Jason Bryk 

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Manitoba Builders' Liens Legislation

In a typical construction project scenario, the property owner contracts with a "general contractor" who promises to construct, or cause to be constructed, the specific project desired by the owners, with completion promised (subject to unforeseen contingencies) by a specified deadline date, and for a consideration or price worked out and agreed to by the parties in advance.  If the contractor fails to do what it promised, the owner has the right to sue the general contractor for the owner's loss.  The general contractor will enter into a number of further contracts with others who are able to and typically "specialize" in providing the different goods and services required to complete the project.  This would typically include an excavation/ foundation firm, a framing firm, a drywall firm, a plumbing firm and an electrical firm.  Suppliers and installers of fixtures and equipment required to heat and light the completed project would also have to be engaged in order to provide the owner with what it has bargained for.  These other providers of "inputs" to the project, that is, providers other than the general contractor, will not have their own direct contracts with the owner, rather, their contracts will be with the general contractor.  Such other providers are usually referred to as "subcontractors" or "subtrades".  The general contractor and the subcontractors will typically engage a number of individual persons to do the actual work ("employees"), and additionally, some of the subcontractors will have to purchase materials from other firms who are in the business of selling such goods ("suppliers").  So what happens if, notwithstanding that the owner is able to and pays what it owes to the general contractor, the general contractor is unable to or otherwise fails to pay what it owes to its subcontractors, suppliers, the subcontractors' own suppliers and the employees of all of these other inputting parties?  The subcontractors can sue the general contractor (they have direct contractual relationships with the general contractor), but what if the general contractor has become insolvent?  They can't sue the owner because they don't have any direct contractual relationship with the owner.  To alleviate this problem, Manitoba - and indeed most other North American jurisdictions - have long ago enacted legislation giving protection to those persons who "improve" a property, but who have no direct contractual relationship with the owner of the property.  The Manitoba Builders' Liens Act (the "BL Act") is the current Manitoba version of that legislation. 


The BL Act, broadly speaking, provides for three legal "mechanisms" to protect persons "improving" real property, namely:


  1. a lien against the property, which, to some degree, provides the improving party with something akin to a real property mortgage (if the improving party isn't paid, it can liquidate the property so as to generate funds required to pay what is owed to it);


  1. the requirement that every time the property owner makes a payment to the general contractor on account of the general contract, 7½% of each such payment is to be held back from the general contractor and, in most construction projects, placed in a distinct trust account, with the funds to be released when the project is completed; and


  1. the imposition of a trust applicable to funds earmarked to be used to pay for the project, with the resulting imposition of trustee obligations on those persons receiving those funds. 


(I)         The Lien


(i)            The BL Act creates liens in favour of those improving real property which form a charge against the real property being improved, and, gives the lien holder the right to have the improved property sold for the purpose of raising funds to pay monies due to the lien holder.

(ii)           With respect to any particular real estate project, whether or not one or more Liens hold priority over a Lender’s duly registered mortgage security:

(1)          is not dependant on whether or not the BL Act holdbacks which are supposed to be made, are or are not made; and

(2)          is dependant on whether or not the Lender advances funds under its mortgage security at a time when one or more Liens have been registered against the title to the real property. If any such advance is made when one or more Liens are so registered, the Lender’s mortgage security, with respect to that advance, will be subordinate to the claims of the holders of the registered Lien or Liens.

(iii)          Where a particular  project is covered by one, or perhaps two or three, titles, it is relatively fast and inexpensive for the Lender to search the title or titles. All such searches should be conducted after 3:00 p.m. local time, when the Manitoba Land Titles Offices cease taking registrations, and, assuming no Lien or Liens have been registered, the funds should be released to the owner before 9:00 a.m. on the next following business day when the Land Titles Offices reopen to take registrations.

(iv)          The problem in effecting title searches arises where, with respect to a particular project, that project is covered by many titles.  For example, a project may comprise a large number of separately titled single family residential units, or a project has been condominiumized and there are a large number of separately titled condominium units. In these cases:

(1)          where the Lender is financing a project with many titles, only randomly selected titles be searched after 3:00 p.m. on the date of intended advancement (we recollect a situation where we acted for a lender providing advances to the owner of a 310 condominium unit building, and, given that it was impossible to conduct 310 after 3:00 p.m. title sub-searches, we searched, say, the titles for units 1, 25, 50, 75, 100, etc. For the next advance, we searched the titles to units 10, 40, 70, 100, etc.).  If the Lender is financing a project where all of the project's titles are in the name of the same owner, it is very unlikely that a Lien would be registered against only one title, and far more likely that if there was a Lien claimant, that claimant would have registered against all of the project’s titles;

(2)          generally however, where a particular project is a relatively large one and the Lender’s advances are in substantial amounts, and, provided that the project only has a few titles, it would be best to search all titles with respect to each advance.

(v)           From a “risk management” perspective, if the Lender searches only random titles (where a project has many titles), while it is possible that the Lender may make an advance whilst one or more Liens have been registered, on the next succeeding titles search by the Lender, such Lien(s) would be discovered, and no further advances would be made until the Lien(s) were removed. In this way, the Lender would tend to minimize its risk, without completely eliminating it.


(II)        Holdbacks

(i)            The BL Act obligates the owner of a property being improved to hold back from each progress invoice submitted to such owner by the project (general) contractor, 7.5% of that invoice, and, where the contract between the contractor and the owner is in excess of $200,000, the owner and contractor are required by the BL Act to open an interest-bearing builders' liens holdback account with a Manitoba chartered bank, trust company or credit union. Although somewhat simplified, in essence, the holdback monies are to be withheld from the contractor until 40 days after the first to occur of completion or abandonment of the project by the contractor. At that point in time, provided that no Lien or Liens have been registered against the project title, the monies in the holdback account may be released to the contractor.

(ii)           Payment of each contractor invoice to the extent of 92.5% of the invoiced amount by the owner to the contractor will reduce the project Lien claimants' (including the general contractor's) Liens to the extent of and in proportion to that 92.5% payment portion, provided that when the owner makes payment, it does so “in good faith” and before the registration of any Liens against the owner’s title. We take “in good faith” to mean that the owner, when making payment, should have no reason to believe that the general contractor who he pays will fail to make payment to those who are in turn engaged by the general contractor to assist it in fulfilling its duties under its contract with the owner.

(iii)          As previously stated, whether or not BL Act holdbacks are made does not affect the priority of the Lender’s mortgage security against the property being improved. Further, the BL Act does not specify that there is any obligation on an owner’s financier to make or to ensure that the holdbacks are made, and where required, be put into an interest bearing holdback account. Nevertheless there are some advantages to a project financier if the holdbacks are made and kept available during the course of construction.  Consider the situation where, before completion of the project, there is a failure to finish due to insolvency of the general contractor or a major sub-contractor.  In this situation the actual setting aside of holdback monies means that there are funds which can be paid into Court, for the purpose of having the Court order the discharge of all of the registered Liens (Section 55(2) of the BL Act). It has been our experience that where this has occurred, and provided that the owner is able to find a replacement general contractor (or major sub-contractor), the removal of the Liens enables the project financier to recommence making project advances, so that the project can be completed, at which time, the financier then has a completed project subject to its security.

(III)       The Trust

(i)            The BL Act imposes trust obligations on project owners, contractors and sub-contractors with respect to monies received by each of them in connection with construction projects. In essence, the trusts are established for the benefit of the persons whom the recipient or holder of project monies has contracted with in order to effect the construction, including contractors, sub-contractors, and certain other beneficiaries such as employees, and The Manitoba Workers Compensation Board. As a general rule, trust monies are not to be used for any purpose other than satisfying the claims of beneficiaries of the trust.

(ii)           A major advantage which accrues to the beneficiary of a trust is that the beneficiary can “trace” trust funds or property which the trustee has parted with in breach of the trust, provided that the trust monies or property can be “identified” in the form of some other property, or in a bank account.  It is possible that a Lender could be liable to a beneficiary that was a victim of a breach of trust committed by the owner, if that beneficiary is able to assert a tracing claim against the "misappropriated" trust money (and such tracing leads to funds that are in an owner's account with the Lender).  Tracing allows a beneficiary to access the specific trust funds it is entitled to, even if those funds are in the hands of third parties (such as a Lender), and even though the third parties themselves may not be guilty of breach of trust.  However:

(1)          tracing is only applicable if the trust property is "identifiable".  The comingling of other funds in an owner's account where the Lender and the owner have established a multi-account "set-off" arrangement, may reduce the likelihood that the particular beneficiaries' trust monies remain "identifiable";

(2)          other funds that may be present in an owner’s deposit account should not be available to a beneficiary who obtains a Court tracing order.  That is because tracing is a proprietary remedy, which means it attaches only to funds from a particular project.  The beneficiary would not be entitled to the owner’s other funds which may be held by the Lender if these other funds do not relate to the beneficiary's particular project; and

(3)          in the Supreme Court of Canada decision in Citadel General Assurance Co. v. Lloyds Bank Canada, [1997] 3 S.C.R. 805, La Forest J. stated that the tracing remedy is subject to certain equitable defences.  Some of these defences may be available to a Lender to allow it to resist a tracing claim.  In particular, as the Manitoba Court of Appeal held in Glenko Enterprises Ltd. v. Keller, 2000 MBCA 7, a tracing claim will be denied where trust funds come into the hands of a third party that gave consideration for the property and who had no notice that it was trust property or, if the third party did have notice that it was trust property, the third party did not have knowledge that an application of such trust property against the trustee's indebtedness constituted a breach of trust.  The court in that case suggested this defence may be available to banks in circumstances that are similar to the present issue.

(iii)          The BL Act does not specifically impose its trusts upon an owner’s financier. Pursuant to the Bank Act (Canada), banks (as depository financial institutions) are in most cases not obliged to determine whether or not funds placed with the depository institution are - or are not - trust funds and whether or not such funds are used in breach of trust obligations by those having control of such funds.

(iv)          However, under the Bank Act, notwithstanding the aforementioned “general” rule, a depository financial institution may be held directly liable to the beneficiaries of a trust in essentially two situations, namely:

(1)          where the institution knows that the trust is or may be breached and nevertheless applies trust monies on account of indebtedness owed by the trustee to the institution (“knowing receipt”);

(2)          where the institution facilitates or assists a trustee in effecting a breach of trust without the institution applying trust monies on account of the trustee’s indebtedness owed to the institution (“knowing assistance”).

(v)           Nevertheless, and in any event, for a Lender/depository financial institution to be liable to BL Act trust beneficiaries, it is not enough for a beneficiary to merely prove that the institution knew of the fact that there are or were trust monies standing to the credit of a trustee’s account with the institution.

In the ManitobaCourt of Queen's Bench decision in Glenko Enterprises v. Ernie Keller Contractors Ltd. (1994), 98 Man. R(2d) 141 (the "Glenko Case"), Beard J. synthesized the relevant case law into the following summary (which was expressly adopted by the Manitoba Court of Appeal and in several other Manitoba cases).

"11       In summary, the case law states that the following inquiries must be made to determine whether a bank which has applied trust funds received from a building contractor to reduce an account overdraft has participated in a breach of trust and must therefore account to the beneficiaries of that trust for those funds:

1.         Did the bank know that the monies being deposited by the customer were trust funds subject to statutory trust conditions?  (Most depository institutions would know this or, because the BL Act trust is a statutorily created trust, the institution would be deemed to know this.)

2.         Did the bank have actual knowledge of the fact that there were trust beneficiaries whose accounts were unpaid?  (This is a question of fact in each case, but certainly, there are probably many situations where the depository institution has no such knowledge.)

3.         If the bank did not have actual notice of unpaid trust beneficiaries, did it have knowledge of facts and circumstances sufficient to put it on inquiry? If so, did it make reasonable inquiries?  (Again, this would be a question of fact in each case, but there are certainly going to be situations where a bank does not have knowledge, and, even where it has, makes reasonable inquiries without ascertaining a breach of trust.)

4.         Did the bank receive and apply the funds in the ordinary course of business without knowledge of any unusual circumstances?  (In amplification of this the Court noted that:  "… the bank is not liable for the builder's breach of trust if the bank, in the ordinary course of business, accepts the deposits and allow cheques to be written thereon, - or for that matter if it applied to funds on overdraft - unless it had or clearly should have had knowledge of the breach of trust by the contractors or of facts to put it on notice".)"

In order for liability to attach to the institution, it would be necessary for a beneficiary to establish that the institution not only knew that it held trust monies, but also that it knew - or from the perspective of a reasonable party should have known - that beneficiaries had not been paid what was due to them when due or that there was a reasonable likelihood that such beneficiaries would not be paid what was then due to them

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