Dorbern Investments v. Provincial Bank, [1981] 1 SCR 459

Supreme Court of Canada

Dorbern Investments v. Provincial Bank, [1981] 1 S.C.R. 459

Date: 1981-05-28

Dorbern Investments Limited, Carrying on Business Under the Firm Name and Style of Corvair Home Builders (Plaintiff-Appellant) Appellant;

and

The Provincial Bank of Canada (Defendant-Appellant) Respondent;

and

Frank Lentini and Tony Caparello (Defendants).

1981: March 9; 1981: May 28.

Present: Laskin C.J. and Ritchie, Beetz, Estey and McIntyre JJ.

ON APPEAL FROM THE COURT OF APPEAL FOR ONTARIO.

Mechanics’ liens—Priorities—Mortgagee and lien holder—Funds advanced prior to rise of lien but mortgage only taken as security after rise of lien and with no notice of lien—Mortgage registered prior to registration of lien—The Mechanics’ Lien Act, R.S.O. 1970, c. 267, ss. 7(3), (4), 14(1), 16, 20, 21, 22—The Registry Act, R.S.O. 1970, c. 409, ss. 69(1), 70.

The issue in this appeal was whether a mortgage on land for past indebtedness, given after a mechanic’s lien on the land had arisen, had priority over the lien, of which no previous written notice had been given to the mortgagee, where the latter registered its mortgage prior to the registration of the claim for lien. The local judge found for the lien claimant but his judgment was reversed by the Ontario Divisional Court which accorded priority to the mortgagee. The Court of Appeal dismissed the lien claimant’s appeal without written reasons.

The lien claimant began work in September 1972. Respondent bank’s predecessor advanced money for the work to the landowners between April 5, 1973, and June 15, 1973, taking as security a chattel mortgage on equipment on the premises and a mortgage on other property. As further security, a mortgage on the subject land was given July 12, 1973 and registered July 30, 1973. The claim for lien was registered August 1, 1973.

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The lending bank, while it knew of the work being performed on the land in question, received no written notice of the lien prior to advancing the money for the work. The advance was made independently of any mortgage on the land so that the lending bank did not come within the provisions of s. 14(1) as having made advances “on account of any…mortgage”. The question, therefore, was whether s. 14(1) was a complete code in this situation to give priority to the lien claimant notwithstanding the fact that the lien claim was registered after the mortgage.

Held: The appeal should be dismissed.

Neither the lien claimant nor the mortgagee were assisted by s. 14(1). The mortgagee did not fall within that subsection. The lien holder was not assisted by it because the provision gave priority, once the lien arose, only in respect of subsequent advances under the mortgage where written notice or registration preceded such advance. This limited, conditioned priority could not be turned into a general one.

Any legal interest created by The Mechanics’ Lien Act was subject to defeasance unless steps were taken pursuant to the Act to protect it. The registration requirements had to be met to enforce the lien even in the absence of competing interests.

Both principle and s. 20 of the Act compelled resort to the relation between a registered lien to other registered interests when the order of priorities was not prescribed. Nothing in the Act, apart from s. 14(1), gave an unregistered lien priority, and where subsequent adverse interests were asserted, the lien claimant was driven to registration for protection at large and as against adverse claimants to an interest in the land. Section 20 recognized this consideration for it provided that, on registration, “the person entitled to a lien shall be deemed to be a purchaser pro tanto” and “a purchaser within the provisions of The Registry Act and The Land Titles Act”. The section’s concluding words—“except as herein otherwise provided, these acts do not apply to any lien arising under this Act”—meant not otherwise applying, thereby leaving for determination under them the effect of a lien claimant’s becoming purchaser by virtue of registration of a lien claim.

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Under ss. 69(1) and 70 of The Registry Act, priority was recognized according to priority of registration. Rather than taking the subject land as security, the mortgagee looked to other security, taking the mortgage as collateral only. No supportable distinction could be drawn between a collateral mortgage given as additional security for a previous advance financing construction on the land affected by the lien claim and a collateral mortgage given as additional security but not related to construction on that land. There was no basis upon which the collateral mortgage, by reason of its being collateral, could be subordinated to an unregistered or later registered lien claim to which the mortgagee had no previous notice.

APPEAL from a decision of the Ontario Court of Appeal[1], upholding the judgment of the Ontario Divisional Court reversing the decision of Scott J. Appeal dismissed.

Robert E. Edgar, Q.C., and Edward M. Werner, for the (plaintiff-appellant) appellant.

C.E. Woollcombe, Q.C., for the (defendant-appellant) respondent.

The judgment of the Court was delivered by

THE CHIEF JUSTICE—The issue in this appeal is whether a mortgage on land for past indebtedness, given after a mechanic’s lien on the land has arisen, has priority over the lien, of which no previous written notice was given to the mortgagee, where the latter registers its mortgage prior to the registration of the claim for lien. This issue engages ss. 14(1) and 20 of The Mechanics’ Lien Act, R.S.O. 1970, c. 267, and the alleged application of ss. 69 and 70 of The Registry Act, R.S.O. 1970, c. 409.

The local judge found for the lien claimant but his judgment was reversed by the Ontario Divisional Court which accorded priority to the mortgagee. The Court of Appeal dismissed the lien claimant’s appeal without written reasons.

Certain construction and renovation work on the land in question was begun by the lien claimant on

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September 11, 1972 but it was later that contracts governing the work were executed. The predecessor of the respondent bank advanced money to the landowners between April 5, 1973 and June 15, 1973 to finance the work to be done (which was to convert an old building into a modern restaurant), taking as security a chattel mortgage on certain equipment to be used in the business intended to be carried on on the property and a mortgage on other property. However, further security was later sought and a mortgage on the subject land was given and taken on July 12, 1973. The mortgage was registered on July 30, 1973, securing the principal sum of $175,000. The claim for lien was registered two days later, on August 1, 1973.

Sections 14(1) and 20 of The Mechanics’ Lien Act read as follows:

14. (1) The lien has priority over all judgments, executions, assignments, attachments, garnishments and receiving orders recovered, issued or made after the lien arises, and over all payments or advances made on account of any conveyance or mortgage after notice in writing of the lien has been given to the person making such payments or after registration of a claim for the lien as hereinafter provided, and, in the absence of such notice in writing or the registration of a claim for lien, all such payments or advances have priority over any such lien.

…

20. Where a claim is so registered, the person entitled to a lien shall be deemed to be a purchaser pro tanto and a purchaser within the provisions of The Registry Act and The Land Titles Act, but, except as herein otherwise provided, those Acts do not apply to any lien arising under this Act.

The lending bank knew that work was being performed on the land in question but did not receive any written notice of the lien (which, pursuant to s. 7(4) of The Mechanics’ Lien Act, arose when the work was begun) prior to advancing money to finance the work. However, because the advance was made independently of any mortgage on the land (the mortgage being taken subsequent to the commencement of the work and subsequent to the advance) the lending bank does not come

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within the provisions of s. 14(1) as having made advances “on account of any…mortgage”. The question is, therefore, whether s. 14(1) is a complete code in this situation to give priority to the lien claimant notwithstanding that the lien claim was registered after registration of the mortgage.

Although the respondent bank contended that its mortgage came, within s. 14(1), a contention which must be rejected, it submitted alternatively that even if it was a subsequent mortgagee which made no advances or payments on account of the mortgagee, this fact did not operate to clothe the then unregistered lien claimant with priority over the mortgage, and certainly not when the mortgage was registered, without notice of the lien, prior to the registration of the lien claim. In my opinion, s. 14(1) does not assist the lien claimant in the circumstances of this case. That provision gives priority to the lien claimant, once its lien has arisen, only in respect of subsequent advances under the mortgage where written notice or registration of the claim of lien has preceded such advances. The concluding words of s. 14(1) underline this in stating that “in the absence of such notice in writing or the registration of a claim for lien, all such payments or advances have priority over any such lien”. Section 14(1) is thus of no assistance in this case either to the lien claimant or to the subsequent mortgagee; the lien claimant cannot turn this provision for a limited and conditioned priority as against a subsequent mortgagee into a general priority ungoverned by any condition such as written notice or registration.

I am bound to say, however, that if s. 14(1) applied here the mortgagee could not, by registering its mortgage before receiving written notice of the lien claim or before registration thereof, defeat the priority of the lien claimant in respect of subsequent advances on account of the mortgage. However, since this case is not governed by s. 14(1) and is not otherwise caught by any express provision of The Mechanics’ Lien Act, the question before the Court is one at large to be decided on

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principle unless the answer is supplied by s. 20 of the Act.

The Mechanics’ Lien Act is a statutory code for the creation and enforcement of liens for the benefit of those who do work upon or supply materials to improve or construct land or buildings. At the same time, it recognizes that there may be adverse claims upon the land and seeks to a degree to establish priorities as between lien claimants and others who assert an interest in the land in respect of which a lien has arisen. Thus, the situation of a prior mortgagee is covered by s. 7(3) and that of a subsequent mortgagee to the extent expressed in s. 14(1). The expression falls short of covering the situation now before us, a subsequent mortgage given for past advances.

In so far as The Mechanics’ Lien Act may be said to create a legal interest in the lien claimant, it is a legal interest subject to defeasance unless steps are taken pursuant to the Act to protect it. Thus the provisions for registration in s. 16, the limitation under s. 21 of the period within which registration may be effected and expiry of the lien under s. 22 if registration is not effected within the prescribed period. I cannot agree with the submission of counsel for the appellant lien claimant that these provisions are mere procedures without substantive effect. The registration requirements must be met to enforce the lien against the land even though there be no competing interests adverse to the lien claimant.

When there are competing claimants whose interests vis-à-vis the lien claimant are not expressly governed by a prescribed order of priorities, resort must necessarily be had to the relation of a registered lien to other registered interests. This is compelled both on principle and under s. 20 of The Mechanics’ Lien Act, previously quoted. Dealing first with principle, there is nothing in The Mechanics’ Lien Act which, apart from s. 14(1) (respecting priority of the lien over all judgments,

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executions, assignments, attachments, garnishments and receiving orders recovered, issued or made after the lien arises), gives an unregistered lien priority. Where subsequent adverse interests are asserted the lien claimant is necessarily driven to registration “in the proper registry office” (to use the words of s. 16) for protection at large and as against adverse claimants to an interest in the particular land.

Section 20, in my view, recognizes this latter consideration in stating that upon registration “the person entitled to a lien shall be deemed to be a purchaser pro tanto” and, moreover, “a purchaser within the provisions of The Registry Act and The Land Titles Act”. I am not troubled by the concluding words of s. 20 that “except as herein otherwise provided, those Acts do not apply to any lien arising under this Act”. I read them as saying that the two Acts do not otherwise apply, thus leaving for determination under them what the effect is of a lien claimant becoming a purchaser by virtue of registration of a claim of lien.

The effect, ordinarily, under ss. 69(1) and 70 of The Registry Act is to recognize priority according to priority of registration. These sections read as follows:

69.—(1) After the grant from the Crown of land, and letters patent issued therefor, every instrument affecting the land or any part thereof shall be adjudged fraudulent and void against any subsequent purchaser or mortgagee for valuable consideration without actual notice, unless the instrument is registered before the registration of the instrument under which the subsequent purchaser or mortgagee claims.

…

70. Priority of registration prevails unless before the prior registration there has been actual notice of the prior instrument by the person claiming under the prior registration.

I use the word “ordinarily” advisedly because the usual course in the financing of construction or improvements or the furnishing of materials is for

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the mortgagee who makes the advances, whether before or after and during the operation of the mortgage, to take the subject land as security. In the present case, the mortgagee looked to other security for safeguarding its mortgage and took the mortgage which is involved in this appeal as collateral only. The question then is whether this should make a difference where the mortgagee rests on prior registration.

It is acknowledged here that the lien claimant performed its last work on June 29, 1973. Since it registered its claim of lien on August 1, 1973, the registration was within the time period, thirty-seven days, prescribed by s. 21. Does this put the lien claimant in a preferred position against a collateral mortgagee despite the latter’s prior registration when, clearly, the lien claimant could not claim priority if the mortgage had been a primary mortgage on the subject land?

I do not think that any supportable distinction can be drawn between a collateral mortgage which, as here, was given as additional security for a previous advance made to finance construction on the land on which a lien is claimed and a collateral mortgage given as additional security for an advance not related to construction on the particular land. It was pointed out by counsel for the respondent and conceded by counsel for the appellant that The Mechanics’ Lien Act does not purport to control the destination of advances made on security of land on which a lien arises. They may be put to uses other than for construction and improvement of the mortgaged land, save as the mortgage itself, through the requirement of progress certificates to support further advances as stipulated in the mortgage, provides some control. In the present case, therefore, I find no basis upon which the collateral mortgage, by reason only of being collateral, may be subordinated to an unregistered or later registered lien claim of which the mortgagee had no previous notice.

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Counsel for the appellant lien claimant alleged that anomalous results ensue from applying The Registry Act rather than The Mechanics’ Lien Act to the factual situation in the present case. He has not, however, shown me how The Mechanics’ Lien Act affords any protection to an unregistered lien claimant. Nor does his assertion of anomalies stand up. It is true that a person who advances money to a landowner beyond the then value of the land and for a purpose unrelated to pending improvements may, by subsequent registration ahead of a lien claimant, deprive the latter of any right to realize anything out of the land. However unlikely that a person making such an advance would fail to secure it at once, he would himself risk defeat of some part of his security if the lien claimant registered first. The appellant’s counsel also asserts that a mortgagee who takes his security after the fact to secure past indebtedness is put in a more favoured position than a mortgagee who takes a mortgage providing for advances on account thereof. Again, this ignores the obligation of the lien claimant to give notice or to register to obtain priority against a mortgagee, whether a mortgagee in respect of past advances or one who makes advances not knowing of a lien claim which has not been registered.

Two other alleged anomalies were put forward on behalf of the appellant. It was pointed out that a mortgagee who takes security for past indebtedness and registers the mortgage before a lien arises is limited to the value of the land at the time pursuant to s. 7(3), but by delaying registration until after the lien arises he would not be so limited. It seems to me to be unrealistic to think that registration would be delayed to take advantage of subsequent improvements on the land to enhance the security, but the statute does not preclude it, any more than it precludes a lien claimant from registering the lien immediately it arises though that too may be unrealistic. Finally, it was the appellant’s position that a mortgagee who makes advances on account of the mortgage

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would obtain priority by registration equally with a mortgagee who takes a mortgage for past advances, and this would limit s. 14(1) to a contest between a lien claimant and an unregistered mortgage. I do not accept this assertion. I have already dealt with this situation by pointing out that I read s. 14(1) as giving the lien claimant priority over subsequent advances, notwithstanding registration of the mortgage under which they are made, provided the lien claimant either gives the prescribed written notice or registers the lien.

In short, the difficulty with the appellant’s position lies in its attempt to found its priority on an unregistered lien claim. The statute gives no support to this, and I see no escape from the conclusion that the present case must be decided on priority of registration. Accordingly, the appeal fails and I would dismiss it with costs.

Appeal dismissed with costs.

Solicitors for the (plaintiff-appellant) appellant: Chown, Cairns, St. Catharines.

Solicitors for the (defendant-appellant) respondent: Day, Wilson, Campbell, Toronto.