Top court rules holdback shortfall is measured against unpaid invoices only
A ruling from the Court of Appeal for Ontario has tightened the circumstances under which construction liens can leap ahead of a building mortgage in receivership proceedings — delivering a measure of certainty to the private lenders, mortgage funds, and real estate debt investors that finance Canadian development.
Released July 13, the decision in KingSett Mortgage Corporation v. Mapleview Developments Ltd., 2026 ONCA 512, dismissed an appeal by two suppliers who argued they were owed a larger priority payment from the proceeds of a court-supervised sale.
The case turned on a narrow but consequential question under Ontario's Construction Act, R.S.O. 1990, c. C.30: when calculating a shortfall in the required statutory holdback, do you measure against every invoice submitted, or only the invoices left unpaid?
The answer, the three-judge panel unanimously held, is the unpaid invoices — at least where no subcontractor lien claims are in the picture at the time of the priority dispute.
What the holdback is — and why it matters
Under Ontario's Construction Act, any party paying for construction work must retain 10% of the invoiced price as a holdback until lien claims expire or are resolved. That reserve exists so subcontractors and suppliers have a fund to draw against if they go unpaid.
When a project falls into insolvency, construction liens can outrank a building mortgage, but only to the extent of any shortfall in the holdbacks that should have been set aside.
The Barrie, Ontario townhouse development at the centre of the dispute went into default on its senior loan from KingSett Mortgage Corporation, with the Ontario Superior Court appointing a receiver on March 21, 2024. The project was later sold to homebuilder Dunsire Homes Inc.
By that point, the two suppliers — Alpa Stairs and Railings Inc. and Newmar Window Manufacturing Inc. — had been paid in full on their earlier invoices but were still owed roughly $195,600 and $445,800 respectively on later ones.
Receivership filings involving builders' liens have increased sharply across Canada's major urban markets, making clarity on how priority claims are calculated increasingly valuable to lenders and their brokers.
What the court decided
The suppliers argued their priority claim should equal 10% of their total invoiced amounts — roughly $110,000 and $292,400.
Dunsire, which stepped into KingSett's shoes as the party bearing the cost of any priority payable, argued the calculation should apply only to the unpaid portion of each contract.
Writing for the panel, Justice Osborne sided with Dunsire. Where an invoice has been paid in full and no subcontractor holds a competing lien claim at the time of the dispute, he held, no shortfall in the required holdback exists in relation to that invoice — because the contractor has already been paid and there is no one else who could benefit from it.
Reading the statute the other way, the court found, would produce a result that is "commercially absurd": a contractor would collect the same 10% twice — once when the owner paid the full invoice without deducting the required holdback, and again as a priority claim against the lender arising from the very shortfall created by that earlier overpayment.
The ruling affirmed a 1992 precedent from the Ontario General Division, Dufferin Concrete Products v. Waterbrooke Development Ltd., and confirmed that longstanding principle for the first time at the Court of Appeal level.
What it means for lenders and brokers
Real estate receiverships have been rising steadily across the province. A key risk in any distressed project workout is the size of the construction lien reserve that must be funded before a sale can close.
The court's ruling narrows that exposure in one specific scenario: where the owner paid contractor invoices in full without deducting the holdback, and no subcontractor lien claims remain outstanding at the time of the priority dispute.
In those circumstances, lenders can now rely on appellate authority that fully paid invoices will not re-enter the calculation as a fresh source of lien priority.
The panel was explicit that the ruling does not cover every situation. Where subcontractor lien claims are outstanding at the time of a s. 78(2) dispute, the court noted, the result may be different.
Brokers structuring construction deals or advising clients on the risks tied to distressed residential development projects should note the importance of the subcontractor question.
Whether any trades are unpaid at the time a receivership crystallises will now be one of the variables that determines how far lien claims can cut into a senior lender's recovery.
The appeal was dismissed with agreed costs of $40,000.
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