E. Gruben’s Transport Ltd. v Alberta Surplus Sales Ltd., 2010 ABQB 244 (CanLII), the landowner Alberta Surplus Sales agreed to sell 150 acres of land to 1327923 Alberta Ltd.  Alberta Surplus allowed 1327923 to move ahead with development (road construction) prior to closing the deal.  The roadbuilding subcontractor (E. Gruben’s Transport) liened the lands when the deal fell through (and consequently Gruben’s didn’t get paid).  The court determined that Alberta Surplus Sales “had no direct or indirect involvement in arranging for the road work to be done;” so the lien was not valid. 

Finally, in Acera Developments Inc. v Sterling Homes Ltd., 2010 ABCA 198 (CanLII), the issue went to the Alberta Court of Appeal.  Acera was the developer/landowner who agreed to sell the land to Sterling and allowed Sterling to build on the land prior to completion of the purchase and subdivision of the land.  When subdivision approval of the land was refused, and Sterling did not get paid, Sterling registered a builders’ lien. Acera's architectural and construction guidelines required that Acera approve the construction plans, elevations, finished grades, finishing materials and colours, final grade slips, setbacks, foundation designs, auxiliary buildings and fencing, and landscaping. All such plans were in fact approved prior to construction. Further, the construction was inspected by Acera as work progressed.  In these circumstances, the court sided with the lien claimant – the lien was valid because there was sufficient evidence of Acera’s active involvement in the work.

Three Categories of Similar Cases

As Master Prowse states in the Georgetown case: “There are three common categories of cases where this issue arises:
(i)         a landlord (registered owner of land) disavows liens placed on its land by unpaid contractors of a tenant,
(ii)        a purchaser who agrees to buy land upon which a building is to be built, and later takes a transfer of the land after the structure has been built, disavows liens subsequently placed on his/her land by unpaid contractors of the builder,
(iii)      a developer/vendor (registered owner of land) who agrees to sell land, and allows the purchaser to build on the land prior to completion of the sale, disavows liens placed on its land by unpaid contractors of the purchaser.”

The present article deals with category (iii – contracting with purchaser of lands before completion of the sale of the lands).  We have addressed the other two categories in prior articles: (i – landlord and tenant) and (ii – vendor and purchaser).

Room For Mischief

Contractors should be very attentive to these risks.  Most of the time, these situations arise innocently enough when a developer becomes insolvent.  But we have also seen developers deliberately arrange their affairs to protect the project from claims of lien (i.e. isolating the registered owner of the lands from any active involvement in the work).  In either case, contractors should be alert to situations where their statutory lien rights may be compromised.

In the present context, this means making some investigation if the party who is contracting the work has a legal interest in the lands.  If the party contracting the work has no legal interest in the lands, further inquiry is required to determine if the party who actually owns the lands is actively participating in (requesting) the work.  Keep in mind, the registered owner’s right to actively participate in the work is not sufficient; there must be active participation by the registered owner in fact.  If these inquiries suggest that lien rights may not exist, the prudent contractor will mitigate risk in some other fashion, such as requiring other security for payment from the party contracting the work.