"AvoidAClaim" Blog

TitlePLUS has on its website sample forms, letters and reports for the use of real estate lawyers.

Among the useful documents there is a sample real estate retainer letter.

It is provided for your consideration and use when drafting your own versions of these respective documents. It is not meant to be used “as is”. It should be adapted to reflect your firm’s procedures and policies, and will need to be modified to correspond to different areas of practice.

Statistics Canada reported, in the fall of 2012, that the number of Canadian households headed by unmarried couples is at an all-time high.

As families change, so do views about property. Fewer Canadians now see marriage as a prerequisite to home ownership. But many aspects of property law reflect a time when marriage was more common. When purchasing property with another person – whether a romantic partner or anyone else – keep in mind that there are ownership options: Buying together doesn’t have to mean owning equal shares.

Traditionally, when spouses purchased a home together they took title (ownership) “in joint tenancy”. This form of ownership means that the parties own equal “overlapping” half-shares (or third shares if there are three parties, etc.) in the entire property. When one party dies, his or her share automatically goes to the other party – and not to the deceased party’s dependents, if any. The expectation was, of course, that the parties would have shared dependents (children of the marriage) who would eventually inherit from the surviving parent.

Not only is this arrangement problematic for homebuyers who have children from previous unions (who might never inherit from the survivor), it also doesn’t make sense in certain other situations.

Consider a scenario in which a large downpayment comes from one of two joint purchasers. (The money may be an inheritance, a lottery win, or even just one person’s hard-earned savings.) The purchasers may intend to contribute equally to the mortgage payments after purchase, but they may want the initial unequal contribution to be compensated for somehow. A simple way to do this is to take ownership as “tenants in common”. The shares owned by tenants in common need not be equal: The parties in our example could agree to take 70 per cent and 30 per cent shares, respectively.

A share in a property owned by tenants in common can be sold or willed (left to heirs in a will) independent of the other shares. This means that partners who have children from former unions can will their shares to their own children.

This won’t be news to real estate lawyers, but its something lawyers in other areas that might overlap with real estate (such as wills, estates and family) should keep in mind.

By Nora Rock, corporate writer and policy analyst at LAWPRO

The concept of constructive trust has long been used, in family law, to support the awarding of an interest in property to a common-law spouse who is not on title.

While the concept of the matrimonial home exists to ensure that married spouses share in the family home on marriage breakdown, the matrimonial home rules do not apply to common-law spouses. However, many common-law spouses contribute to the family economy in such a way, during a period of cohabitation, that fairness dictates that they receive a share in property to which the other ex-spouse is on title. To support this kind of transfer, courts often impose, at a party’s request, a constructive trust on certain property.

The Limitations Act, 2002 would seem to impose a limitation period of two years for claims based on constructive trusts. On February 13, 2013, the Ontario Superior Court of Justice rendered judgment in McConnell v. Huxtable (2013 ONSC 948 (CanLII)), a case testing that limitation period. In this case, the applicant ex-common-law spouse Judith McConnell made a constructive trust-based claim against her ex-spouse’s property in February 2012. Her evidence was that the parties had separated in 2007 after a 13-year cohabitation. The respondent Brian Huxtable, relying on the Limitations Act, 2002, argued that her claim was statute-barred.

In refusing to issue summary judgment in favour of Huxtable, the court held that the limitation period applicable to family law-based constructive trust claims is 10 years, as prescribed in the Real Property Limitations Act, not two years.

The court explained that the nature of family breakdown makes it difficult to identify with any degree of accuracy the timing of the breakdown, and hence the moment when the claim for a constructive interest in the other spouse’s property arises. Instead, the claim should be characterized as an “action to recover land’ governed by section 4 of the Real Property Limitations Act, and subject to a 10-year limitation period.

In light of the frequency of claims against lawyers that are based on missed limitation periods, this decision deserves to be welcomed by the Ontario family bar; however, an appeal has been filed. Until a final decision is rendered by the Court of Appeal, we strongly recommend that lawyers file constructive trust claims within two years from the time they are discovered.

On March 15, 2013, The Lawyers’ Weekly published an article titled “LSUC toughens real estate practice rules” in which the author reported that Ontario real estate lawyers “are already paying an extra $500 in annual fees”. We assume that this was intended as a reference to the Real Estate Practice Coverage Option (REPCO) premium,

The REPCO premium is $250 for the 2013 policy year; the same as it was in 2012. While the premium was $500 when first introduced, it has since been reduced on two separate occasions: to $400 for the 2010 policy year, and then to $250 for 2012.

All lawyers who intend to practise real estate law in Ontario in 2013, must be eligible for, apply for and be granted this coverage option before being able to practise in this area of law. This coverage option provides insurance protection to ensure that members of the public, and Land Titles Assurance Fund, are protected against the registration of fraudulent instruments under the Land Titles Act.

See the LAWPRO website for more information on REPCO coverage.

This article by Kathleen Waters, President & CEO of LAWPRO, originally appeared in the Feb 22, 2013 issue of The Lawyers Weekly published by LexisNexis Canada Inc.

Title insurance is one tool that purchasers can employ to reduce some of the risks associated with a real estate purchase.

This may not sound like “news” meriting coverage in a publication for lawyers. However, claims experience here at LAWPRO suggests that the function of title insurance is not fully understood by the bar – and that’s a problem, because in Canada, the bar is usually responsible for explaining it to the public.

The most fundamental title insurance knowledge gap, as we see it, relates to scope of coverage. Canadian residential title insurance is designed to cover defects in the title to property and legal compliance as defined in the policy, not problems with the condition of property, in general. It isn’t an all-inclusive home warranty. This is one of those distinctions that appears clear in theory but can be murky in practice and surprise some homeowners. And surprised homeowners often turn their dismay into anger at their lawyer, whether justified or not.

A related but not identical misunderstanding centers on the effect of the client’s decision to buy title insurance on the lawyer’s overall duties in the purchase transaction. More specifically, some lawyers seem to be confused about the extent to which title insurance relieves them of the duty to consider or recommend other risk-management steps. And you can’t make reasonable recommendations if you don’t understand the coverage in the title insurance policy.

Acting for the purchaser in a real estate transaction is, after all, primarily an exercise in risk management. Distilled down to common denominators, most purchaser-side claims that flow from title-insured real estate deals arise from a lawyer’s failure to consider or address risks that fall outside the coverage provided by a title insurance policy.

Different types of property are subject to different compliance requirements. For example, properties that will be used for commercial purposes are subject to different safety standards (for example, under the Fire Code) than are single-family residential units. Similarly, rental properties must comply with rent control legislation in many provinces. Some title insurance policies cover losses related to, for example, violations of compliance schemes that have been registered against the property in some way or that would have been uncovered by a search letter.

Unaddressed risks can lead to claims when a lawyer relies on the fact that the title insurance policy offers this kind of “violations” coverage, but the lawyer does not understand that this coverage does not extend to the risk of buying a property subject to an undiscovered condition if some part of the solicitor’s duty (outside of obtaining title insurance) could have given notice of the condition.

A reader might protest here that the lawyer is responsible for investigating title, and not for discovering problems that would only be revealed upon expert examination of the physical property or its operations. However, depending on the standard of care (and it evolves over time) the lawyer IS responsible for turning his or her mind to the possibility that there may be such problems, and for informing the purchaser of the potential for risks that might warrant other action – asking the title insurer to “insure over” a particular risk or provide a special endorsement perhaps or for the client to seek other expert assistance. A classic example in Ontario over the years has been rent control compliance. There may be no outstanding violation notice, but helping a client buy an apartment building without the client understanding the impact of illegal rents is a risky undertaking for the lawyer.

Finally, if a client instructs the lawyer NOT to investigate non-covered risks, or if the results of other inquiries are inconclusive or ambiguous, it is the lawyer’s responsibility in typical retainers to advise the client of the impact of the limitations given the purchaser’s intended use of the property. The lawyer’s duty to enquire about the purchaser’s intentions for the property and to recommend appropriate searches or inspections even in a title-insured transaction is clearly described in the Law Society’s “Residential Real Estate Transactions Practice Guidelines” (at Part 2: Due Diligence). Of course, whether or not an unhappy or nervous client then has recourse under the agreement of purchase and sale depends on the individual transaction.

In order to turn his or her mind to the advisability of additional risk-management steps, the lawyer must first, of course, understand the scope of coverage provided under the policy chosen. Title insurance policies vary from provider to provider, and providers have been known to change their coverage over time in response to claims experience. Policies for commercial real estate can differ substantially from residential policies (in general, they tend to offer less comprehensive coverage), and so lawyers who handle almost exclusively residential transactions should take care to review thoroughly policies arranged for commercial transactions. For a commercial transaction, the lawyer is more likely to have to build coverage up, through the addition of specific endorsements, than in a residential transaction. Particular searches and documentation may be required before a given endorsement is made available.

The lesson? When it comes to title insurance, you may know less than you think you know. Don’t operate on autopilot. Determine what is important about the property to the client, turn your mind to potential risks, review the proposed policy, and recommend additional investigation, where appropriate.

I had occasion to learn, recently, about the impact of a power of attorney on a real estate transaction: the most basic lesson being that powers of attorney increase fraud risk. So much so, in fact, that the Law Society of Upper Canada has recommended that their use should be avoided wherever possible in real estate transactions.

Of course, one of the situations in which it may NOT be possible to avoid dealing with a power of attorney arises when it’s in place on the other side of your transaction: For example, where you are representing a purchaser buying from a vendor who is selling through an attorney.

The fraud potential, in this scenario, can take at least three forms: the attorney can have completely fabricated the POA document; he or she could be misusing a POA (for example, for a purpose for which it is not operative); or he or she can have obtained it improperly, for example, through duress.

This fraud potential requires special diligence on your part. Exactly what is required of you MAY depend on whether or not there are any “indicia of fraud” in the transaction; for more about this, consult both the Law Society’s “Guidelines On Powers Of Attorney In Real Estate Transactions” and the reasons in Reviczky v. Meleknia. At a minimum, and even in the absence of any suspicious circumstances, you will need to take a number of basic steps to limit the potential for fraud.

First, determine whether any mortgage lender involved in the transaction (whether or not you are acting for it) is willing to extend the funds where the vendor is acting through a POA, and on what terms. Make the same inquiries of the proposed title insurer, if any.

Next, obtain and carefully review a true copy of the POA to determine whether it provides the authority being relied upon to complete the transaction, and whether it meets formal requirements (for example, under the Substitute Decisions Act, 1992).

Requisition the delivery of a registered copy of the POA.

Carefully review transaction documents signed under the authority of the POA.

Finally, comply with any other investigative steps required by the lender and/or the title insurer.

Want to know more? For a more in-depth discussion of managing risks on BOTH sides of the transaction, see “Powers of attorney and solicitors’ liability: The case law” published in the Summer 2008 edition of LAWPRO Magazine.

2013 is the first year 500,000 Canadians turned 60. It seems like a good time to revisit this article from five years ago, when the first edge of the Boomers were entering their seventh decade. It examines the implications for lawyers of this large and aging clientele.

Click here or on the image above to read this article from the Winter 2007 “Aging Boomers” edition of LAWPRO Magazine. All past LAWPRO Magazine articles can be found at www.lawpro.ca/magazinearchives

• I will ensure I meet with my clients in person at least once: In most real estate practices the staff handle many aspects of the client’s matter. However, ultimate responsibility still lies with the supervising lawyer. Take the time to meet with the client in person to review the transaction and understand the client instructions, particularly with respect to the client’s intended uses of the property. Not every matter is straightforward, and you don’t want to have to be addressing a problem that was only noticed the day the deal is to be closed, or never noticed at all.
• I will remember that the lender is also my client in most residential transactions: Lawyers often forget, because they deal face-to-face with the purchasers, that the lender is also their client and is owed a duty of care. You have to provide any information to the lender that is material to the transaction. The lending clients can bring claims against lawyers for failing to disclose all the relevant information they knew (or ought to have known).
• I will make sure I take my instructions from the person with the true interest at risk in the transaction: At times it may be easier to gather information relevant to the transaction from intermediaries like a mortgage broker or real estate agent. However, in the event of a claim lawyers need to be able to show that they took their instructions from the person with the value at risk in the transaction, or at least have documentation from that person authorizing the lawyer to take instructions from the intermediary in all circumstances.
• I will document my conversations with and instructions from the client: This is the best defence you’ll have against a malpractice claim. The client may only be involved in one or two real estate transactions in their lifetime and will remember the details, while the lawyer who sees countless transactions will likely have little specific recollection of one matter. Keep notes of your conversations with the client and document what you discussed and what actions you took in a detailed reporting letter to the client.
• I will not give my electronic registration password to my clerks or anyone else: Only the lawyer who received the electronic registration credentials provided by the Ministry of Government Services is entitled to use the lawyer disc and password to register an instrument on title using the electronic system. And yet LAWPRO sees claims in which the lawyer allowed (or claims not to have been aware) that someone else in the office was using the password. As tempting as it may be in a busy real estate practice to let the clerk register instruments requiring a lawyer’s electronic signature…don’t.

Click here to see the full list of resolutions taken from New Year’s resolutions for a healthier law practice and a new you, which appeared in the December 2012 issue of LAWPRO Magazine.

The following article by Nadia Dalimonte, claims counsel at LAWPRO, appeared in the November 20 edition of TitlePLUS Today.

It isn’t uncommon for real estate lawyers to be retained to act for both the purchaser of a property and the mortgage lender that is financing the purchase. However, a review of lender claims against lawyers for negligence suggests a misconception by some lawyers who believe that their only obligation to the lender client is to register the mortgage. The reality is that unless the lawyer’s retainer is explicitly limited to registering the mortgage (which should be confirmed in writing where possible), the solicitor should always be mindful of the additional responsibilities that are owed to the lender leading up to the advancement of funds and registration of the mortgage.

Throughout the course of the transaction, solicitors should always consider whether information received from any party, a title search, or other due diligence may be considered information material to the lender’s decision to advance funds under the mortgage. This includes information that may suggest that the property is being purchased at an inflated price. As well, information that suggests that the purchaser is misrepresenting the true circumstances of the purchase should be reported to the lender before the solicitor proceeds to close the transaction and advance funds under the mortgage.

In the case of the institutional lender client, the lawyer does not usually meet with the client prior to the closing but instead may have some exchange of written correspondence with the client. Typically, institutional lenders post their instructions on a website. It is up to the solicitor to check to see if there have been any changes to the standard instructions since the last time the solicitor acted for that lender.

The solicitor must comply with any specific written instructions from the lender to the extent possible and advise the lender of any limitations in the solicitor’s ability to do so. For example, some lenders will require a solicitor to ensure that a particular mortgage payee clause is included in the fire insurance policy for the property. However, given that the solicitor will only have access to an insurance binder prior to closing (which does not include the terms of the policy), it would be prudent for the solicitor to advise the lender client about the limitation on the solicitor’s ability to ensure that the requested mortgage clause is included in the policy prior to closing.

When institutional lenders sell a property under power of sale and suffer a shortfall on the mortgage, the real estate transaction is often reviewed by the lender to determine whether the solicitor that acted was somehow negligent. It is common for LAWPRO to see these types of claims. Therefore, it is especially important for solicitors to be diligent about ensuring that lenders are made aware of all material information prior to advancing funds under the mortgage.

In addition, in many cases, the mortgage lender is not necessarily an institutional lender such as a bank. In light of the commonly held view that real estate is a safe investment, many private individuals use mortgage investments as a means of saving for retirement. Private lenders often engage the assistance of mortgage brokers or trust companies in securing a mortgage investment. These intermediaries are often entrusted by the private lender to provide instructions to the solicitor. However, such retainers can be a minefield if the solicitor is not careful to confirm the identity of the client with the parties and the person from whom the solicitor is taking instructions. It is vital that the solicitor communicate with the “true” (i.e., beneficial) client with respect to all material information. In addition, of course, the solicitor must comply with the Law Society of Upper Canada obligations regarding the completion of documentation (typically a Form 9) which establishes that the scope of the solicitor’s retainer does not include providing advice regarding the value of the investment.

Furthermore, private mortgage investments tend to be higher risk than those entered into by institutional lenders such as banks. Therefore, it is important for solicitors to advise private lenders of information material to the decision to advance funds even if the private lender may be considered a sophisticated client. Such information may include arrears in a prior mortgage or tax arrears on the property. It is also important to ensure that the solicitor follows up with the client regarding all the necessary documentation required in the transaction such as investment authority forms. Once the solicitor’s duty to the client is discharged, the most prudent way to ensure protection from any eventual claim is to confirm all instructions in writing.

Always remember that solicitors owe a duty to protect the interests of lender clients in addition to the interests of purchaser clients.

This article by Kathleen Waters (President & CEO at LAWPRO) originally appeared in the Oct 5 issue of The Lawyers Weekly published by LexisNexis Canada Inc.

Hundreds of real estate malpractice claims find their way to LAWPRO every year. Some involve complex and exotic fact situations, but many do not.

At the heart of most claims is the lawyer’s failure to deliver something the client has requested or expected. Where the deliverable is at the heart of the deal − keys or money − the client will promptly draw the lawyer’s attention to a failure to deliver. Deliverables that are less connected to the client’s immediate needs, like a title insurance policy, are easier to overlook.

Failing to secure title insurance when instructed to do so is perhaps the easiest way to increase your risk when acting on a real estate deal. From the lawyer’s (and LAWPRO’s) perspective, it’s also emerging as a dangerous exposure.

Why? When a lawyer is asked to secure title insurance and doesn’t, he or she effectively becomes responsible for everything the policy would have covered, even if the range of insurance protection exceeds the normal standard of practice in the “opinion on title” world.

Consider a lawyer who makes a different kind of error — for example, assume we are in the “old days” and the lawyer forgets to search with the local municipality for building department work orders. The purchaser-client discovers post-closing that there is building non-compliance at the property, but no work order has been issued. In the Ontario conveyancing world pre-title insurance, that would likely have been the end of the matter in terms of the lawyer’s exposure: From a causation perspective, the lawyer is off the hook because there is no way the lawyer could have uncovered the issue by making the standard search.

But many title insurance policies cover a purchaser (and lender) where the non-compliance existed at closing and a work order is issued at a later date. In today’s world, where the lawyer is instructed but fails to secure title insurance, the alleged error becomes failure to obtain the title insurance and the non-existence of a work order as of closing becomes irrelevant.

How does title insurance get missed? Often in haste. One of the advantages of using title insurance to protect a deal is that it can permit shorter closing periods by eliminating some search-related delays. Rushing a transaction may mean that the title policy is applied for, but the deal is closed before the policy coverage is actually bound. If signs of a problem emerge after closing, the insurer may decline to proceed with the policy or insist on exclusions. After all, the insurer did not bind itself, in our example, to issue a policy.

This “error” is more likely in situations where there is uncertainty about the legal effect of the insurer’s response to the application. Title insurers vary in their procedures. An insurer may respond to certain applications for insurance by issuing the policy itself, such that it takes immediate effect on closing without the need for any other action on the insured’s part. Some lawyers may, by their own actions, be authorized to bind the insurer, provided they stay within the terms of their firm’s agreement with the insurer. In other cases, an insurer might issue a “binder” that provides temporary coverage pending finalization of the terms, disclosure of information, or satisfaction of conditions. An insurer may, for example, call this binding of coverage “pre-approval.”

After the coverage is bound, it’s common for insurers to require the insured (meaning, his/her lawyer) to take certain actions as a precondition to the negotiated coverage taking effect. For example, to secure TitlePLUS title insurance coverage, the insured is always required to submit the registration number for the transfer (or mortgage), so we know the deal was closed and registration occurred.

The dangerous claims mentioned above typically arise in situations where the client (whether the lender or the purchaser) has instructed the lawyer to obtain title insurance, the lawyer has taken the initial step of contacting the insurer about coverage, but then has failed to realize that the coverage has not been bound before closing. By “bound”, I mean a contractual agreement that allows the insured to insist upon issuance of the policy, subject to payment of the premium and satisfaction of clearly defined pre-conditions to issuance (if any).

What kinds of loss can this problem apply to? Consider, for example, an instance of identity fraud: A lender requests title insurance as a condition of making a mortgage loan, the lawyer undertakes to obtain the insurance, the mortgage funds are advanced, and it later comes to light that the “owner” who obtained the mortgage was actually a fraudster, and the real owner of the property has no knowledge of the mortgage transaction.

Before the advent of title insurance, a lawyer who handled a transaction that turned out to be based on identity fraud would likely not be liable for the loss if he or she had taken reasonable steps to guard against fraud (for example, checking the mortgagor’s identification). The essence of a good fraud has always been how hard it is to detect.

With the advent of title insurance, which provides coverage for fraud, the situation is markedly different: In instructing the lawyer to obtain title insurance, the lender is no longer relying on the lawyer’s reasonable efforts to investigate the identity of the borrowers — ​​​​​​​​it is purchasing protection against loss regardless of flaws in that process. The risk of identity theft is intended to be moved to the insurance company. The lawyer’s failure to obtain the insurance is causally linked to the lender client’s loss, if the mortgage proves to be unenforceable.

Sobering? We hope so. But the solution is conceptually straightforward, if time-consuming on occasion: Follow through fully on title insurance instructions; be sure you understand the legal effect of the insurer’s response to the policy application, whichever insurance company you chose to deal with; consider before closing whether any conditions on the insurance binder or pre-approval are acceptable to you and your client, seeking instructions if necessary; comply with all conditions of coverage; and give the client prompt notice of issuance of the policy.