Title

As the purchaser or lender in a real estate transaction, you need to ensure that your investment is secure. As a purchaser, you need to obtain good title to the property and be confident that the property is not subject to any liens, encumbrances or other defects. As a mortgage lender, you need to ensure that the borrower is credit worthy and they will be able to continue to make regular mortgage payments. Also, you will need to ensure that if the borrower defaults on his mortgage payments, you have sufficient security in the property to at least offset the majority of your lost investment. As a mortgage lender, an appraisal of the current value of the property is important. An environmental assessment is also vital to ensure that the property is not contaminated. A lender must also know that the borrower has good title to the property, and in the case of a foreclosure or power of sale that you will be able to have clear title free of any liens, encumbrances or title defects. Traditionally, purchasers and lenders have relied on their lawyer to provide an opinion on the state of title on which the purchaser or lender could rely on in order to close the transaction. The purchaser or lender could rely on their lawyer having conducted proper due diligence so as to be able to provide such an opinion.

A recent development in Ontario real estate has been the advent of title insurance. Title insurance has been in existence in the US real estate market (residential and commercial) for many years prior. Title insurance has only become a recent development in Ontario in the past ten years. Title insurance is a policy of insurance that protects consumers in the event of an unexpected title problem arising following closing. Certain off-title inquiries that would be normal for the purchaser’s solicitor and/or lender’s solicitor are not conducted and the title insurance company provides coverage if a problem arises post closing that would have been revealed by a standard search. In Ontario, various title insurance companies are now operating, including Stewart Title Guaranty Company, First Canadian Title, Chicago Title Insurance Company. The Law Society of Upper Canada also operates and runs a title insurance product called TitlePLUS.

Title insurance has become the norm in residential real estate transactions in Ontario. For commercial transactions, the value of the transactions is generally much greater and the purchasers and/or lenders often require confirmation prior to closing that they will be obtaining good title to the property or in the case of the lender, that they are getting a good and valid mortgage on the property. Title insurance premiums are based on the value of the particular purchase and/or the mortgage amount of the loan transaction and therefore, for higher value commercial transactions it often makes sense for the purchaser and/or lender to conduct a full search of title including all off-title inquiries. Title insurance provides protection against various title problems that are listed as insured risks under the particular policy. Title insurance is not a guarantee for purchasers or lenders but rather as with most insurance policies, it is an indemnity and the insured party must prove damages prior to any claim being approved and paid. Standard title problems that are covered under a title insurance policy include arrears of property taxes, zoning by-law violations, existing work orders and any encroachments that would be revealed by an up-to-date survey. One of the big advantages of title insurance is that it can often expedite the closing process. Standard searches that are required for a solicitor to provide an opinion often take a long time to be received from the various governmental authorities where as a title insurance policy can usually be issued in a matter of days. If the purchaser and/or lender is faced with tight time lines on closing, they can choose to rely on a title insurance policy to protect their interest in the property. Also, title insurance companies can reduce the cost to the purchaser and/or lender in that certain searches are not required to be conducted such as zoning compliance and tax certificates. Title insurance also provides limited coverage in the case of title fraud, which is of great value in the case of a residential transaction. Title insurance companies are also very good at tailoring their particular policies to the actual transaction being contemplated and insurance companies will often underwrite and provide particular insurance for purchasers and/or lenders for actual title problems revealed before closing. One of the negative features of title insurance is that the purchaser and/or lender is often closing the transaction without a complete understanding as to the current state of title on all title matters. They are taking a risk by not conducting certain searches prior to closing. An insured risk may become a problem at a later stage. The claims process is “no fault” based but it is such that the insured party must prove damages relating to an insured risk under the policy prior to the title insurance company providing compensation.

The decision that the purchaser and/or lender must make in whether to obtain a title insurance policy or not depends on the particular circumstances of each transaction. In the case of residential transactions the fraud coverage alone that is provided by all major title insurance companies is a good enough reason to pay the policy premium amount and obtain the policy. That is not to say however that certain off-title searches should not be conducted even if title insurance is obtained. For instance, in the case of a cottage transaction, it is always advisable to obtain an up-to-date survey given the unique circumstances facing cottage properties such as riparian rights and septic location issues. In the case of commercial transactions, title insurance again must be considered on a case to case basis. The cost of obtaining a complete title search along with all required off-title searches must be compared to the cost of the title insurance policy and the advantages and disadvantages weighed in each case. Many commercial lenders are now requiring a loan policy issued by a major title insurance company in their favour prior to closing. Often times these policies are required in addition to the solicitor’s opinion on title that the mortgage company is getting a good and valid first mortgage on the property.

I believe that title insurance companies will continue to work with real estate solicitors so that the clients are able to obtain the best coverage possible for each particular transaction. In each particular case, it is important for purchasers and lenders to discuss the options available with their lawyer. Your lawyer can advise you as to the appropriate path to proceed whether it be the traditional solicitor’s opinion on tile and/or a policy of title insurance.