Cottages and Rural Properties: Avoid Common Errors that Lead to Title Insurance Claims
Cottages are a Canadian summertime staple. For many, cottage life has become tradition and cottage ownership is a dream come true. Conversely, cottage and rural residential properties generally present the real estate lawyer with some of the most challenging and complex issues of any area of real estate law, and may surprise lawyers who are used to dealing exclusively with urban properties.
To ensure the cottage or rural residential property purchase experience is a positive one for the client, the following are a few of the key issues that merit additional inquiry.
Access is a primary consideration when purchasing a cottage property. There is nothing pleasant about driving toward your cottage only to find a neighbour has blocked your access. Ambiguities in access to a property can create tensions with neighbours which could result in expensive litigation thereby turning the cottage dream into a nightmare. In addition, given the importance of access and the price of many cottage properties, lack of a legal right of access can seriously affect their value.
To avoid title insurance claims and provide the client with comfort against this risk, determine whether access to the property is via a municipally maintained road, or through crossing over privately owned or Crown land. Unless the property is on an open municipal road, ask the client to explain and show how they get to the property using the registered plan, or online tools such as Google Maps. Remember that land designated as a “road allowance” or street on a registered plan does not necessarily provide access, unless the municipality has opened it as a road.
If access is obtained by crossing a private roadway or public land, is the access granted pursuant to a registered easement or right of way? Title insurers will insure the validity of “together with” easements if they are described in the policy application. However, a defective easement or right of way can result in a landlocked property creating significant stress and a complete loss of enjoyment of the property for the client. For this reason, it worth diligently investigating the legitimacy of any easements. Keep in mind that doing so requires more than seeing reference to a right of way on title to the dominant/subject lands. Real estate lawyers also need to search the servient tenements to ensure that right of way is properly reflected there, and that the description is consistent with the description of the right of way on title to the subject property. Confirm with the client that the route actually used to reach the property is in accordance with the easement.
If there is no registered easement or right of way, keep in mind that prescriptive easements are difficult, and sometimes impossible, to establish. Attempting to prove a historical grant of easement sufficient to satisfy the legal test may be time consuming and expensive with no guarantee of success. A discussion with the client regarding this issue may avoid significant buyer’s remorse after closing.
A related matter to consider is whether the property is subject to easements providing access for neighbours that may interfere with the client’s use. Title insurance will generally except coverage for any construction on, or obstruction of, any “subject to” or mutual easement by the client.
Septic Systems – Preventing is Better than Fixing
Many cottage and rural residential properties rely on on-site wastewater treatment systems to manage household water. These systems are regulated to ensure health and safety.
Imagine enjoying a beautiful four bedroom cottage in mid-summer only to be told by the local governmental authority that the cottage cannot be used because the existing septic system on the property only provides sufficient capacity for a two bedroom cottage.
To avoid title insurance claims and ensure the client’s uninterrupted use and enjoyment of the property, consider obtaining information regarding the compliance status of the septic system by contacting the local health unit, conservation authority or municipal building department, depending on the location of the property. Title insurers often do not require a septic file search with the local governmental authority. However, some basic due diligence can assist in reducing some of the more significant risks associated with septic systems. For example, approval of a septic system is generally associated with a certain number of bedrooms on the property. Ask the client to confirm the number of bedrooms on the property in order to ascertain whether there might have been additions made to the property after the issuance of approval to determine whether the system still satisfies regulatory requirements. Advise your client that title insurance does not guarantee that the septic system is in working order.
Shoreline road allowance
Many bodies of water in Ontario are surrounded by a shoreline road allowance owned by the Crown. Often, the municipality will have sold this road allowance to the property owner. If this is the case, the property being purchased may comprise more than one parcel and PIN. If a legal description refers to a past instrument number, review that instrument to confirm that it includes all the land that the client expects to receive.
If the shore road allowance has not been purchased and conveyed, ask the client how close any improvements on the land are to the water’s edge to determine whether there are any encroachments onto the shore road allowance. If encroachments are suspected, consider recommending obtaining a survey.
Zoning – The Undisclosed Risk
Zoning can be a tricky area for real estate lawyers to address when acting on typical residential transactions. Lawyers have limited ability to easily identify whether a residential property contains anything more than a single family residence since there is no physical inspection by lawyers. Consider that many properties today contain additional living units such as a basement unit or a detached garage or carriage house converted to a living unit. A failure to identify zoning issues raised by these spaces may cause significant losses to a client. A governmental authority could reject any proposal for a zoning amendment or variance and require the client to tear out any additional living spaces that are determined to be separate units. Depending on whether the correct information was provided to the title insurer, there may be only partial or no coverage for the loss. Adequate investigation and communication with the client can go a long way to preventing title insurance claims and significant difficulty for the client after closing.
Helpful questions to ask include:
- Whether the basement is finished or there is a carriage house or other type of finished structure on the property with a view to determining whether these spaces might constitute a separate unit.
- Does the client expect to rent out the basement, or other parts of the property, to generate income to help pay the mortgage?
- Premanufactured homes are becoming more common. Ask the client whether this is contemplated. Consider whether they might not meet zoning requirements.
- Where a building department search has been completed, confirm with the client whether the improvements on the property correspond with what is stated in the search results in terms of number of livable spaces. Sometimes information regarding the compliance status of a property can be conflicting. Consider further due diligence by way of communication with the local authority to clarify where search results are unclear or ambiguous. There have been title insurance claims where a phone call to the local authority would have provided clarity and confirmed that the current physical status of the property is clearly not in compliance. Consider recommending a short postponement for the closing if clarification cannot be obtained in time.
- Request information regarding the client’s intentions for the future use of the property. Clients may buy a property expecting to add to or change the use after closing. Future uses are generally not covered by title insurance policies. For example, if a client wants to open a home daycare on the property, but after closing learns he or she can’t proceed because such use is not permitted under the zoning by-law, title insurance will not compensate the owner because he or she cannot use the property as intended.
Ask questions of the client to learn about the physical characteristics of any improvements on the property and to understand the client’s expectations for the property. Without this, a lawyer will not be in a position to provide appropriate advice or guidance regarding appropriate searches and due diligence and will also not be able arrange appropriate title insurance coverage.
Planning for Risks Not Generally Covered by Title Insurance
Understanding the nature and scope of title insurance is key to assisting the client with determining appropriate risk management steps or insurance arrangements to address various risks associated with the purchase and future ownership of a property.
Title insurance is generally designed to cover risks associated with defects in registered title, compliance, access, and fraud risks.
The scope of building authority related compliance coverage is often confused as providing coverage for deficient workmanship in construction, rain or pipe water leaks, and general building code deficiencies. It is important that the client understands that the purpose of title insurance is to cover the marketability of title to property and not, generally speaking, problems with the condition of property.
Title insurance is not designed as a form of traditional home insurance. Ensuring the client understands this will allow the client an opportunity to ensure that potentially significant risks such as water leaks or sewage backup are appropriately addressed under a home insurance policy. Endorsement coverage may need to be purchased in order to obtain comprehensive coverage for these risks.
Title insurance is not a substitute for a thorough home inspection of any resale property. If purchasing a property with a structure built at a time and location where permits were not available, title insurance is not likely to respond. When purchasing a century old home, for example, additional due diligence with respect to preclosing inspections should be considered, and the building’s heritage status should be checked.
Whether acting for first time home buyers, families seeking the peace and tranquility of a recreational property or clients seeking to purchase a retirement home, lawyers play an invaluable role in providing clients with guidance and advice in risk management. The first step to doing this is understanding the risks associated with the unique aspects of a particular transaction and what is important about the property to the client. The second step is to recommend additional investigation and due diligence to prevent future problems. Title insurance is one of multiple tools lawyers and clients can use to create an overall safety net against the risks of purchasing a property. The greatest value real estate lawyers can provide to clients is to use easily available information to prevent future issues from arising.