CONSTRUCTION LIENS WHEN WORK ORDERED BY TENANT

Persons taking part in the construction or renovation of a building may be entitled to register a lien on the building called a legal hypothec to secure their claims to the extent of the increase in value added to the building as a result of the work, materials or services provided.

An essential condition for the right to register a legal hypothec is that there must be a contract between the owner and the builder. The subcontractors and suppliers of material who transact with the builder must also disclose their subcontracts to the owner to protect their rights. The rational for this system is that the owner, after being made aware of the existence of the subcontractors and suppliers of material, may choose to pay them directly or withhold payment from the builder until the latter provides releases from the subcontractors and suppliers.

Often, a commercial lease may provide that substantial renovations or leasehold
improvements be made to the leased premises. A recent case decided by the Superior
Court, District of Montreal, involved substantial ventilation and plumbing work that was carried out at the express request of the tenant in premises that were leased for the operation of a factory.1 The construction contract was concluded between the tenant and the builder. The subcontractor disclosed the existence of its subcontract to the tenant.

Although it was proven to the satisfaction of the Court that the owner was aware of the existence of the construction agreement as well as the nature of the work to be carried out by the tenant and it authorized the tenant to carry out the work to the leased premises, the owner did not legally bind itself to pay the sums due to the builder or the subcontractor upon the completion of the work in the event that the tenant failed to do so. Furthermore, the owner personally had direct contact and was consulted by the engineers who were responsible to design important parts of the work and the owner followed the progress of the work on a regular basis. The owner even participated, to a certain degree, in the development of the tenant’s project insofar as he made changes to the premises to facilitate the execution of the work. The Court concluded, however, that these elements were insufficient to establish that the work was carried out at the request of the owner.

Although it was clear that no contract had been entered into directly between the owner and the contractor, in certain circumstances, the terms of the lease could expressly or implicitly designate the tenant as the agent of the owner with respect to the construction of the leasehold improvements or renovations. In such a case, even if the contract is entered into directly between the tenant and the contractor, the owner would be considered to be a party to the construction contract and legally bound by the tenant, acting as his authorized agent. This would allow the builder and the subcontractors to register their construction liens against the owner’s property. Unfortunately for the builder and subcontractors, the evidence in this case did not support their argument.

Even if the construction agreement would have been binding on the owner of the building, the right to register a legal hypothec would still be limited to the increase in value added to the building by the work and materials. In the Calomat case, the builder and subcontractor built an entire factory in the leased premises for the tenant at a substantial cost. Although the material and equipment installed by the builder and subcontractor were certainly useful, if not indispensable, to the operation of the tenant’s business, the Court held that they did not add any significant value to the building nor were they physically incorporated into the building so as to form an integral part of it. They were only attached to the building in order to allow a part of the building to be used for the industrial production purpose envisioned by the tenant. They conserved their individuality and could be removed from the leased premises without seriously damaging the building or rendering releasing impossible. In the circumstances, even if the construction agreement would have been entered into directly with the owner, the builder and subcontractor would still not have had a right to register a construction lien because the work and materials did not significantly increase the value of the building.

The lesson for the builder and subcontractor from this case is that the construction contract should be entered into directly with the owner and that the identity of the latter should be verified by consulting the title to the property at the land registry office. Otherwise, the builder and subcontractor should take appropriate precautions to ensure that the tenant is financially able to meet its obligations pursuant to the construction agreement and the subcontracts.

1 Centre D’Isolants Calomat Inc. vs. La Plomberie Fury Inc. et al., 2010 QCCS 3425.