It is a common understanding among real estate lawyers that residential title insurance will provide protection against municipal work orders and building bylaw violations discovered by buyers after they purchase a home.
But it turns out that not all title insurers offer this protection.
The issue came to light recently in the case of Paul and Stefanie Macdonald v. Chicago Title Insurance Company of Canada. Back in April, 2006, the Macdonalds bought a house in Toronto which had been renovated before they purchased it.
They later discovered that, during the renovation, load-bearing walls had been removed, making the second floor unsafe to use. No building permit had been issued for the alterations.
In November, 2013 the City of Toronto issued a work order requiring work to support the floor structure. The Macdonalds did the work and made a claim for the costs under their Chicago Title policy.
The policy itself provides insurance coverage for itemized risks if they affect title on or after the date of the policy, including expenses to repair the structure because of any outstanding notice of violation.
Yet Chicago Title denied the Macdonalds coverage on the basis that it was not covered by the policy.
In October, the couple applied to the Superior Court for a summary judgment. They asked the court for a declaration that they had coverage under the policy, and that the insurer was obligated to compensate them for the money they had spent.
The judge ruled the municipal work order was not a risk covered in the policy because it did not affect the Macdonalds’ “ownership of the land” and therefore did not fall within the definition of “title” in the Chicago Title policy.
The judge’s reasoning was based on the fact that the work order was not registered by the city against the title to the property. The judge was apparently unaware that work orders are never registered against title.
In his decision, Justice John Macdonald (no relation) noted that the owners have the “entire right, title and interest” in the house “just as they did before they knew of the deficient and dangerous nature of what they purchased. Their title is as marketable now as it always was.
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 a search would have revealed.
Clearly, work orders affect title and they become the purchaser’s responsibility if title is transferred without dealing with the violation. In my view, the case was wrongly decided and the owners were entitled to a successful claim on their title policy.
In December, the application for summary judgment and the court case itself were both dismissed. Gavin Tighe, lawyer for the Macdonalds, has filed a notice of appeal.
Would a similar claim have been honoured by other title insurers? I was advised by a representative of TitlePLUS that their standard policy wording would have protected the owners. I believe that policies issued by Stewart Title and First Canadian Title would also have covered this situation.
The lesson to be learned from this case is that buyers and their lawyers should always review the wording of their title insurance policy, and choose their insurers very carefully.
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 firstname.lastname@example.org, phone 416-364-9366 or fax 416-364-3818.
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