Xemex Contracting Inc v Koor Energy Ltd, 2023 ABKB 577

Court of King’s Bench of Alberta Citation: Xemex Contracting Inc v Koor Energy Ltd, 2023 ABKB 577 Date: 20231012 Docket: 2201 01829 Registry: Calgary Between: Aspen Properties (Northland Place) Ltd. Appellant/ Defendant - and - Xemex Contracting Inc. Respondent/ Plaintiff - and - Koor Energy Ltd. Defendant _______________________________________________________ Reasons for Decision of the Honourable Justice R.A. Neufeld _______________________________________________________

Appeal from the Endorsement Decision by J.R. Farrington Filed on the 25th day of March, 2023 I. Introduction [1] Aspen Properties (Northland Place) Ltd (“Aspen”) appeals an Applications Judge decision in which it was decided that abuilder’s lien registered against a small downtown commercial/office building had been validly registered. The lien was filed by XemexContracting Inc. (“Xemex”) in respect of work it had done under contract with a tenant of Aspen, for which it had not been paid.

Thetenant (Koor Energy Ltd) did not defend an action brought by Xemex and did not take occupancy of the premises, leaving it in a state ofdisarray for Aspen. [2] At issue before the Applications Judge, and for this Court on appeal, is whether Aspen’s fee simple ownership of thebuilding can properly be subject to a lien. This turns on whether Aspen was an “owner” as defined in s.1(

j) of the Builder’s Lien Act (nowthe “Prompt Payment and Construction Lien Act”): (j) “owner” means a person having an estate or interest in land at whose request, express or implied, and i. on whose credit, ii. on whose behalf, iii. with whose privity and consent, or iv. for whose direct benefit work is done on or material is furnished for an improvement to the land and includes all persons claiming under the owner whose rightsare acquired after commencement of the work or the furnishing of the material; [3] The Applications Judge found that Aspen was an “owner”, as the work was done at Aspen’s implicit request and Aspendirectly benefitted from it.

Consequently the lien was declared to be valid. [4] Decisions from an Applications Judge are reviewable on a standard of correctness. Appeals are to be conducted on a de novobasis. On appeal, new evidence may be provided, and new arguments made. Alternatively the parties may simply reargue their positions,relying on the previously filed affidavits and case authorities.

That is the case here. [5] The decision of the Applications Judge correctly began its analysis of the validity of the lien by referencing the findings ofour Court of Appeal in Royal Trust Corp of Canada v Bengert Construction Ltd (1988), 1988 ABCA 58 , 85 A.R. 210, asquoted in the more recent ABCA decision of Acera Developments Inc v Sterling Homes Ltd, 2010 ABCA 198: “...the concept “request” in s.1(j):- it must be decided on the facts of each individual case; it does not necessarily involve a directcommunication by alleged owner to contractor; it does involve more than mere knowledge or consent.

In ordinary language the word “request” indicates the idea of an active or positive proposal, as contrasted with mere passivity oracquiescence. Webster groups it as a synonym with “ask” and “solicit”, synonyms which agree in meaning “to seek to obtain by makingones wants or desires known”. “Requests”, he says has a suggestion of greater courtesy and formality in the manner of asking”. [6] The Applications Judge went on to conclude that according to the case law, the common element of an “ownership” findingis that there was “something more” present beyond mere knowledge that the construction was taking place.

The leasehold improvementinducement, together with the approval and monitoring activities of Aspen were, in the opinion of the Applications Judge, sufficient toclassify it as an “owner” of the renovation project and therefore subject to a valid lien. [7] Aspen argues that the Applications Judge erred in his application of the case authorities to the facts of this case. It says thatthe building construction guidebook, including the approval of plans, placement of insurance, and identification of procedures to be usedduring construction, is not directed at the tenant improvements themselves.

Rather, those protocols and procedures are directed atensuring that the work done on site do not adversely affect the building, other tenants, or the landlord. For example, the guidebookimposes requirements on use of common areas during construction, noise mitigation, use of elevators, use of loading docks, andresponsibility of contractors and subcontractors to comply with occupational health and safety laws. More importantly, the actualactivities of the landlord during the construction fell far short of what the landlord could theoretically have done under the terms of theConstruction guidebook.

For example, at no point did the landlord approve plans other than those pertaining to work that could affect thebuilding itself, or other tenants, and at no point did the landlord conduct inspections or give specific directions to Xemex. [8] Xemex responds that the Applications Judge correctly found that the purpose of participating in the project is irrelevant.Even if Aspen was only participating to protect its other tenants and the structural integrity of its building its participation was sufficientto make it an owner of the project for the purpose of the Act.

Xemex also says that the landlord benefitted from the renovation workdone as owner of the improved building.

II.

Assessment [9] As noted in Royal Trust Corp of Canada v Bengert Construction Ltd (1988), 1988 ABCA 58 , 85 A.R. 210, casesinvolving liens placed against fee simple owners by contractors working for tenants must be decided on their own individual facts andcircumstances. [10] If there is a common thread to the case authority regarding owner liability (for builders lien purposes) it is that once the ownerof property moves beyond being a passive, or knowledgeable observer of work done on their property and becomes actively involved inthe project they will be at risk of having their interest in the land subjected to a lien.

For landlords, this means that if a tenant wishes toundertake work on a building, an important decision must be made: that is, whether to distance oneself from potential liability to lienclaimants (on default of the tenant), or incur that risk in order to make sure that the work is properly done, will not adversely affect thebuilding and other users, and will in the event of default by the tenant actually improve the building rather than detract from it. [11] Although individual cases vary in result, the case law provides some direction as to the markers of active participation thatmay lead to a finding that a landlord is an “owner” of a project.

For example, if a landlord approves plans for leasehold improvementsand conducts inspections it is much more likely to be found to have actively participated in the project (and hence impliedly requestedthat it be undertaken): Providing inducement for tenant improvements would fortify such a finding by making it clear that the landlordknew of such plans in advance (at least in a general way), and indeed facilitated the work through financial incentives.

Similarly if alandlord benefits directly from the work done such as through improvements to areas occupied by the landlord itself, or through sharingin increased revenue due to the improvements, a finding of active participation is more likely to be made as the direct benefit of theimprovements may explain why the work was impliedly requested in the first instance. III.

Did Aspen expressly or impliedly request the work tobe done? [12] Xemex argues that Aspen actively participated in the renovation, in the following ways: by issuing a comprehensive manualdealing with 1. the prerequisites for approval of construction by the landlord (approval of demolition by the landlord, and a City demolitionpermit: approval of architectural, mechanical, structural and electrical drawings by the landlord’s property manager/project manager; acity of Calgary building permit; and proof of insurance; 2. procedures for minimizing construction impacts on and within the building; 3. security measure, procedures and responsibilities; 4. loading dock procedures; 5. eevator use requirements and restrictions; 6. hours of work restrictions; 7. garbage disposal requirements; 8. recommended waste diversion methods; 9. restrictions on use of common areas; 10. approval by landlord of X-Ray, coring cutting and chipping activities and plans; 11. procedures for and approval of work affecting base building systems such as HVAC, electrical, Plumbing, Life Safety; 12. requirements for life safety systems, including use of designated subcontractors; 13. restrictions on hoarding; 14. construction cleaning requirements; 15. occupational health and safety requirements and responsibility; [13] All of the foregoing were to be accepted by the contractor in advance.

Xemex complied by signing the acknowledgementspecified in the manual. [14] In addition to the requirements of the manual itself, Xemex says that Aspen took a hands-on approach during the renovationproject. It assigned three employees to liaise with Xemex, one of whom acted as the facilitator of the first construction kick-off meetingheld before Xemex started work. It reviewed and approved plans as submitted by Xemex, as required by the manual.

It had meetingswith Xemex and its subcontractors, conducted walk throughs, reviewed the initial bid, reviewed building permits, change orders andinvoices, and required Xemex to execute a Prime Contractor Agreement Assignment and Assumption of Prime contractor Status letteraccepting liability for OHSA obligations and indemnifying Aspen. [15] Aspen does not deny having put these protocols, procedures and restrictions in place. It argues that the purpose of those

restrictions was to protect itself, its building and its other tenants from the potentially adverse impacts of construction. The purpose wasnot to encourage or facilitate improvement of the building for Aspen’s advantage. Aspen argues that the Applications Judge erred in lawby finding that the purpose of Aspen’s “active participation” was irrelevant to the issue whether there was an implied request by Aspenthat Xemex undertake the renovation Project.

It also says that when Xemex left the job due to lack of payment by Koor Energy Ltd, theproject was in a state of disarray, and unsuitable for marketing without substantial investment (estimated at $6-$8 per square foot). [16] Where it is alleged that a landlord became an “owner” of a project under the Act by virtue of controls exercised over theproject, the landlord’s purpose or objectives in doing so is relevant to the ownership issue.

This is relevant not only to the question ofwhether there was an implied request that the work be done but also to whether the work as performed would be of be direct benefit tothe landlord.

Ultimately, both prongs of the definition of “owner” inform the basic policy of ensuring that those who own land are notunfairly benefitted by those who provided work or materials for its improvement and who remain unpaid. [17] It follows that if the purpose of participation in a project by a landlord in leasehold improvements by a tenant was to preventthe contractor from doing work in a way that would adversely affect others in the building (or the building itself), that should beconsidered as one factor in deciding the “ownership” issue. [18] To that extent, I respectfully disagree with the decision below. [19] I do not however disagree with the finding of active participation.

Not only was Aspen entitled to review and approve variousaspects of the renovation plans, it actually did so. It was also actively involved in discussions with Xemex regarding constructionplanning, kick-off and execution, all in an effort to facilitate an orderly and safe construction program. For example it provided checklistsfor Xemex to follow to prevent construction delays and detailed procedures for ensuring that work done on the renovation would beintegrated with existing building systems.

It also kept itself informed of change orders and invoicing matters. [20] I therefore agree with the Applications Judge that Aspen’s conduct went beyond that of a mere knowledge of the project andbecame one of active participation. This is sufficient to ground a finding that Aspen implicitly requested Xemex to perform therenovation in accordance with its protocols and procedures, satisfying the first component of the definition of “owner” in the Act.Aspen’s purpose is becoming actively involved was not however the pursuit of a direct benefit from the renovation project. I turn to thedirect benefit question next.

IV. Direct Benefit [21] Under the terms of the lease agreement negotiated between Aspen and Koor Energy Ltd, Aspen agreed and indeedincentivized Koor Energy Ltd to renovate the demised premises. By clearing the way for the premises to be leased, the renovationbenefitted both the landlord and the tenant. [22] It is not as clear that Aspen received a direct benefit from the renovation, as that term is used in the Act. [23] In Royal Bank of Canada v 1679775 Alberta Ltd, 2019 ABQB 139, Justice Graesser of this Court reviewed the evolution ofthe case law interpreting the meaning of “direct benefit”.

At paras 140-143 he states: “[140] Northern Electric [ (SCC), [1977] 2 S.C.R. 762], remains the main binding precedent from the Supreme Courtin this area.

The majority found that the construction activities were for the direct benefit of Manufacturer’s Life as they would share inthe gross revenues from the developed property over the 80-year period of the lease with Metropolitan Projects Limited. [141] No authority has been provided to me, and I am not aware of any other authority, suggesting that a reversionary right toimprovements at the end of a lease or on termination of the lease by the landlord for tenant default, without more, is a “direct benefit” tothe landlord. [142] Northern Electric found a direct benefit because the chambers judge and the Supreme Court concluded that the development wasas much for Manufacturers Life’s benefit as for the developer, Metropolitan.

In Hamilton v Cipriani, [ (SCC), [1977] 1S.C.R. 169], the Supreme Court concluded that the Ontario Water Services Commission acted as Hamilton’s contractor (and banker)such that Hamilton became an owner and was liable for liens filed by contractors and suppliers working for the Commission.

In Phoenixv Bird, [ (SCC), 54 N.R. 109 (S.C.C)], the Supreme Court concluded that the improvements were for the direct benefit ofPhoenix and its subsidiary because the construction was in effect for Phoenix’s head office. [143] Before Acera, Suss Woodcraft [ (AB KB), [1975] 5 WWR 57], was the leading Alberta case on “direct benefit.”There, McDonald J (as he then was) found a direct benefit because of the participation rent the landlord was entitled to, not the landlord’sreversionary interest in the improvements at the end of the lease.

McDonald J considered the effect of the reversion at the end of theterm, as well as the potential forfeiture of the improvements to the landlord in the event the tenant defaulted under the lease during theterm.

However, those comments (as well as the comments by the trial judge in Northern Electric referred to in Suss Woodcraft) do nothold that the reversion, or the possibility of forfeiture because of the landlord’s default, constitute by themselves direct benefit.” [24] He concluded that: “[147] All three of the Supreme Court cases, Northern Electric, Hamilton v Cipriani and Phoenix v Bird, make it clear that there mustbe some immediate benefit for there to be a “direct benefit.” A request may be inferred from the immediate benefit that makes it clearthat the improvement is really being constructed at least partly for the imputed owner.” [25] In argument Xemex relied heavily on comments made by our Court of Appeal in Acera regarding the direct benefit issue.

Atparagraphs 37 to 39, Justice Berger (as he then was) stated as follows: “[37] It remains, accordingly, to consider whether the work done and the material furnished by Sterling accrued to the “direct benefit”

of Acera. Acera allowed Sterling to improve its lands. In law, the improvements become attached to the land and are owned by theowner of the freehold. Until the subdivision plan is registered Acera is prohibited from selling the lots, so it must be taken to haveinvited Sterling to improve the lands “for its [Acera’s] direct benefit”. Acera owns the freehold, therefore it owns the improvements,therefore it is directly benefitted. Having allowed Sterling in as a tenant-at-will it cannot argue the improvements were done against itswill, i.e. that they were “not requested”.

Paragraph (iv) of the definition of “owner” is satisfied. [38] Acera has failed to transfer the lots in accordance with the lot purchase agreement. Accordingly, Sterling cannot sell the homesto interested third parties. It follows that Acera has directly gained the value of the improvements to the lands and will continue to holdthat increase in value to its benefit as long as it retains title to the lands. In other words, were it not for Sterling’s lien, Acera would keepthe benefit of the improvements.

Therefore, until such time as Sterling is able to acquire title to the homes, the direct benefit from theentirety of the work accrues to Acera. [39] In addition, the contractual arrangement whereby Sterling would build homes in advance of acquiring title to the land included,as I have found, the implied request by Acera of Sterling to do just that. All of this, as I have indicated, took place under the watchful eyeand subject to the stringent building requirements imposed by Acera.

It is apparent, by way of illustration, that strict adherence to Acera’sarchitectural and construction guidelines were intended to facilitate and enhance the development of Acera’s lands. In that sense, mindfulthat it was anticipated that construction would begin before sub-division approval and transfer of the lots was obtained, such constructionwas of direct benefit to Acera.” [26] Like Justice Graesser, it is my view that the comments made by the Court in Acera must be considered in light of the unusualcircumstances of that case.

Acera involved the development of a planned residential development near Cochrane, Alberta. Thedeveloper/landowner (Acera) undertook extensive construction of infrastructure for the community, and detailed planning prior toapproval of the subdivision. Because no subdivision was in place, it had no lots to convey to builders, but was eager to see constructionstart so that marketing and sales could take place as soon as subdivision approval was granted. [27] Sterling Homes entered into an agreement with Acera to buy twelve lots and was encouraged to do so before subdivisionapproval.

Acera was actively involved in approval of the home designs, grades and utilities connections. Sterling started construction,spending approximately $1,700,000 on excavations, foundations and framing before learning that Acera would be defaulting on itsobligations under the agreement.

It was clear that the work done by Sterling conferred an immediate, substantial and direct benefit to theAcera development. [28] I do not consider that Acera supports the proposition that mere legal ownership of leasehold improvements on expiry ortermination of a lease constitutes a direct benefit to the landlord for the purpose of the Act. That may constitute an indirect benefit, butmore is required, such as participation by the landlord in increased revenue from the demised premises, or improvement of areas beyondthose leased in order for a direct benefit to be found.

In other words, I agree with Justice Grasser that Acera was not intended, and shouldnot be read as a change in the law concerning the direct benefit issue as articulated in earlier Supreme Court of Canada cases such asNorthern Electric Co Ltd v Manufacturers Life Insurance Co, (SCC), [1977] 2 SCR 762; Phoenix Assurance Co ofCanada v Bird Construction Ltd, (SCC), 54 N.R. 109 (S.C.C); and Ciprani v Hamilton (City), (SCC),[1977] 1 S.C.R. 169. [29] In this case, I am not satisfied that Aspen would receive any direct benefit from the work done by Xemex.

Its uncontrovertedevidence is that the renovation project was left in a state of disarray and was not complete; the design produced an office layout thatwould not be attractive to prospective tenants, and that to make the space available for marketing would cost considerable money ($6.00-$8.00 per sq foot). The benefit to Aspen’s residual interest in the demised premises was indirect, and of uncertain value. [30] The appeal is therefore allowed and the lien is declared invalid. Heard on the 13th day of September, 2023. Dated at the City of Calgary, Alberta this 12th day of October, 2023. R.A. Neufeld J.C.K.B.A.

Appearances: Michael MacIsaac Norton Rose Fulbright Canada LLP for the Appellant

Sean T. Fitzgerald, KC Miles Davison LLP for the Respondent