Chapter 17: The Construction Lender and Builders Liens
17.1 | What provisions of the Builders Lien Act touch particularly on the legal position of construction lenders?
Position of construction lenders
Commentary: reference has already been made to a number of such provisions:
- The definition of owner expressly excludes “a mortgagee.” [See paragraph 3.6]
- Where the lender is a savings institution, it may retain the owner’s holdback where agreed. [See paragraph 5.8]
- Where the holdback is retained by the lender, a holdback account need not be established.
17.2 | What information may be obtained from the lender?
Information from lender
Commentary: a lien holder or beneficiary of a trust created by the Act may, by delivering a written notice, require that the lender provide the following information:
(i) the terms of the mortgage or agreement for sale,
(ii) in the case of a mortgage, particulars of the amount advanced under the mortgage, including the dates of advances, and of any arrears in payment, and
(iii) in the case of an agreement for sale, particulars of the amount secured under the agreement for sale and any arrears in payment.
[See section 41(1)(b)]
17.3 | What about priorities?
Commentary: the priority of the construction lender, whose loan is secured by a mortgage over the improvement, may depend on who is competing for priority and other relevant circumstances. Priorities between the construction lender and persons other than builders lien claimants will generally be resolved with reference to the Land Title Act. It may also be necessary to consult section 28 of the Property Law Act.
[See Property Law Act. R.S.B.C. 1996. Chapter 377] The basic rule is that the lender has priority for money advanced in good faith before the lien is filed but advances made after the lien has been filed are subordinate to the lien.
[See section 32(1) and 32(2)]
Where the lender applies the mortgage money to pay off a lien, the lender will then enjoy the same rights and priorities as the lien claimant to the extent of the payment.
[See section 32(3)]
17.4 | Are there any exceptions to this priority rule?
Effect of court order
Commentary: a construction loan is invariably advanced in installments. As construction on the project proceeds, the improvement increases in value and by advancing the money in stages, the lender attempts to maintain an equivalence of the actual amounts secured and the value of the security. Frequently, however, while the building is under construction, the value of the security is worth much less than the amount which is necessary to advance. For example, a lender may have advanced half the money contemplated by the financing arrangement and be secured by the value of the land and a half completed building. The difficulty is that the value of a half-completed building may be significantly less than half the value of the fully completed building.
Where a project encounters difficulties and the market value of the partially completed improvement is less than the amount of the advances already made by the lender, everyone loses. The lender is not fully paid off and there is no money left for the lien claimants. The lender, however, might be prepared in principle to continue to advance money under its mortgage if it could be assured that those additional advances would have priority over the liens. If this were done, the project could be completed. Its value would probably match or exceed the amount of the lender’s claim, raising the possibility that something will be left for the lien claimants. This outcome would be in the best interests of all concerned but the basic priority rule impedes such an arrangement.
For this reason, the Act creates an exception to the basic priority rule. Where lien claims have been registered, the lender may apply to the court for an order that one or more further advances under its mortgage are to have priority over the lien claims. The court must make that order if it is satisfied that:
(a)the advances will be applied to complete the improvement, and
(b)the advances will result in an increased value of the land and the improvement at least equal to the amount of the proposed advances.
[See section 32(4)]
An order made under this provision permits work on the improvement to continue.