A decision of Alberta’s Court of Queen’s Bench in late 2021 addressed whether a construction holdback could be matrimonial property, irrespective of the fact that under typical construction circumstances, it would not .

The facts in Carvalho v Carvalho, 2021 ABQB 933 https://canlii.ca/t/jkgdv are straightforward. Tanya and Belarmino Carvalho were a married couple that owned a house in Fort McMurray which was so badly damaged by the disastrous forest fire of 2016 that it needed to be rebuilt from the foundation up. The couple separated in 2018, but even though they were separated, the parties took out a construction mortgage in late 2018 to rebuild the home The mortgagor was the Royal Bank of Canada, and the mortgage amount was $483,116.00. Power Sparks Electric Ltd., a company in which the Carvalhos held equal shares and of which Mr. Carvalho was the directing mind, became the general contractor on the project.

The parties entered into a comprehensive separation agreement that took effect in late October of 2020. Once the matrimonial home was completed, the agreement provided that any equity would be divided in equal shares between them in a final settlement of the matrimonial property issues, with Mr. Carvalho assuming the mortgage and title to the property. By this time, Mrs. Carvalho had relinquished her share of the company to her husband. Although Mr. Carvalho did a lot of the work himself, he also hired subcontractors when needed. The mortgage proceeds had been deposited into the wife’s lawyer’s trust account where they were drawn on five times throughout 2020 to pay for materials and labour. An amount roughly equal to 10% of the mortgage was retained in the lawyer’s trust account as a holdback; that figure was $48,331.14. Mr. Carvalho submitted a Certificate of Substantial Completion on October 20, 2020, but Mrs. Carvalho’s lawyer refused to release the holdback, arguing that the money in the trust account constituted matrimonial property so should be applied toward his client’s share under the settlement agreement.

Among the various arguments Mr. Carvalho put before the Honourable Justice Mah were: the actual cost to rebuild the home had escalated because the state of deterioration was worse than originally thought due to the house being left vacant for 18 months and exposed to the elements; that he had borrowed money from private sources to cover these additional costs; and because of a declining real estate market, the home was not worth what it once was.

First of all, Justice Mah looked to the separation agreement to ensure its validity. He found that it conformed to the requirements as set out in the Matrimonial Property Act and that both parties had received independent legal advice before signing. A compelling factor for him was that  Mr. Carvalho had signed the agreement just three days after he had submitted a Certificate of Substantial Completion, which led the judge to infer that he must have known of the costs associated with the project, including any costs associated with borrowing additional money to supplement the mortgage proceeds.

To calculate the equity in the home, the agreement provided guidance as it required each party to retain a professional appraiser to do a market appraisal of the finished house. The two values would then be added together and divided by two to arrive at the appraised value. The mortgage amount of $483,116.00 would then be subtracted from the final appraised value to arrive at the equity in the property. From this, Mr. Carvalho would pay his wife half the value in cash. A minor complicating factor arose though in that the parties decided for some reason to get two appraisals each. So, at the end of the day, the judge simply added each respective pair of appraisals, then added the resulting two sums, divided by two to get a final appraised value. He subtracted the mortgage amount from this figure to get the amount of equity and halved this to arrive at the payout amount owed to Mrs. Carvalho.

However, Mr. Carvalho argued he should not have to pay his half-share of the equity to Mrs. Carvalho but that she owed him instead because, among other things, he had run up additional costs in rebuilding the house. However, the judge was having none of it. He determined that Mr. Carvalho knew exactly how much the project was costing him because he had signed the Certificate of Substantial Completion three days before he signed the settlement agreement. Moreover, the parties had each received independent legal advice prior to signing the agreement so neither could come back after the fact to argue the agreement was unfair.

Justice Mah arrived at a practical solution to the matter. Having determined that the separation agreement and more particularly the formula for calculating equity was valid and thus legally binding, he ordered Mr. Carvalho to transfer to Mrs. Carvalho his half share in the equity of the matrimonial home, which represented a figure of $$67,376. If Mr. Carvalho failed to do so on or before 30 days from the date of this decision, he was ordered to provide a Statutory Declaration to Mrs. Carvalho’s lawyer and the $48,331.14 being held in the lawyer’s trust account as a construction holdback would become matrimonial property and thus transferred to Mrs. Carvalho with judgment for the balance of the equity in the matrimonial home to be entered against Mr. Carvalho.