As a lawyer who practices in the area of real estate (conveyancing, mortgages, foreclosures, and litigation) I have concluded that title insurance is an important tool to protect lenders. This position is contrary to the position of many “real estate jockeys” who are satisfied relying exclusively on “protocol” and “real property reports” in closing real estate transactions. A recent Ontario case, CIBC Mortgages Inc. v. Computershare Trust Co. of Canada, 2015 ONSC 543, is illustrative of the value of title insurance for lenders.
In the Computershare case the owners of the property were presumed by Justice Murray of the Supreme Court of Justice of Ontario to have fraudulently discharged the first mortgage which had been registered against the property. Subsequent to discharging the first mortgage the owners continued to make payments under the first mortgage for over a year. The owners then sought out a new first mortgage and a new second mortgage both of which were registered on the title. Shortly after doing so the owners stopped making payments under the original first mortgage and the new first and second mortgages. This led to all three mortgages mortgagees bringing an application to court to settle priority.
Justice Murray of the Supreme Court of Justice of Ontario concluded that, notwithstanding the principles of indefeasibility, the first mortgage was discharged fraudulently and therefore should be re-registered in priority to the new first and second mortgages. This result is quite shocking from the perspective of the new first mortgagee and second mortgagee. The new first mortgagee (now second) and second mortgage (now third) are left to claim against any excess equity in the property after the original first mortgage and if this sum is insufficient to claim against the owners of the property personally. The lender may have a claim against the "assurance fund" of the Land Titles Office but this was not addressed in the decision. If this transaction occurred in Alberta the lender may have recourse to sections 168 and 170 of the Land Titles Act (Alberta) which provide:
Protection of bona fide purchasers and mortgagees
170(1) Nothing in this Act is to be so interpreted as to leave subject to action for recovery of damages, or to action of ejectment, or to deprivation of land in respect of which the purchaser or mortgagee is registered as owner, any purchaser or mortgagee bona fide for valuable consideration of land under this Act on the plea that the purchaser’s transferor or the mortgagee’s mortgagor has been registered as owner through fraud or error, or has derived title from or through a person registered as owner through fraud or error, except in the case of misdescription as mentioned in section 183(1)(e), if the purchaser or mortgagee has made all reasonable efforts to confirm that the transferor or mortgagor is the registered owner of the land.
It is important to note that these sections do not make it automatic that the Registrar will pay out a claim and in fact section 170 creates an onus on lenders to have have ".. made all reasonable efforts to confirm that the transferor or mortgagor is the registered owner of the land". This threshold might suggest that it might be prudent for lenders to obtaining appropriate title insurance.
Actions against Registrar
168 Any person
(a) who sustains loss or damage through an omission, mistake or misfeasance of the Registrar or an official in the Registrar’s office in the execution of the Registrar’s or official’s duties, or
(b) who is deprived of any land or encumbrance or of an estate or interest in any land or encumbrance
(i) through the bringing of it under this Act,
(ii) by the registration of another person as owner of the land or encumbrance, or
(iii) by an error, omission or misdescription in a certificate of title,
and who by this Act is barred from bringing an action for the recovery of the land or encumbrance or interest in the land or encumbrance,
may bring an action against the Registrar for the recovery of damages.
Protection of bona fide purchasers and mortgagees
170(1) Nothing in this Act is to be so interpreted as to leave subject to action for recovery of damages, or to action of ejectment, or to deprivation of land in respect of which the purchaser or mortgagee is registered as owner, any purchaser or mortgagee bona fide for valuable consideration of land under this Act on the plea that the purchaser’s transferor or the mortgagee’s mortgagor has been registered as owner through fraud or error, or has derived title from or through a person registered as owner through fraud or error, except in the case of misdescription as mentioned in section 183(1)(e), if the purchaser or mortgagee has made all reasonable efforts to confirm that the transferor or mortgagor is the registered owner of the land.
(2) The protection for a purchaser or mortgagee referred to in subsection (1) commences when the purchaser’s or mortgagee’s instrument is registered.
It is important to note that these sections do not make it automatic that the Registrar will pay out a claim and in fact section 170 creates an onus on lenders to have have ".. made all reasonable efforts to confirm that the transferor or mortgagor is the registered owner of the land". This threshold might suggest that it might be prudent for lenders to obtaining appropriate title insurance.
The Computershare decision motivated me to look further about the principles of indefeasibility in Alberta. In this respect I reviewed the words of Professor Bruce Ziff in his text the Principles of Property Law . At p.474 of his 5th Edition, Professor Ziff stated: “A title is indefeasible when it cannot be vitiated by some antecedent act that might undermine the validity of the current rights.” The principle of indefeasibility stems from our Torrens land titles registration system and more particularly from section 60(1) of the Land Titles Act (Alberta)
Obligation affecting land
60(1) The owner of land in whose name a certificate of title has been granted shall, except in case of fraud in which the owner has participated or colluded, hold it, subject (in addition to the incidents implied by virtue of this Act) to the encumbrances, liens, estates and interests that are endorsed on the certificate of title, absolutely free from all other encumbrances, liens, estates or interests whatsoever except the estate or interest of an owner claiming the same land under a prior certificate of title granted under this Act or granted under any law heretofore in force and relating to title to real property.
60(1) The owner of land in whose name a certificate of title has been granted shall, except in case of fraud in which the owner has participated or colluded, hold it, subject (in addition to the incidents implied by virtue of this Act) to the encumbrances, liens, estates and interests that are endorsed on the certificate of title, absolutely free from all other encumbrances, liens, estates or interests whatsoever except the estate or interest of an owner claiming the same land under a prior certificate of title granted under this Act or granted under any law heretofore in force and relating to title to real property.
I located a chapter dealing “Priorities and Registration” which explicated the Torrens land registration system (of which Alberta uses) and also explicate how fraud against title is an exception to the principle of indefeasibility. Professor Ziff reminds purchasers and lenders, and their legal counsel, of “Indefeasbility and its Qualifications”. Professor Ziff identifies the constructs of “immediate” and “deferred” indefeasibility and reviews how fraud has been treated in the history of case law in Alberta. Professor Ziff reviewed the Holt, Renfrew& Co. Limited v. Henry Singer Limited, 1982 ABCA 135 case. The Holt case was in respect of a purchaser which asserted priority over an unregistered lease. The majority of the Alberta Court of Appeal concluded that the determination of when a fraud has been perpetrated is dependent upon the alleged fraudster having “more than mere knowledge that there is an unregistered interest”. In the Holt case the purchaser was not bound by the lease notwithstanding having some knowledge of its existence.
Professor Ziff contrasted the Holt case with the Alberta (Forestry,Lands and Wildlife) v. McCulloch, 1991 ABCA 291 case. In the McCulloch case the Alberta Court of Appeal ordered that a Caveat giving notice of a right of repurchase which had been inadvertently discharged by the Registrar of the Land Titles Office should be reregistered against the title which had been transferred. The Court concluded that “knowledge of the unregistered interest, by itself, does not constitute fraud” and stated “for there to be fraud, the knowledge must be used for an unjust or inequitable purpose”. In the McCulloch case the Court concluded that such purpose was present.
This historical Alberta case law provides some insight into the recent result in the Computershare case. In the Computershare case the owners of the property acted in such a manner that their fraud was an exception to the principle of indefeasibility. In a recent exchange which I had with a “real estate jockey” I again insisted that many lawyers in Alberta relied too heavily on “real property reports” and protocol closing as a rationale for avoiding obtaining title insurance. Having now reviewed the Computershare case and the historical Alberta cases mentioned above, I have concluded that lenders might be wise to better protect themselves against fraud by obtaining title insurance particularly if they are not instructing their legal counsel to take "all reasonable efforts".
