The Supreme Court of Canada has written the final chapter in one of the most important title-insurance cases of this generation.
The story began when Paul and Stefanie Macdonald bought a Toronto house that had been badly renovated by a prior owner.
During their own renovations, the couple discovered that load-bearing walls had been removed without the required building permits. As a result, the second floor of the house became unsafe to use.
Eventually the City of Toronto issued a work order requiring remedial steps to support the unsafe floors.
The Macdonalds did the work themselves at a cost of $75,000 and made a claim for the costs under their insurance policy with Chicago Title. The policy provided coverage to the owners if the title was unmarketable, which means that a buyer could refuse to complete a purchase agreement.
Chicago Title denied the owners’ claim on the basis that it was not covered by the policy.
In October 2014, the Macdonalds asked the Superior Court for a declaration that they had coverage under the policy for the remedial work and repairs, and that the insurer was obligated to compensate them.
When Chicago Title asked the court to dismiss the claim, the judge ruled the municipal work order resulted from what was essentially a hidden physical defect and was not covered by the policy.
The court reasoned that the work order did not affect “ownership of the land” since it was not registered on the title to the property. The judge was apparently unaware that work orders are never registered against title.
In Ontario, work orders — even though not registered on title — continue to affect a property after ownership is transferred. Historically, Ontario lawyers included a municipal search for outstanding work orders in their due diligence for a property purchase. Often, this search is no longer necessary based on the assumption that title insurance will protect the owner against whatever the search would have revealed.
Last year, the Ontario Court of Appeal reversed the trial decision and ruled that the title insurer was liable for the cost of repairs and more than $50,000 in costs. A central part of the court’s ruling was that a significant but hidden physical defect made the title unmarketable, and the insurance policy covered the owners for that.
Writing for the Court of Appeal, Justice William Hourigan cautioned that Canadian courts must interpret title-insurance policies to ensure that “consumers are treated fairly and that their reasonable expectations are protected.”
Last month, the Supreme Court of Canada dismissed the insurer’s appeal and upheld the ruling of the Ontario Court of Appeal.
Although the result was a win for the Macdonalds and for homeowners in general, the Supreme Court’s conclusion runs contrary to centuries of common law that has underpinned marketability of title.
The ruling effectively means that a house with significant hidden construction defects has an unmarketable title.
Speaking to a Law Society program for real-estate lawyers last week, Jeffrey Lem, Ontario’s director of titles, explained that a toxic waste dump might be totally unmarketable, but could have a pristine title with clear ownership and no mortgages.
In the wake of the Macdonald case, some title insurers have amended their policies to exclude coverage for significant hidden defects.
Lawyers cannot assure buyers that there are no material hidden physical defects in their properties. Going forward, the risk of assuming them may rest with buyers or those title insurers who will still provide this coverage.
Bob Aaron is a Toronto real estate lawyer and frequent speaker to groups of home buyers and real estate agents.
He can be reached by email at email@example.com, phone 416-364-9366 or fax 416-364-3818.
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