Over the past few years, title insurance has become quite popular. So much that there are now some lenders who will not advance mortgage funds without receiving confirmation that title insurance has been obtained in the transaction. There have also been several reports in the media as well (especially after another mortgage/title fraud case comes to light) about the advantages of title insurance.
I am often asked by my clients as to what title insurance is and whether it is mandatory for a purchaser to obtain title insurance.
Title insurance protects the “title” to the property, from losses incurred as a result of unknown title defects or other covered matters that exist at the time of the purchase, but are unknown to the purchaser at that time.
What does title insurance protect the purchaser from? Types of risks that are usually covered under a title insurance policy include: survey irregularities; forced removal of existing structures due to work orders or building code violations; claims due to fraud or forgery; unregistered easements and rights of-way; lack of pedestrian or vehicle access to the property; unpaid taxes; etc. For a risk to be covered, generally it has to have existed as of the date of the policy. As with any type of insurance policy, certain types of risks might not be covered, for example, native land claims and environmental hazards are normally excluded.
A couple of days ago, a client of mine called me in a panic. He purchased the property no more than a month ago and had just received a notice of outstanding taxes from the municipality. The outstanding tax amount was $12,089.00!!! Before he called me, he had, of course contacted the tax department at the municipality thinking that this was an obvious mistake on their part. The municipality had confirmed to him that the previous owners (the sellers) had not paid taxes for the past 3 years and there was an outstanding tax amount of $12,089.00, inclusive of penalties and interest.
I immediately got in touch with the sellers’ solicitor. After much back and forth correspondence, we got to the bottom of the issue. Turns out that the sellers had thought that their mortgagee was paying the realty taxes. The mortgagee had thought the sellers were making the tax payments. Someone somewhere had dropped the ball. The purchaser, however, was left holding the tab! I reassured my client that we had obtained title insurance at the time of the closing of the purchase transaction and that unpaid taxes would be covered by the title insurer. I notified the title insurer and provided them with copies of all required closing documents. Within days the outstanding taxes were paid by the title insurer.
Is title insurance mandatory? – No, title insurance is not mandatory. However, the alternative to title insurance is a “Solicitor’s Opinion on Title”.
What is a Solicitor’s Opinion on Title? – Put simply, that would be the solicitor telling the purchaser and the lender that the purchaser has a good and marketable title to the property. A solicitor’s opinion is limited to the state of the property as of the date of closing and must be qualified by many matters including the accuracy and authenticity of searches obtained, both on and off-title as well as any defects that might be revealed by an up-to-date survey. Title insurance specifically covers most unknown title defects and errors in survey and public records.
When title insurance is obtained, there are several searches that are not necessary such as zoning, building, work orders, rent control, hydro, water, gas, fire department, licensing, health department, etc. Each of these searches has a fee associated with it. Also, if the property is not title insured, then the lender will require an up to date survey of the property.
The cost savings far outweigh the one-time premium and the protections go beyond what a lawyer’s opinion can provide.
What will title insurance NOT cover? – Title insurance will not cover the functionality or quality of the property or any changes to the current use of the property as well as known defects or any defect that was disclosed to the purchasers before the transaction closed.
This exclusion is important for both the purchaser and the real estate agent to understand. A real estate agent is required to make reasonable inquiries and convey information to the purchaser. If a defect is known prior to closing most title insurance companies will work with the parties to provide insurance. Note that under the standard OREA form of the Agreement of Purchase and Sale, there is provision that where the purchaser raises a valid objection in writing to the seller as to title or to any outstanding work order or deficiency notice or to the fact that the present use of the property may not lawfully be continued, and the seller is unable to remove, remedy or satisfy these objections, the seller has the option to obtain title insurance in favour of the buyer and any mortgagee (at the seller’s expense, of course) insuring over such defects or deficiencies. If the sellers refuses to remove, remedy or satisfy the objections or to obtain the title insurance, then the buyer may terminate the agreement.
If you have further questions, feel free to contact me.