Supreme Court

<^ c^v "=(3 o^§ CV 04376 THE SUPREME COURT OF THE NORTHWEST TERRITORIES ^':..:

BETWEEN: THE EXECUTIVE LTD. and 892536 N.W.T. LTD. and B.A.S. DEVELOPMENTS LTD., MICHAEL O'NEILL, CAPITAL CITY CARPETS LTD., ROBERT BRUMMOND, NELSON LUMBER COMPANY LTD., RTL-ROBINSON ENTERPRISES LTD. and GEM CABINETS LTD.

Respondents

Reasons following trial of two issues pursuant to the Mechanics Lien Act: (1) A bona fide payment of 90% of the contract price by the beneficial owner discharges any unregistered lien. (2) Section 8 of the Act operates to defeat any lien against an owner's interest where that owner owes nothing to the contractor.

REASONS FOR JUDGMENT OF THE HONOURABLE MR. JUSTICE J.E. RICHARD Trial held at Yellowknife, Northwest Territories on August 5, 1993

Reasons filed: August 10, 1993 Counsel for the Applicants: P. Bolo Counsel for Nelson Lumber Co. Ltd.: G. Watt

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CV 04376 THE SUPREME COURT OF THE NORTHWEST TERRITORIES BETWEEN: THE EXECUTIVE LTD. and 892536 N.W.T. LTD. Applicants - and -B.A.S. DEVELOPMENTS LTD., MICHAEL O'NEILL, CAPITAL CITY CARPETS LTD., ROBERT BRUMMOND, NELSON LUMBER COMPANY LTD., RTL-ROBINSON ENTERPRISES LTD. and GEM CABINETS LTD.

Respondents REASONS FOR JUDGMENT ) At the request of the Applicants and the Respondent Nelson Lumber Co. Ltd., the Court ordered the trial of two issues which involve an interpretation of certain provisions of the Mechanics Lien Act and an application of those provisions to the rather unique factual background of the within litigation.

The trial of these two issues proceeded on the basis of a series of admitted facts, as follows:

1 . 892536 N.W.T. Ltd (hereinafter "892536") was the owner of a number of undeveloped residentially zoned lots in the City of Yellowknife in the Northwest Territories during the spring/summer of 1992.

• 2 -2. 892536 listed these lots with a real estate agent to be sold to interested parties including any developers who wished to construct residences on the properties.

3. One of the lots owned by 892536 was: LOT Twenty (20) BLOCK Five Hundred Fifty-Five PLAN 2133 YELLOWKNIFE

(hereinafter "Lot 20") 4. The listed price of Lot 20 with the real estate agent was $45,000.00. 5. B.A.S. Developments Ltd (hereinafter "BAS") developed a number of properties in the City of Yellowknife during the summer of 1992. One of the properties which BAS developed was Lot 20. This was done with the knowledge of 892536.

6. A verbal agreement of purchase and sale respecting Lot 20 was entered into between BAS and 892536. Rather than BAS paying the purchase money of $45,000.00 to 892536 to purchase Lot 20, an arrangement was made whereby BAS would build a house on the property and would pay 892536 the $45,000.00 out of the sale proceeds of the house.

7. BAS entered into an agreement with Nelson Lumber Company Ltd. (hereinafter "Nelson Lumber") to supply building materials for the construction of the house. These materials were ir>corporated into the residence and were supplied on or before October 2 1 , 1992.

8. BAS entered Into an agreement of purchase and sale with T.C. Enterprises Ltd. which ultimately assigned its rights to purchase to The Executive Ltd. Tony Chang is a director and shareholder in both T.C. Enterprises Ltd. and The Executive Ltd. as well as in 892536. However, the other shareholders and directors of these three companies cfiffer as does the share structure.

-3-9. The total purchase price payable to BAS under the agreement was $135,000.00. TNs sum was meant to represent the sum of $90,000.00 for the house which was constructed by BAS and the further sum of $45,000.00 for the land.

10. It was agreed between 892536, BAS and The Executive Ltd. that The Executive Ltd. would make direct arrangements with 892536 to acquire Lot 20 from 892536 and that the Executive Ltd. would pay BAS the sum of $90,000.00 for the residence. TNs was done because The Executive Ltd. intended to resell the house and 892536 and The Executive Ltd. did not wish to incur a duplication in legal fees and disbursements in transferring the property on two separate occasions. These arrangements were made a few days before October 27, 1992. Nelson Lumber had no notice of any of these arrangements.

1 1 . The house was completed and BAS and The Executive Ltd. closed the transaction with respect to the house on October 27. 1992. At the time of closing there were no liens registered against Lot 20. However, The Executive Ltd. held back 10% of the sale proceeds, being $9,000.00, in the event that any liens were filed and paid the balance of $81,000.00 to the solicitors for BAS.

12. The $81,000.00 which was paid by The Executive Ltd. to BAS was paid in good faith and not to defeat any claims of lien. At the time of the payment of said funds. The Executive Ltd. had not received any notice in writing that anyone had the right to lien Lot 20. The payment of $81,000.00 was made after Nelson Lumber's right to a mechanics lien arose.

13. As The Executive Ltd. intended to resell the residence on Lot 20 witNn a short period of time it r>either registered a transfer of the legal titie from 892536 nor paid 892536 the $45,000.00 wNch was owing. The intent of these parties was to have The Executive Ltd. sell the property and pay 892536 the $45,000.00 owed out of the sale proceeds. The reason for proceecGng in this manner was to save the extra legal fees and registration fees which would be Incurred in registering two transfers as opposed to just one.

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-4-14. At no time were any monies owing from 892536 to BAS as a result of the construction of a house on Lot 20 from BAS. 892536 was never expected to profit as a result of a house being built upon Lot 20. All that 892536 was ever entitied to receive was the $45,000.00 price for Lot 20 as originally listed with the real estate agent.

15. On November 12, 1992 Nelson Lumber filed a claim of lien against Lot 20. It had no notice of any interest The Executive Ltd. may have had in Lot 20 at that time.

16. The Executive Ltd. had not registered any instrument at the land Tities Office whereby it claimed an interest or estate in Lot 20 at any material time.

THE LEGISLATION: The Mechanics Lien Act, R.S.N.W.T. 1988, c.M-7 is essentially identical to the first mechanics lien statute passed in this jurisdiction over one hundred years ago. It can hardly be described as modern legislation. See N.W.T. Committee on Law Reform, working paper #2, "Mechanics Lien Law in the Northwest Territories", 1988.

The Mechanics Lien Act creates a lien upon land in favour of persons who perform services on, or supply materials to, that land. The lien is a creation of the legislature, it did not exist at common law. The lien exists and ceases to exist in accordance with the specific provisions of the Act. The Act provides the method by which the unpaid workman or supplier can realize on his lien. The Act also affords protection to the owner of the land.

For the purposes of these reasons, I need only set forth the following excerpts from the Act: 1 . In this Act, "owner" indudes (a) a person having an estate or Interest In the lands on or In respect of which work is done or materials or machinery are placed or furnished, at whose request and on whose credit, or on whose behalf or consent or for whose direct benefit the work is done or materials or machinery are placed or furnished, ...

(1) The lien shall attach to the estate and interest of the owner in the building, erection or mine in respect of which the work is done or the materials or machinery are placed or furnished and the land occupied or enjoyed in connection with the building, erection or mine.

11. Except as provided in this Act, the lien shall not attach so as to make an owner liable for a greater sum than the sum payal>le by the owner to the contractor.

In the absence of a stipulation to the contrary, an owner is entitied to retain 10% of the price to be paid to the contractor for a period of 45 days after the completion of the contract.

8. (a) payments up to 90% of the price to be paid for the work, machinery or materials ... that are made in good faith by the owner to the contractor, ... before the person daiming the lien gives written notice of the claim to the person making the payment, discharge the lien given by tNs Act for the amount of the payments, but this secti*on does not apply to a payment made for the purpose of defeating or impairing a claim to a lien existing or arising under this Act; I

-6-(b) In addition to all other rights or remedies given by this Act. a lien operates as a charge, to the extent of 10% of the price to be paid by the owner for the work, machinery or materials.... up to 10 days after the completion of the work or after the delivery of the machinery or materials in respect of wNch the lien exists, unless written notice Is given as provided In paragraph (a).

6 The legislation indicates that although a supplier who provides materials to the main contractor has a lien on the owner's interest, that lien is logically limited, by s.l 1, to the amount that the owner owes to the main contractor. The exception indicated by the wording of s. l 1 contemplates a situation where an owner has not complied with the requirements of the Act, resulting in "double" payments by the owner.

7 Section 8 has the effect of creating a holdback fund for the benefit of lien claimants who have not yet registered their liens nor have notified the owner of the existence of their liens. The holdback fund is in an amount equal to 10% of the price of the contract between the owner and the main contractor. An owner who is about to pay the contract price to the main contractor, and who has not been notified of any lien claims against his land, can, by withholding 10% for potential lien claimants, discharge any existing but unregistered lien against his land. The 10% holdback fund, or lien fund, then becomes the security against which the workman or supplier has a charge, rather than the owner's interest in the land. This section affords some protection to lien claimants while at the same time allows an owner to make his contractual payment in good faith without worrying about having to pay "double" if liens are subsequently filed.

I In the present case Executive Ltd., as owner, held back 10% ($9,000.00) of the contract price from the main contractor BAS upon completion of the contract. Payment by Executive Ltd. of 90% of the contract price to BAS had the effect of discharging any mechanics liens of which Executive Ltd. was unaware. Thereafter, any unpaid workman or supplier was restricted to the replacement security, i.e., the lien fund of $9,000.00.

THE SECTION 8 ISSUE: One of the issues to be tried herein is stated as follows: Has the lien of Nelson Lumber been discharged by operation of s.8 I of the Act? 3 Based on the foregoing analysis of the legislation and on the admitted facts, I answer that question in the affirmative. Nelson Lumber's lien was discharged on October 27, 1992; thereafter it had a charge on the replacement security, i.e., the lien fund of $9,000.00.

1 In its claim of lien filed in the Land Titles Office, Nelson Lumber claims a lien on the estate or interest of 892536 (not Executive Ltd.). On the trial of this issue. Nelson Lumber submits that Executive Ltd. is not an "owner" within the context of s.8 of the Act I and that therefore Executive's payment of 90% of the BAS contract price did not operate

-8-to discharge any liens. 12 With respect, on the basis of the admitted facts, I am unable to accept the assertion that Executive Ltd. was not an owner within the definition in s.l of the Mechanics Lien Act. T.C. Enterprises entered into a contract with BAS for the construction of a residence by BAS on the subject land, and also a contract with BAS and/or 892536 for the purchase of the land. Subsequently T.C. Enterprises assigned its interest in these two contracts to Executive Ltd. From the moment of that assignment (the paries have not provided the Court with the specific date of that assignment; however, it was clearly prior to the date of the payment of the 90% of the contract price, i.e., October 27, 1992), Executive Ltd.:

a) had an estate or interest in the land; b) was requesting (indirectly if not directly) BAS to build the residence and put the materials on the land; c) was consenting to the supply of materials to the land; d) was receiving the direct benefit of the supply of the materials to the land. 13 Executive Ltd. was therefore indeed an owner within the context of the Mechanics Lien Act and acted as an owner in accordance with the provisions of that Act. Having done so. Executive Ltd. is entitled to the statutory protection offered to an owner by s.8 of the Act .

THE SECTION 11 ISSUE: The other issue being tried herein is stated thus: Does s.l 1 of the Mechanics Lien Act operate so as to defeat any lien against the estate or interest of 892536 N.W.T. Ltd. in the land?

I also answer this question in the affirmative. The facts of this case are unusual. They do not constitute the normal situation in a real estate transaction. For the reasons which are stated in the summary of facts, the I registered owner 892536 did not have any contract with the main contractor BAS whereby 892536 was to pay monies to BAS for the construction of a residence. However, on the admitted facts, 892536 is an "owner" within the context of s. l 1. That section clearly operates so as to defeat any lien against the estate or interest of 892536 in the land.

SUMMARY: It is not surprising that Nelson Lumber, in filing its claim of lien on November 12, 1992, claimed against the estate of 892536 (and not against the estate of the beneficial I owner Executive Ltd.), for the name of 892536 and not the name of Executive Ltd.

-10-appeared on the title as the owner of the land. 18 In the result, however. Nelson Lumber was unable to realize upon the estate of the registered owner (892536) by virtue of s. l 1 of the Act; and, as at November 12. 1992. it was unable to realize its lien against the estate of the beneficial owner (Executive Ltd.) in the land by virtue of the bona fide 90% payment on October 27, 1992 and the operation of s.8(a) of the Act. After October 27, 1992, Nelson Lumber's lien against the land was replaced by a charge against the lien fund.

19 Before concluding these reasons I wish to add one observation. It should be stated that the existence of unusual factual circumstances here, i.e., the beneficial owner Executive Ltd. (with whom the main contractor has its contract) not having title to the land, is, in the final analysis, merely a red herring. Had the "normal" situation occurred, i.e.:

a) Executive Ltd. acquires title from 892536; b) Executive Ltd. signs construction contract with BAS for $90,000.00; c) Nelson Lumber supplies materials to site; d) BAS completes contract; e) Executive's solicitors search title on October 27, 1992 and find no liens registered against title; f) Executive pays 90% to BAS on October 27, withholding 10% for lien fund;

-11-g) Nelson Lumber, being unpaid, files lien on November 12, 1992, the result would be the same, i.e.. Nelson Lumber would be restricted to a claim against the lien fund.

The issues, then, are decided as above. The Applicants Executive Ltd. and 892536 shall be entitled to one set of costs in Column 4 with respect to the trial of these two issues.

L ((Uc^^l / J. E. Richard J.S.C

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CV 04376 THE SUPREME COURT OF THE NORTHWEST TERRITORIES

BETWEEN: THE EXECUTIVE LTD. and 892536 N.W.T. LTD. Applicants - and -B.A.S. DEVELOPMENTS LTD., MICHAELO'NEILL, CAPITAL CITY CARPETS LTD., ROBERT BRUMMOND, NELSON LUMBER COMPANY LTD., RTL-ROBINSON ENTERPRISES LTD. and GEM CABINETS LTD.

Respondents

REASONS FOR JUDGMENT OF THE HONOURABLE MR. JUSTICE J.E. RICHARD