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Archive for December, 2016

Supreme Court upholds title-insurance victory

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. He can be reached at bob@aaron.ca . Visit his website at aaron.ca. Twitter @bobaaron2


Foregoing inspections means losing lawsuits


What happens if you discover water flowing below the floor in a newly-purchased house and you have to completely gut the basement to remove toxic mould? Who is responsible?

That was the problem facing Eric Smith and his mother, Louise, after they bought a house in October 2011.

During his first inspection of the house, Eric asked the owner if he had ever had any water problems in the basement and was told “no.” The seller later told Eric that there had been a water problem in the basement in 2002, but it had been fixed.

The Smiths decided not to have a home inspection because the male buyer and seller were both members of the Freemason’s fraternity and “could trust each other.”

Although it was important to the Smiths that the property had not had any water problems, the offer which was drawn up by their lawyer made no mention of that issue.

After closing, the Smiths hired a carpenter to paint the house and do basement repairs. The carpenter discovered that the basement carpet was wet. Water was flowing under the floor, the floor strapping was completely black with mould, and there was no vapour barrier between the concrete and the strapping.

There was also mould on the baseboards and in the basement drywall, all of which had to be removed.

Mould spores were discovered in the ceiling and on the walls of the fireplace.

Water damage was discovered in the basement bathroom and in the stairs. Electrical wires in contact with heating vents and water pipes presented a serious danger and had to be repaired.

Mould was also discovered in four locations upstairs.

Eventually, the Smiths sued the sellers for repair costs of $85,000 calculated at the modest rate of $15 an hour paid to their carpenter. The damages amounted to almost half of the $167,500 purchase price of the house. The buyers’ claim to the courts was based on fraudulent misrepresentation and concealing of a dangerous hidden defect.

The law in this area is caveat emptor: buyer beware. If there are no representations or warranties in a purchase agreement, a seller is not liable in damages to a buyer, but there are exceptions:

  • Where the seller fraudulently misrepresents or conceals an issue;
  • Where the seller knows of a hidden defect which makes the house unfit for habitation, and fails to disclose it to the buyer;
  • Where the seller is reckless about statements made relating to the fitness of the house for habitation.

After a four-day trial, the judge threw out the buyers’ claim. He ruled that they had not inserted any contractual protections in the offer. “I find,” he wrote, “that the sellers were ignorant of the water drainage/leakage and mould contamination issues anywhere in or around the house.” He added that “this is not a case of concealment.

“The sellers saw nothing that led them to understand the problem was recurring, nor was there anything that should have led them to that conclusion.”

Not only did the Smiths lose the case, but they had to pay their lawyer as well as a portion of the defendants’ legal bill.

The lessons to be learned from this sad case are:

Rule 1: Always insert a home inspection condition in an offer to purchase;

Rule 2: If you ignore Rule 1, insert representations and warranties in the agreement about the condition of the property;

Rule 3: if you ignore Rules 1 and 2, don’t expect to be compensated for any problems you discover after closing.

Bob Aaron is a real-estate lawyer. He can be reached at bob@aaron.ca , on his website aaron.ca and on Twitter @bobaaron2.