Title Insurance in a Real Estate Closing
Title Insurance and it’s use in Real Estate
So you are finally set to close on a real estate property and move in to your new home. You have hired a real estate agent to help you find the property within your price range, in the neighbourhood of your choice and the offer has been accepted. You have decided on the lawyer you wish to work with and are eager to know how much all of this is going to cost. You find out from your real estate lawyer that title insurance will attract a fee of a couple hundred dollars. Given that this bumps up your costs during closing, you want to know what a title insurance policy is all about and how it works. Let’s find out…
What title insurance is NOT:
Let’s dis-spell some misconceptions about title insurance from the start. Title insurers stress the fact that their policies are certainly not intended to be any form of a home warranty and should not be misunderstood as such. For example, it does not speak to whether the property is well built or that the roof or foundation is intact and certainly does not provide coverage for the appliances purchased as part of the transaction. Neither does it provide a guarantee that you will be able to change the current use of the property.
Title Insurance – what is it?
When you purchase a real estate property, you obtain “title” to the property through a process under which the previous owner transfers their ownership to you. This is done by way of registration of a document called the Transfer/Deed under the Land Titles system. According to some accounts, title insurance has been around in the US since 1868 and was used to provide protection to purchasers for unanticipated title problems. However, it has picked up popularity in Canada in recent years where it is obtained virtually in all residential and a large majority of commercial real estate transactions. The focus under a title insurance policy is not to guarantee title, but instead is on providing compensation or damages depending on the loss or claim.
When completing a real estate purchase transaction, lawyers will routinely order a title insurance policy that provides protection for both the buyer as well as the mortgage lender if the property is mortgaged. The main reason is so that the policy holders have protection from certain risks that are present whenever real estate transactions are involved.
When title insurance is ordered by the law firm, the company charges a premium for the policy. The premium amount is lower if the transaction is a ‘cash’ transaction in that it does not involve a mortgage. This premium will be higher for properties that are of higher value and the amount of insurance is the actual purchase price of the property. The amount of the premium may vary depending on a number of factors some of which may include the type of property, the purchase price, the registered amount of the mortgage etc.
An important point about title insurance is that once it is ordered, the protection remains for as long as the insured party is on title without the need for renewals or monthly premiums. Once the deal has closed and your lawyer has ordered the title insurance, coverage will continue under the owner policy for as long as the same buyer owns the property.
Risks covered by Title Insurance:
In brief, according to the Financial Services Commission of Ontario, some of the most important coverages which may be available under a title insurance policy are as follows:
- Protection from defects in title – such issues may hinder ability to have clear rights to the property
- Conflicting ownership interests
- Liens that exist on title – for example, a previous owner has outstanding mortgages that remain on title or other liens such as condominium liens.
- Encroachment issues – where an existing structure on land needs to be removed because it sits partly on a neighbour’s property.
- Errors in surveys and public records
- Title Fraud
Essentially, title insurance ordered by your real estate lawyer will provide owners (and banks, if the property is subject to a mortgage and a lender policy is ordered) with a comprehensive and no-fault protection against title risks involved in a transaction.
Perhaps the most popular reason to have title insurance is to cover title fraud. As a general example, this may involve a situation where a fraudster deals with or transfers the title to your home without your knowledge. This may be by way of transferring title to him or herself by stealing your personal information and forging documents. The second step may involve the fraudster registering a mortgage on the title to your home and absconding with the funds. Of course, as the years go by, the fraudsters seem to get more and more advanced in their approach. Hence the need for the protection that title insurance provides. Here, the innocent party (insured) may later discover that the title to his or her property is defective when an unknown mortgage lender contacts them about the default in payment. Luckily, the protection offered continues after closing in that the individual may seek compensation from the title insurer due to the fraud.
In the real estate world, policies obtained for title insurance may cover different type of risks depending on the type of property one is purchasing. For example, there may be certain items covered on a residential policy jacket that would be excluded in a commercial policy. Typically, commercial policies require even more due diligence due to higher cost of properties and the increased cost of coverage.
Other risks that may be covered:
- Title defects such as liens, executions against title, encroachment issues
- Arrears in taxes
- Arrears in hydro and gas
- Executions against prior owners
- Fire department work orders against the property
- Hydro work orders against the property
- Compliance with conservation authorities
- Access limitations
- Planning Act contraventions
- Fraud, forgery, or false impersonation where they effect the insured’s interest on title
Exclusions from coverage:
When there are risks that are difficult to quantify, title insurers will typically exclude such from coverage. That being said, here is a small list of some of the standard exclusions that may be listed under your insurance policy:
- Environmental matters (termites, infestations, UFFI, underground storage tanks, soil contamination, leakage of water etc.)
- Land claims – Native or aboriginal
- Post-closing expropriations
- Future use in the event the owner changes the use of property
- Default on the owner’s existing mortgage
- Legality of rents under the rent legislation
- Risks known to or agreed by the insured but not shared with the title insurer
- Septic system functionality
Also, a title insurer will require a multi-unit endorsement for a property containing 2-6 units (including basement apartments) in order to provide additional coverage.
Conclusion:
Title Insurance serves as a lower cost alternative of closing a real estate law transaction and all parties, including the buyer and lender may be put to ease if a certain item is covered under the policy. It is often more cost effective to order a policy than to conduct off-title searches and / or obtain a new survey which can add up quickly. It is also known to be a time saver in the sense that it reduces the type and number of searches a law office has to conduct. As a no-fault compensation provider, it is no wonder title insurance has, in a sense, taken over real estate conveyancing and is a go-to choice for both law firms and home owners and lenders.
For further questions or information about your real estate transaction in Kitchener-Waterloo or surrounding regions, please contact our office.
Read MoreCondominum Law: Some tips and tricks for your real estate purchase
Condominium Law: Buying real estate in Kitchener-Waterloo and surrounding regions
It is interesting to see how many people tend to gravitate towards purchasing a condominium as opposed to a semi-detached or detached home. Whether you have just started shopping for real estate or have already signed an Agreement of Purchase and Sale, one thing is for sure: as a potential buyer, it is a good idea to understand what it is that you are buying, especially when it comes to buying into something like the condominium, knowing condominimum law it very important.
It is no surprise that condominiums are a popular choice for those looking to get into the real estate market. This could be due to a variety of factors such as affordability (thanks to the sky-rocketing real estate prices over the last few years), availability or simply being able to ditch your shovel and lawnmower by having a property management company handle the exterior maintenance of the property. In our real estate law practice, we often close transactions involving condominiums and deal with buyers from all walks of life. However, many people buying a condominium for the first time do not know what is generally involved and what the key attributes of this form of ownership are. As a result, we share some tidbits:
Source of Condominium Law:
It is the Condominium Act, 1998 which governs condominium corporations and under which we find details with respect to how to create a condominium, the structure involved, the rules and regulations, the requirements with respect to owners, tenants, management and many other facets. The main documents that govern the condominium are the declaration and description, the by-laws, and the rules.
In a sense, when you are buying a condominium, you are buying a form of legal ownership in your unit along with an undivided interest in the common elements. This means that typically, the portion of your unit entitles you to exclusive use and ownership. This use is limited within the boundaries of this unit. Your condominium also comprises of areas known as common elements which may include lobby areas, garage for parking, facilities shared between the unit owners such as a gym, party room and the like. These areas may be said to be owned in a communal manner for use of all of the unit owners.
Boundaries and Common Expenses
You may wonder exactly what you own within the condominium complex. To find that out, one must reference the declaration and relevant condominium documents to know the boundaries of their units and the areas that make up the common elements. The declaration will also tell you the percentage of maintenance fees or common expenses that each unit owner is responsible for. It is important to note that in many condominiums, a unit owner will pay for his or her pro- rated share of the expenses paid to maintain the common elements. This could include things like paying for maintenance, development, security, insurance, etc. Although it may sound obvious but generally, the more amenities a condominium has, the more likely it is to have higher common expenses. Typically, a high-rise will have many common element areas whereas a townhouse complex is likely to have less. The real estate scene in Kitchener-Waterloo appears to have many condominiums set up as townhouses and less high-rise buildings which are more commonly seen in and around Toronto. However, as we can see with the development projects that have started as well as those that are in the pipeline, the local skyline is set to adjust even more.
Some condominiums may have parking, storage and lockers set up as separate units just like the physical space in which the buyer is going to own. However, in other condominiums, these areas may be designated as exclusive use for the by virtue of the buyer’s ownership of the unit.
There are multiple types of condominiums that one may come across. You may have a common elements condominium, vacant land condominiums, standard condominiums, phased condominiums etc. They all derive their authority from the Condominium Act, 1998.
Who runs this operation?
Typically, a Board of Directors is elected which makes decisions related to operations as well as money management. The Board may hire a management company to see the day-to-day operations. Some smaller condominiums may not employ a property manager due to budgetary constraints and choose to be more hands on.
The Board also plays a role in ensuring compliance of the rules and regulations in a condominium with the underlying idea being that through collective endeavour, all owners contribute to a good overall standard. The rules and regulations should be reviewed to ensure that you are comfortable with them and to identify any lifestyle concerns.
What is a Status Certificate?
Imagine you were buying shares of a company (publicly listed or private), would you want to know its’ financial merits and ensure it is not involved in any legal trouble? If the answer is yes, one may want to consider making an offer conditional to review of a status certificate by a lawyer for 3-5 days from receipt by the buyer. Either party (buyer or seller – usually with the help of the property manager or their respective real estate agent) can order the status certificate.
In a nutshell, it provides a snapshot of the legal and financial health of the Condominium Corporation. It is often a very large document consisting of multiple components some of which have been mentioned above. It will tell us whether the condominium is facing major financial challenges (i.e. have there been any special assessments imposed recently on top of the current common expenses – which means more money out of your pocket as the potential buyer). It will also disclose if there are any lawsuits that have been filed or any other litigation that the condominium is involved in and whether there is adequate insurance in place.
Further, it will also show details with respect to what kind of money is available for major repairs and replacements. If the condominium you’re buying into is dipping into the negative, it may lead to concerns for the possibility of higher common expenses. This is where the reserve fund study comes in which provides an indication from another professional (engineers) on the likelihood of major repairs. It’s a pretty good idea to let a lawyer look at this before you sign off on the dotted line.
Conclusion
All in all, becoming a homeowner (whether owning a condominium or a house) is major step. It is a good idea to know what it is that you’re buying and have an understanding of what is involved. Be sure to consult a professional to guide you every step of the way. For further questions about your real estate transaction, contact a Kitchener-Waterloo real estate lawyer.
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Rent to Own – What is it ?
Sometimes, those who may have trouble qualifying for a mortgage may enter into this type of arrangement with a potential Seller. In a rent to own, the Seller is essentially financing the buyer / tenant’s purchase of the property until you can qualify for the same and buy it.
Often this involves an “option to purchase” under which the buyer is not a buyer in a true sense but only a tenant with an option to buy which he or she may exercise at a future date depending on the contract. This typically involves a deposit to be paid along with a higher than normal rent payment which is structured for a certain time until the option can be exercised. Further, some agreements may be set up so that a portion of the rent payment goes towards the down payment.
It is important to have this agreement structured properly so all parties are aware of their rights and obligations. A buyer has to understand the legal difference between being a tenant and not yet a buyer and the risks he or she faces in relation to both the deposit and the down payment. There are plenty.
It is also important to ensure that a mortgage lender will recognize the “down” payment given to the owner / seller to truly be a “down”. If the bank does not, it may mean that the option to purchase cannot be exercised – thereby leading to a scenario the potential buyer may risk losing their deposit / down payment.
It is important to consult a lawyer to discuss this further
This article is for information purposes only and does not constitute legal advice and does not create any solicitor-client relationship. Please contact your legal representative and accountant.
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