The vendor sold the building the week after the contractor finished it, and distributed the proceeds. The Construction Act had already turned them into somebody else’s money — by the act of selling.
At a glance
A numbered company owned a 74,000 square foot industrial building in the Greater Toronto Area and had just completed a $3.9 million re-fit — new roof, dock levellers, a sprinkler upgrade and a full electrical service replacement — to make it leasable. Eleven days after the certificate of substantial performance was published, it sold the building for $6,850,000 to an owner-occupier.
The general contractor was owed $412,000 — the basic holdback plus two disputed change orders. The vendor’s position was the ordinary one: the contract debt was the vendor’s, the vendor was solvent on closing, and the buyer’s comfort was a representation, an indemnity, and a search of title showing no registered liens.
Eight days after closing the numbered company distributed $1,940,000 to its shareholder and paid $276,100 of trade payables that had nothing to do with the building. By the time the contractor moved, the vendor had $18,000 in the account and an indemnity it could not fund.
The buyer’s comfort had been right about one thing and wrong about the thing that mattered. It was right that the contract debt was the vendor’s liability. It was wrong that the sale proceeds were the vendor’s money.
The section defines its own arithmetic, and the whole file turns on doing it exactly rather than approximately.
Consideration received by the owner as a result of the sale: $6,850,000.
Less the reasonable expenses arising from the sale — agency commission $205,500 and vendor’s legal fees and disbursements $18,400: $223,900.
Less the amount paid by the vendor to discharge the existing mortgage on the premises: $4,410,000.
Trust fund for the benefit of the contractor: $2,216,100.
Against a debt of $412,000. The vendor was not short of money on the closing date; it had five times what it owed, sitting in a fund it was not permitted to touch. Eight days later it had touched all of it.
Two wrong readings of the same section produce two wrong answers. Treating the gross $6,850,000 as the trust makes the discharge of the vendor’s own mortgage a breach, which the section expressly excludes. Treating “what was left after the distribution” as the trust makes the fund nil and the trust self-extinguishing, which would make s.9 pointless. The trust is fixed at the moment of sale on a defined net, and what the trustee does afterwards changes the trustee’s exposure, not the size of the fund.
Construction Act s.9(1) is headed Vendor’s trust and it fires on the transaction: “Where the owner’s interest in a premises is sold by the owner”, an amount equal to the value of the consideration received, less “the reasonable expenses arising from the sale and the amount, if any, paid by the vendor to discharge any existing mortgage indebtedness on the premises”, “constitutes a trust fund for the benefit of the contractor”.
Section 9(2) then names the trustee and states the prohibition: “The former owner is the trustee of the trust created by subsection (1), and shall not appropriate or convert any part of the trust property to the former owner’s own use or to any use inconsistent with the trust until the contractor is paid all amounts owed to the contractor that relate to the improvement.”
Read the two together and the mechanic is unusual in this corpus: it is the only one where the act of selling is itself what creates the obligation. Section 8 imposes a trust on amounts owing to or received by a contractor; s.7 on amounts an owner receives for financing an improvement. Section 9 is the one that fires because a sale happened.
Two escape valves exist, and neither helped here. Under s.10(1), “every payment by a trustee to a person the trustee is liable to pay for services or materials supplied to the improvement discharges the trust of the trustee making the payment” to the extent of the payment — so paying the contractor works, and paying anybody else does not. Under s.11(2), where the trustee paid for the improvement out of borrowed money, “trust funds may be applied to discharge the loan to the extent that the lender’s money was so used by the trustee, and the application of trust money does not constitute a breach of the trust”. The re-fit here had been funded from operating cash, not from the mortgage, so there was nothing to shelter.
The buyer, incidentally, was never the trustee. Section 9(2) names the former owner. That is the double edge of the section: the buyer is not exposed to the trust, and equally cannot rely on the vendor being able to fund an indemnity out of money the vendor was never entitled to spend.
The contractor sued the numbered company for breach of trust and joined its sole director personally under s.13(1)(a), which extends liability to “every director or officer of a corporation” who assents to or acquiesces in the breach. The distribution to the shareholder was documented in a directors’ resolution the director had signed, which removed most of the argument about assent. It settled at $412,000 plus costs.
The buyer was untouched, but not because of the indemnity. Its counsel had taken a $412,000 holdback from the price on closing, against the certified contract, and paid the contractor directly out of it. The holdback worked; the indemnity would not have. For the parallel where an unpaid contractor’s remedy runs against the land rather than the money, see liens that attached sixty days after a certificate; for who else can be named personally when trust money moves, see effective control that reached past the directors.
Had the buyer relied on the vendor’s covenant alone, it would have been an unsecured claimant against a shell, behind a contractor with a statutory trust claim and a lien right against the very premises the buyer had just bought. The contractor’s lien had not expired — the certificate had been published eleven days before closing — so the alternative to paying $412,000 out of a holdback was defending a lien on the buyer’s own title while suing a company with $18,000 in it.
There is a broader cost the vendor did not price either. The 10 per cent basic holdback under s.22(1) — “Each payer upon a contract or subcontract under which a lien may arise shall retain a holdback equal to 10 per cent of the price of the services or materials as they are actually supplied” — is a separate and additional discipline. A vendor who has retained the statutory holdback and then distributes it is in breach of both s.22 and s.9(2) on the same dollars.
The tell was on the closing statement. It had a line for “net proceeds to vendor” and no line for the construction contract that had been certified substantially performed eleven days earlier. A closing statement that nets to a distributable number in a jurisdiction where the statute nets to a trust number is describing a different transaction from the one taking place.
The practical version: whenever the premises being sold have been improved in the past year, ask for the certificate of substantial performance and the contractor’s outstanding balance before the funds flow, and hold that balance back. It is a cheaper conversation on the day than after the distribution.
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