Title Insurance and Real Estate Transactions

TITLE INSURANCE

(By Sally H. Burks of Perley-Robertson, Hill & McDougall, LLP)

This paper will provide you with basic information on the use of title insurance by lawyers in real estate residential and commercial transactions in the Province of Ontario.

Currently in Ontario, there are two choices for assuring title to a property being purchased:

1. A legal opinion on title from a lawyer, which has been the traditional method of completing real estate transactions; or

2. Title insurance offered by private insurance companies.

The Law Society of Upper Canada’s Rules of Professional Conduct obligates lawyers to discuss with their clients all options available to protect their interests in real estate transactions. Lawyers must be able to discuss with their clients whether title insurance is appropriate in a transaction and which title insurance product is best if title insurance is appropriate.

Title insurance is not a substitute for a lawyer’s services in a real estate transaction. Title insurance is a tool to be used by the lawyer to assist the client in purchase and mortgage transactions when appropriate. Lawyers continue to search the title to properties and provide their title opinion to the insurer. A full title search required for a purchase transactions remains unchanged. The title search on a refinance, where a title insurance policy is purchased for a mortgagee, usually requires that the title search commence at the last arms length transaction with an inspection of the land transfer tax affidavit to determine if any mortgages were assumed.

Title Insurance in Residential Purchase and Mortgage Transactions

Title insurance may guarantee a purchaser’s interest in title against hidden and undisclosed risks that may not be revealed by the traditional method of searching. It may also insure against problems which are generally excluded from a solicitor’s opinion on title. If records are inaccurate and search results faulty, title insurance may cover a problem.

A residential title insurance policy will generally cover the following items:

· liens or defects in title

· property defects that would have been revealed by an accurate and up-to-date survey

· work orders

· zoning and setback non-compliance or deficiency

· fraud

· forgery

· duress

· incompetence

· incapacity or impersonation

· charges incurred for public utilities (other than final meter readings)

· lack of a building permit for additions

· someone else building a structure on the insured’s land after the policy date (other than a fence or boundary wall)

· other risks as set out in the policy

It is possible to arrange for additional coverage under the title insurance policy by way of special endorsements issued by the company. In some cases endorsements are offered to the mortgagee but not the purchaser as the mortgagee’s risk is less than the purchaser.

Most of the coverages afforded under the title insurance policy are effective only as of the closing date of the transaction so that occurrences following closing are not covered.

There are exceptions and exclusions to the title insurance policies for such matters as Aboriginal claims, environmental issues, government claims, crown patent and mining rights. Coverage for septic systems and wells are generally not included unless certificates can be produced.

As with other types of insurance, it is necessary to provide the insurer with accurate information. If the lawyer or the client know of a problem with a property that problem must be disclosed to the insurer in order to have coverage.

With the title insurance policy the lawyer is relieved from conducting the off title due diligence searches for the items covered. Often the savings are substantial to the client. Particularly, the relief from not having to have a new survey of the property prepared can be a saving which off sets the cost of obtaining the title insurance policy. Surveys may cost in the neighbourhood of $1,000 and other off title due diligence inquiries may cost $900 to $1000.

A typical cost for a title insurance policy to cover only the purchaser is $216, to cover only the mortgagee in a purchase transaction is $216, to cover only the mortgagee when refinancing is $108 and to cover both the purchaser and the mortgagee in a transaction is $270. (Prices effective July 2004 in Ontario, Canada. Ed.)

The purchase of a title insurance policy may allow for a fast closing of a transaction. Sometimes, due diligence cannot be completed quickly depending on the nature of the search and the municipality involved. Municipalities can take a very long time to produce certificates of compliance. With title insurance a closing may take place within several days.

The City of Ottawa, for example, historically has taken a month or longer to respond to zoning and work order inquiries although there has been a recent promise of speedier responses.

Title Insurance in Commercial Transactions

A lot of the same concepts apply to title insurance for commercial transactions. However, because the value of the property is usually greater in a commercial transaction, the risk to the insurer is also greater. Accordingly, insurers will request that more due diligence be completed by the lawyer.

In some cases, the necessary due diligence required by the insurer is so onerous that there is no cost saving to the client. Transactions cannot close more quickly in these circumstances because the due diligence search responses must be received in the same manner and within the same time frames as an uninsured transaction.

The due diligence searches required for the mortgagee in a commercial transaction are fewer than for the purchaser so it may make sense to purchase a title insurance policy for the mortgagee.

Title insurance in commercial transactions can facilitate large closings in many jurisdictions and cross border transactions as well. For example, in a transaction involving the purchase of a chain of two hundred restaurants located in many different provinces, there is gap coverage available for the period during which funds are held until registration is completed in each jurisdiction. Title problems may be insured (depending on the severity of the problem) which can allow for a swift closing.

Premiums for commercial title insurance are based on the purchase price of the property or the value of the mortgage and may simply be too onerous bearing in mind that much of the due diligence investigations must also be paid for on behalf of the purchaser in any event.

Hazards of Title Insurance

Title insurance is not a magic bullet to solve all problems. It is important to know what title insurance does not cover and what it does cover. Although title insurers offer survey coverage it does not offer any coverage should, say, fences not be located on the boundary of the property.

It is important to retain a lawyer who can determine whether title insurance is appropriate and which is the best product. The application form for title insurance must be completed carefully so that coverage is not later denied. Full disclosure must be made to the title insurer.

One purpose of the title insurance policy is to insure over certain potential problems. But a purchaser should be aware if there are problems with a property for safety and other reasons.

Conclusion

Title insurance has a place in real estate transactions, especially those involving complicated land deals and financings. It should be viewed as complimentary to the traditional process of investigation of title and title due diligence rather than as an alternative. It is common sense that substantial financial commitments should not be made without full knowledge of all the pertinent facts, potential liabilities and inherent risks in the venture.

One senior lawyer in town compares the use of title insurance to a person going to his or her doctor for a yearly check up and the doctor saying that she can either do an ECG, listen to the patient’s lungs, order blood and other tests or the patient can simply purchase an insurance policy which would pay out when the patient dies. It’s a balancing of risks.