Anonymised, illustrative composite. An Ontario quick-service restaurant in a leased unit, a tenant allowance credited against rent, and a lien claim that reached the landlord’s own freehold interest — not the target’s balance sheet.
At a glance
A buyer acquired the assets of a quick-service restaurant franchise location operating from a leased unit in an Ontario shopping centre, for $1,050,000. Eighteen months earlier the tenant had built out the space: a $760,000 leasehold improvement contract with a general contractor, of which $300,000 was a landlord tenant allowance — credited against the tenant’s rent over the balance of the lease term under the lease’s own construction schedule — and the remaining $460,000 the tenant funded directly from its own working capital.
The diligence team’s construction-lien checklist had been built for own-premises deals: confirm the target’s holdback obligations, confirm no liens are registered against title to the target’s own real property. Applied here, that checklist returned a clean result, because the target does not hold title to anything. It is a tenant.
A change-order dispute between the general contractor and the tenant, unresolved since before the acquisition, left two of the contractor’s subcontractors unpaid. They registered $96,000 of construction liens against the shopping centre premises — not against any asset the target itself owned, because the target owned nothing the liens could attach to. The liens attached to the landlord’s freehold interest in the building, a party who was never a signatory to the construction contract and never engaged the subcontractors directly.
The buyer’s own-premises checklist had no line for this, because it assumes the target is the owner whose interest the lien reaches. Where the target is a tenant, the statute routes the exposure through a different provision entirely, and the balance sheet the diligence team was reading is not where the risk sits.
Total liens registered: $96,000. Of the $760,000 leasehold improvement contract, $300,000 was the landlord-funded tenant allowance, accounted for under the lease’s own construction and rent-credit terms; $460,000 was funded by the tenant directly and never touched the landlord’s side of the ledger. The statutory cap on the landlord’s own exposure is 10% of the payment accounted for under the lease — 10% of $300,000, or $30,000. The remaining $66,000 of the lien claim reaches only the tenant’s leasehold interest, not the landlord’s freehold and not the target’s other assets beyond that leasehold interest itself.
Section 19(1) of the Construction Act, under the marginal note “Leasehold interest,” provides: “If the interest of the owner to which a lien attaches is leasehold, and if payment for all or part of the improvement is accounted for under the terms of the lease or any renewal of it, or under any agreement to which the landlord is a party that is connected to the lease, the landlord’s interest is also subject to the lien, to the extent of 10 percent of the amount of such payment.” This is a wholly different provision from s.22, which governs a payer’s own holdback obligation on its own contract. Section 19 answers a different question — not how much a payer must retain, but whether a THIRD PARTY’s freehold interest, one that never contracted for the work at all, can be reached by a lien arising from someone else’s construction contract. The unit of analysis is not the target’s balance sheet; it is the landlord’s own title, and only to the extent the lease itself financed the work.
Two further features of s.19 change what a landlord can and cannot do in response. Subsection (2) protects lien claimants against the landlord’s own remedies: “No forfeiture of a lease to, or termination of a lease by, a landlord, except for non-payment of rent, deprives any person having a lien against the leasehold of the benefit of the person’s lien.” And where a landlord does intend to terminate for non-payment of rent while a lien is registered, subsection (3) requires notice to every registered lien claimant, and subsection (4) gives that claimant a narrow window to protect its position: a person receiving that notice “may, within ten days thereafter, pay to the landlord the amount of the unpaid rent, and the amount so paid may be added by that person to the person’s claim for lien.” None of this exists on an own-premises file, because there is no landlord in the picture to notify and no lease for a lien claimant’s rights to survive.
The contrast with the general holdback mechanic is the whole point. Section 22(1) requires each payer to retain 10% of what it pays on its own contract, against its own exposure. Section 19 asks a narrower and different question specific to a leasehold structure: does the improvement’s financing run through the lease at all, and if so, how much of the landlord’s own interest does that expose. A diligence checklist that only knows how to ask the s.22 question will find nothing wrong on a tenant fit-out, because it is asking the wrong provision to answer a question the wrong provision cannot answer.
The purchase agreement was revised before closing to require the vendor to discharge or bond off the $96,000 of registered liens as a condition precedent, and the buyer separately confirmed with the landlord’s counsel that the landlord’s own $30,000 exposure under s.19(1) would be resolved as part of that discharge rather than left outstanding against the premises the buyer was about to occupy under an assigned lease. The deal closed with the liens discharged and no exposure carried forward on either the landlord’s interest or the assigned leasehold.
Had the liens remained registered through closing, the buyer would have taken an assignment of a leasehold interest already subject to $96,000 of construction liens, with the landlord separately exposed on $30,000 of that through no act of its own — a fact pattern that gives a landlord real leverage to refuse consent to the lease assignment altogether, or to demand terms as the price of granting it, independent of anything in the asset purchase agreement between buyer and seller. A diligence process that never asks the s.19 question would not have flagged that leverage until the landlord’s consent letter came back with conditions nobody had budgeted for.
The tell is a lien checklist with no line item for “is the target a tenant or an owner.” A construction lien exposure built entirely around a payer’s own holdback obligation silently assumes the target owns the real property the work was done on. On a leased location, that assumption is wrong on its face, and the statute answers a completely different question once it is corrected.
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