Over the past few years Ontario has been hit by a wave of fraudulent real estate transactions involving identity fraud; that is, people either forging or fraudulently conveying or mortgaging properties using the identity of the registered owner. Most of the property in Ontario is registered under a land registration system called the Land Titles Act (the “Act”). The Act is a Torrens system of title registration which guarantees the title as shown on its parcel register.
A year ago, the leading case in Ontario was the Ontario Court of Appeal decision in Household Realty Corp. v. Liu, which held that a fraudulent transfer or mortgage was valid and enforceable once registered, and that a forged mortgage was valid because the lenders did not participate in the fraud. That meant that title was considered “immediately indefeasible” (i.e., impossible to annul or void) and, in a series of Ontario cases, innocent owners lost their title or had it subject to a valid mortgage or charge and needed to apply for compensation to the Land Titles Assurance Fund (the “Fund”) that exists under the Act to compensate those prejudiced by that statute. That raised important insurance issues in Ontario, because title insurers were greatly impacted by such reasoning. In Ontario, a residential title insurance policy provided coverage after the date of the policy for forgery where someone else claimed an interest in or a lien against the property. That clearly covered the identity fraud that was occurring. In addition, a title insurance policy, as an indemnity insurance policy, included a duty to defend the title and, therefore, to deal with the litigation related to such fraud and to make a claim against the Fund. Title insurers used those advantages to market their product and sold a number of policies to existing homeowners because of such concerns. At the same time, title insurers suffered because they were often bearing the costs of such claims and rarely were compensated by the Fund.
In the last year, there have been changes to the law in Ontario that affect the growing impact of real estate title fraud on residential homeowners in the province. The first was the enactment by the Province of the Ministry of Government Services Consumer Protection and Service Moderation Act, 2006 (“Bill 152”), which amended the sections of the Act impacted by title fraud. The second was the decision of the Ontario Court of Appeal in Lawrence v. Wright (“Lawrence”) in which the court reversed the position previously taken by Ontario courts in respect of title fraud. The third was an amendment to the Rules of Professional Conduct for lawyers in Ontario.
Bill 152 solved the problem by making it clear that, in cases of fraudulent conveyances, the deferred indefeasibility model operates. That reversed the position taken in all of the cases decided before last fall and means that the initial transfer or charge is invalid. However, a subsequent transfer from the interim owner to an innocent purchaser or chargee would be indefeasible.
Clearly the deferred indefeasibility approach exposes title insurers to greater risk. A title insurer was never at risk when it insured a fraudulent purchaser or lender because of the policy exclusions. However, previously an “innocent” insured purchaser or lender would have obtained good title and the title insurer would not be called upon to compensate the insured as it was the Fund that was compensating the true owner. It should be noted that Bill 152 affirms that the Fund is a fund of last resort and that a title insurer is not able to collect from the Fund.
The Ontario government, in addition to enacting Bill 152, also made submissions when the Lawrence case was heard last fall by five Justices of the Court of Appeal, including Ontario’s Chief Justice. The Court spent some time reviewing the position put forward by the Province of Ontario as to the deferred indefeasibility model. The Court looked at the earlier cases, including the reasoning set out in the Court of Appeal’s decision in Household Realty and concluded “both the result and that reasoning to be incorrect” and adopted the deferred indefeasibility model.
Rules of Professional Conduct
Earlier this year, the body that regulates lawyers in Ontario, the Law Society of Upper Canada, joined the fight against title fraud by amending the Rules of Professional Conduct for Ontario lawyers to require that lawyers acting for both purchasers and lenders, as is commonly the case, provide both of the clients all material information relevant to the transaction in writing. The commentary to the Rule suggests looking for matters such as recent price escalation or recent transfers, even if not instructed to do so by the parties. The goal is to assist the parties in discovering fraud or other illegal activity.
Impact on Title Insurance
In Ontario, it is still prudent for a purchaser or lender receiving a conveyance of a home to title insure for several reasons. First, if the conveyance is fraudulent, the party could be the “intermediate owner” and the title or charge would be void as it was made pursuant to a fraudulent instrument under the current law. Second, the title insurance policy covers future fraudulent acts such as a later fraudulent transfer or charge. Third, as a title insurance policy is an indemnity policy, a title insurer is obliged to pay the litigation costs to protect the title that the title insurer has insured whether as an intermediate owner or a true owner obtaining rectification of title. Fourth, if a property owner loses title or has title subject to a charge, a title insurer would have an obligation to pay under the policy once the title question has been settled. A claim for compensation under the Act would require going through the process of showing, in addition to proving the claimant is unable to get compensation from other sources, that the claimant has met the obligation of doing reasonable due diligence (as set out by the Director of Titles) and the claim has been made within a six-year time limitation period. In addition to the cost and delay of applying to the Fund, these are all possible ways to lose compensation. The change to the Rules of Professional Conduct may disclose and eliminate some fraud, but won’t eliminate the need for such coverage. Accordingly, a purchaser or lender initially acquiring title to a home will still wish to obtain title insurance coverage.
Some Final Remarks
Since Bill 152 and the Lawrence case do not eliminate the risk of title fraud itself, only modify which parties maintain title and which need to claim compensation from the Fund, title insurers still have an insurance product that has a strong position in the residential market in Ontario. Unfortunately, since it is now clear that title insurers cannot obtain compensation from the Fund and innocent insureds, such as lenders who commonly purchase title insurance, will not be given the insured title or charge, the cost of providing that coverage may result in title insurance premium increases unless this wave of title fraud in Ontario is brought under control.