16 Dec 2021

    Buyer Beware! Why a Dispute With Your Contractor May Affect Your Mortgage Featured

    Many property owners will find that they need to hire a contractor to conduct renovations, repairs, or just for general upkeep.

    For this article, it is essential to know that from the perspective of the law, the term “contractors” has a broad definition and can include landscapers, gardeners, painters, and engineers. 

    Many property owners may be surprised to know that the lien system in Ontario is a powerful legal tool for contractors. Liens are an encumbrance on the title to a property. A lien looks similar to a mortgage that a bank may register on a title to a property to enforce its security interest. Construction liens work similarly. If a contractor isn’t paid, they can register a lien on the property they worked on, which (through a lawsuit) can eventually be used to sell the property to pay the outstanding amounts owed to the contractor. Several other important characteristics of the lien system are not the subject of this article. 

    Lenders, such as a property owner’s mortgagee, are mainly concerned with construction liens for several reasons. First, suppose the contractor eventually does manage to have the property sold to pay their lien. In that case, it will require the mortgage lender to forgo the interest revenue on the mortgage that they were expecting over the term of the mortgage. Property owners may be subject to penalties for this.  Secondly, and more importantly, construction liens prioritize all other encumbrances on the title (i.e. other mortgages). As you can imagine, this is particularly concerning to mortgage lenders. There are many exceptions to this priority system. If the contractor eventually sells the property, the onus is on the mortgage lender to prove that their mortgage falls within one of those exceptions. The sale proceeds will be used to satisfy their mortgage first rather than the contractor’s lien. This legal obstacle is one a mortgagee may not appreciate. 

    For most residential property owners, a construction lien is not particularly concerning to their mortgage lender. Construction liens do not take priority over registered mortgages that were written before the lien registration period commenced. While not the case in every scenario, the construction lien registration period is typically when a contractor begins work on the property. As a result, mortgage lenders may be concerned if a property owner commences construction while obtaining mortgage financing. 

    Many mortgages have a rule written into the paperwork stating that if the property owner causes a lien or charge to be registered on the title to the property, then the mortgage lender has the right to pay off the charge or lien and add the outstanding amount to the mortgage. Some mortgages may even consider such a charge to breach the terms and advance the mortgage, requiring the entire amount to be paid immediately. 

    The construction laws in Ontario are designed for the benefit of contractors to ensure they get paid for the services they provide. It’s the reason construction liens are such a powerful remedy. Many mortgage lenders will find an exception to ensure their interest is protected. However, a construction lien can make a dispute with a contractor much more complicated than an outstanding invoice. If you have concerns with a contractor who may contemplate registering a lien against your property, contact the construction law lawyers at Walker Law Professional Corporation. 


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    Walker Law Professional Corporation

    Tanya Walker obtained her law degree from Osgoode Hall at York University in 2005 and her Honours Bachelor of Commerce with a minor in Economics from McMaster University in 2002. She was called to the Ontario Bar in 2006 and created Walker Law a litigation law firm in 2010. Tanya is currently serving a term as Bencher of the Law Society of Ontario; elected by her peers as not only the first Black elected female Bencher from Toronto, in the 220-year history of the Law Society, but also as one of the youngest sitting Benchers.
 Tanya is a frequent speaker on legal issues to the Toronto Community and regularly appears on the CTV Show, Your Morning as a legal expert. She has also been named in the 2017 and 2018 Lexpert Guides as one of the Leading Lawyers to Watch in Corporate/Commercial Litigation and is also the recipient of the 2018 Women’s Business Enterprise of the Year Award.

 Tel: 647-342-2334 ext. 302 
 Email: tanya(at)tcwalkerlawyers.com


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