The typical secured creditor is a lender. Frequently, however, purchasers of real property can also become secured creditors through the mechanism of a purchaser's lien. These liens are a boon for purchasers, but can be troublesome for creditors as the liens will often take priority over other financial charges, including registered unsecured judgments.
The scope and priority of purchaser's liens were recently examined in the case of Pan Canadian Mortgage Group.1 The British Columbia Supreme Court explored their history, noting that when a purchaser of real property provides a deposit or other funds to the vendor in part or whole payment of the purchase price, the purchaser's lien forms an equitable charge over the property. The purchaser thus becomes a secured creditor in the property to the extent of the payments made.2
It is simplest to think of the purchaser's lien as a form of consumer protection. If the vendor fails to perform the contract of purchase and sale, the purchaser can recover the deposit or other funds and is entitled to a lien on the property. However, if the purchaser fails to perform its part of the contract, the lien is lost.
The lien is fairly robust, and can persist even if the underlying contract of purchase and sale is made invalid or rescinded.
In Pan Canadian Mortgage Group, an incomplete residential townhouse development was foreclosed upon. The subject property was sold and the construction mortgage was fully paid out. The remaining funds from the sale consisting of approximately $2.5 million were paid into court.
Two groups claimed priority over the funds. The first group were the purchasers of fully paid prospective townhomes which were to be constructed on the property. They argued that they each had a purchaser's lien over the property and the remaining funds from its sale in order to satisfy their collective advances of approximately $6.2 million. The second group were certain judgment creditors of the owner of the property who held judgments registered against the title of the property. They made various technical arguments in their favour claiming that their unsatisfied judgments of approximately $1.4 million had priority over the claims of the purchasers. The judgment creditors focussed on deficiencies in the purchase contracts including the fact that the contracts were initially entered into with a corporation that did not own the property.
Ultimately the Court held that each of the purchasers did have a purchaser's lien that arose not as a result of contract but through equity. The Court found that the purchasers had a secured charge against the land that was independent of the contract between the parties. The purchasers had intended that their purchase funds would be applied to the development. Their purchase contracts were not completed due to the developer's breach, and not due to any fault on their part.3 The purchasers thus had priority over the judgment creditors to the approximate $2.5 million paid into court.
Why was the construction mortgage paid out first, even before the lien was? In this case, the purchasers agreed, more or less, in contracts of purchase and sale, that the construction mortgage would have priority over any purchaser's lien. (Although not explicitly ruled upon, were it not for this fact, I would expect the purchaser's lien to take priority over the construction mortgage.)
The decision is currently under appeal.
Footnotes
1 Pan Canadian Mortgage Group v 679972 BC Ltd, 2013 BCSC 1078 [Pan Canadian Mortgage Group]
2 Pan Canadian Mortgage Group, at para. 90.
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