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Real Estate Title Fraud - Title Insurance is Still the Answer!

August Publications

Last summer I wrote a Lang Michener LLP Real Estate Brief and an article in Lawyers Weekly about title fraud entitled “Real Estate Title Fraud – Is Title Insurance The Answer?”. I reviewed the case law to that date and the coverages that were provided and set out when I thought people should title insure their residential dwellings to assist with the risk of fraud. My conclusion was:

“An easy answer (when purchasing a new home) is to title insure your property, as most title insurance policies cover certain events that occur after the date of the policy. These include fraud and forgery, matters that are obviously not protected by the lawyer’s usual title opinion effective as of closing. In addition, a title insurance policy, as an indemnity insurance policy, includes a duty to defend your title – to deal with the litigation related to such fraud.

For an existing owner of a home that was not title insured at its purchase I don’t feel that it is necessary to title insure today so long as the owner is in occupation of the property with a clearly identified ownership and no unusual title dealings. The risk of fraud is minimal because a purchaser or lender would find it almost impossible to be “innocent” and the risk to the ‘con persons’ of being caught is great. However, if you do not occupy your property, unless you are very scrupulous about and extremely comfortable with the persons who are occupying the property, the risk of fraud increases and purchasing title insurance is prudent.

The case law at that point was quite clear. As I said in the Lawyer’s Weekly article:

“There have been 5 lower court and one court of appeal decisions over the past decade and the result of these cases now seems pretty straightforward. In accordance with the language of the Act and the various decisions, the rule seems to be that an “innocent” purchaser or lender’s interest is valid even if obtained pursuant to a fraud, and a “fraudulent” purchaser or lender’s interest (the member of con persons’ group) is invalid. A lender or owner whose interest is lost or encumbered to an “innocent” purchaser or lender by a fraud must first look to the person who committed the fraud and then to the Fund for compensation.”

Since those words were written there have been two significant changes to the law in Ontario in this area. The first was the enactment by the Province of Ontario of Bill 152, the Ministry of Government Services Consumer Protection and Service Moderation Act, 2006, introduced on October 19, 2006 and which became law on December 20, 2006 (“Bill 152”), which amended the sections of the Land Titles Act (the “Act”) considered in those 6 decisions. The second was the decision of the Ontario Court of Appeal in Lawrence v Wright [2007] O.J. No. 381 (“Lawrence”) in which the court reversed the position previously taken by Ontario courts in respect of title fraud.

Not surprisingly, a few weeks ago I got an e-mail from a gentleman who read my August 2006 article on Lang Michener LLP’s web site saying “What is your opinion on title insurance now that the government has passed Bill 152?”. An excellent question and he could also have added “and now that the Ontario Court of Appeal decided differently than you thought it would?” I thought it was important to look at the changes and see whether I should change my advice. Certainly the law is very different than it was in August of 2006.

Bill 152

When the Lawrence case is discussed below the critical legal question is: When someone receives a conveyance of land under the Land Titles system in Ontario does the Act impose a model of “immediate indefeasibility”, “deferred indefeasibility” or “nemo dat”? Immediate indefeasibility means that, as a purchaser, once the transfer to you is certified you have good title and it is not subject to challenge except where you were aware that good title wasn’t or couldn’t be conveyed. Deferred indefeasibility meant that once the transfer to you is certified you have the ability to convey good title but you might not have good title yourself, depending on the circumstances. If the model was “nemo dat”, then if the conveyance is made to you by someone who did not have the right to convey the property to you, your title is void, even though you had no knowledge of the fraud. The transferor cannot convey what it did not own.

While the nemo dat model was argued by the innocent party’s lawyers in the Lawrence case, it was not accepted and it is not a principle that fits within the concept of the Ontario Land Titles system - that one can rely on the title set out in the parcel register. A nemo dat approach would require lawyers to search behind the title of the owner just as we do under the Registry Act system to ensure that the owner had in fact acquired proper title. That would inevitably bring chaos to the Land Titles system and reverse the strong move of our province in recent years to have most of Ontario properties registered under it.

The difficulty for the courts in determining whether we had a deferred indefeasibility or an immediate indefeasibility model was the contrast between the words in two parts of the Act (before it was amended) - subsection 78(4) and Section 155.

Subsection 78(4) said:

“When registered, an instrument shall be deemed to be embodied in the register and to be effective according to its nature and intent, and to create, transfer, charge or discharge, as the case requires, the land or estate or interest therein mentioned in the register”.

Section 155 of the Act said:

“Subject to the provisions of this Act, with respect to registered dispositions for valuable consideration, any disposition of land or of a charge on that land that, if unregistered, would be fraudulent and void is, despite registration, fraudulent and void in a like manner.”

The courts had difficulty reconciling the two provisions. Subsection 78(4) said that the fraudulent transfer is valid and enforceable once registered, while Section 155 said that a fraudulent and void transfer is still fraudulent and void despite registration. The cases that arose prior to Lawrence seem to have leaned on the words “Subject to the provisions of this Act” at the beginning of Section 155 which suggest that, in case of conflict, subsection 78(4) is paramount. That led to the courts accepting a model of immediate indefeasibility except in those circumstances where the fraudulent person himself was benefiting from title. An “innocent” purchaser or lender in a fraudulent transaction would get title free and clear, but a “fraudulent” purchaser or lender would be deprived of title.

Since the financial institutions that advanced mortgages were generally innocent, that produced results where the true owners of real property would end up with their true title subject to a valid charge. That was the case in: (1) Durrani v. Augier (2000) 5 O.R. 3rd 35; (2) The Toronto-Dominion Bank v. Jiang (2003) 9 R.P.R. 4th 114; (3) R.A. & J. Family Investment Corporation v. Orzech (1999) 44 O.R. 3rd 385; and (4) in Household Realty Corp. v. Liu (2005) OJ No. 5001 (“Household Realty”). It was also the answer in the lower court in Lawrence v Wright [2006] O.J. No. 2907. The approach was starting to change with two lower court decisions in the fall of last year which I will mention below.

Bill 152 solved that problem by making amendments to Section 78 to make it clear that Subsection 78(4) does not mean immediate indefeasibility in cases of fraudulent conveyances, but the deferred indefeasibility model is what operates in fraudulent circumstances. Bill 152 amends both Section 78 and Section 155 of the Act and adds new definitions.

Section 15(1) of Bill 152 now defines in quite express terms fraudulent instrument and fraudulent person as follows:

"fraudulent instrument" means an instrument, (a) under which a fraudulent person purports to receive or transfer an estate or interest in land, (b) that is given under the purported authority of a power of attorney that is forged, (c) that is a transfer of a charge where the charge is given by a fraudulent person, or (d) that perpetrates a fraud as prescribed with respect to the estate or interest in land affected by the instrument; ("acte frauduleux")

"fraudulent person" means a person who executes or purports to execute an instrument if, (a) the person forged the instrument, (b) the person is a fictitious person, or (c) the person holds oneself out in the instrument to be, but knows that the person is not, the registered owner of the estate or interest in land affected by the instrument; ("fraudeur")

Section 15(10) of Bill 152 adds the following two subsections to Section 78:

(4.1)  Subsection (4) does not apply to a fraudulent instrument that is registered on or after October 19, 2006.

(4.2)  Nothing in subsection (4.1) invalidates the effect of a registered instrument that is not a fraudulent instrument described in that subsection, including instruments registered subsequent to such a fraudulent instrument.

Section 15(11) of Bill 152 repeals Section 155 and replaces it with the following:

155.  Subject to this Act, a fraudulent instrument that, if unregistered, would be fraudulent and void is, despite registration, fraudulent and void in like manner.

Section 155 has two changes: 1) it uses the defined term “fraudulent instrument” so it incorporates the specific definitions set out above and; 2) it drops the words “with respect to registered dispositions for valuable consideration” so whether or not there is valuable consideration a fraudulent instrument is fraudulent and void. Otherwise Section 155 remains the same.

The key changes are to Section 78 where subsection 4.1 just exempts the fraudulent instruments registered on or after October 29, 2006 from either doctrine of indefeasibility. Bill 152 goes on and provides for the deferred indefeasibility model by saying in subsection 4.2 that subsection 4.1 does not invalidate instruments that are not fraudulent instruments registered subsequent to a fraudulent instrument. Accordingly, now under the Act the doctrine of deferred indefeasibility applies in connection with fraudulent instruments. That reverses the position taken in all of the cases cited above and means that the initial transfer or charge is invalid, regardless of whether the transferee or lender participated in the fraud or was “innocent”. However a subsequent transfer to an innocent purchaser or chargee would be indefeasible.

Bill 152 goes on to establish the manner in which the innocent purchaser or lender can obtain compensation from the Land Titles Assurance Fund (the “Fund”) and the way in which the true owner of the property can obtain an order putting title back into his or her own name. To protect the title of the true owner, the Director of Titles has the ability to register a caution where it appears that a registered instrument may be fraudulent and a hearing will be held for rectification of the register.

My August papers talked about the element of uncertainty in terms of compensation from the Fund and Bill 152 does not eliminate that concern. There still remains an obligation for a person to attempt to recover just compensation for the loss themselves under section 57(1). The Fund remains a fund of last resort – the injured party must first make all reasonable efforts to obtain compensation elsewhere before pursuing a claim against the Fund. In addition a person must demonstrate “the requisite due diligence as specified by the Director” in order to qualify for the compensation. Questions remain as to the manner in which compensation will be given and the qualification before payment. However, it seems less abusive to have that standard when it isn’t the true owner that is looking for compensation, but rather it is the purchaser or lender in a fraudulent transaction. They presumably would have had some ability to review the fraudulent transaction before accepting the transfer or charge and, if they used appropriate due diligence, may have prevented the same from occurring.

Accordingly, Bill 152 reverses the position in the cases that I reviewed in August. Now any purchaser or lender who received its title or charge in a fraudulent transaction on or after October 19, 2006, whether innocent or fraudulent, will not obtain good registerable title and, if innocent, will have an opportunity to obtain compensation from the Fund. The true owner of the property will, subject to going through the procedure under the Act, be entitled to rectification of title and the return of his or her property.

It should be noted that Bill 152 sets out expressly that the Fund is a fund of last resort and if your property is title insured your insurer is not able to collect from the Fund. Bill 152 has expressly said that claims against the Fund can’t be made by an insurer or as a subrogated claims, the kind an insurer would make. If you are title insured, once the title issue is resolved it is your insurer, not the Fund, that compensates you.

Lawrence Case

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. While Lawrence’s lawyer argued the nemo dat model, that was rejected by the Court. The Court spent some time reviewing the immediate indefeasibility model put forward by the innocent lender and the position put forward by the Province of Ontario - the deferred indefeasibility model. The Court looked at the cases that I have referred to above, 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.”

The court came to this conclusion by insisting that it was necessary to look pointedly into the question of deferred indefeasibility and immediate indefeasibility, concepts which the Court of Appeal in the Household Realty case said were not necessary to consider to reach a decision. In the Lawrence case, the Court of Appeal did an extensive analysis of those concepts and decided that deferred indefeasibility governed.

The court in Lawrence relied upon a judgment of a higher court, the Supreme Court of Canada, in United Trust Co. v. Dominion Stores Ltd., [1977] 2 S.C.R. 1915 (“United Trust”) which the Court “viewed within the context of policy considerations”. The United Trust case has long stood for the proposition that a purchaser with actual notice of an unregistered interest affecting the lands could not rely on the provisions of the Act to extinguish that interest. In that case United Trust had actual notice of an unregistered lease in favour of Dominion Stores, had tried to negotiate a surrender of that unregistered lease and when it couldn’t, took title and tried to argue that the Act had extinguished the unregistered lease.

In that case, Chief Justice Laskin, in a dissenting opinion, had argued that immediate indefeasibility model applied under the Act and therefore United Trust would take the property free of the lease. The majority however, did not focus on either deferred or immediate indefeasibility but concluded that the Act did not result in an extinction of the doctrine of actual notice. United Trust took the property subject to the unregistered Dominion lease that it was aware of. In the Lawrence case the Ontario Court Appeal said that the “United Trust” decision meant that the Supreme Court had adopted the deferred indefeasibility model even though the language of the Supreme Court decision did not expressly say so.

While there could still be a debate between the Household Realty and Lawrence decisions going forward, there is no question that the Lawrence decision clearly reviews and rejects Household. In addition, the concept of deferred indefeasibility was relied upon in two lower court title fraud decisions in October and November of 2006 (Rabi v Rosu (2006) 48 R.P.R. (4th) 1 and Home Trust v. Zivic [2006] O.J. No. 4561) where, on the specific facts of each case, the Household Realty decision was distinguished and fraudulent charges were held invalid. Further, now that Bill 152 has been enacted, the debate only relates to those fraudulent acts which occurred prior to October 19, 2006 and will be of relatively limited scope. It is most appropriate to now take Lawrence as the law in Ontario for fraudulent transactions which occurred prior to that date and one can reasonably say that the Court of Appeal summarizes the current status of the law as follows.

“The theory of deferred indefeasibility accords with the Act and must be taken into consideration in an analysis of Section 155 in its relationship with other provisions under the Act. Under this theory, the party acquiring an interest in land from the party responsible for fraud (the “intermediate owner”) is vulnerable from a claim from the true owner because the intermediate owner had an opportunity to avoid the fraud. However, any subsequent purchaser or encumbrancer (the “deferred owner”) has no such opportunity. Therefore, in accordance with s. 78(4) and the theory of deferred indefeasibility, when the deferred owner acquires an interest in the property that is good against all the world.”

Advice in 2007

Obviously, a paper of this nature can only give general advice and each reader should fully inform his own lawyer of the facts before getting specific advice that can be relied upon. When I read what I said in the Lawyers Weekly article last August, notwithstanding Bill 152 and the Lawrence case, I think the best general advice remains the same. For a purchaser or lender receiving a conveyance of a home, it’s prudent to title insure for several reason. First, if the conveyance to you is fraudulent you could be, in the wording of the Lawrence case, the “intermediate owner” yourself and your title or charge would be void as it was made pursuant to a fraudulent instrument under Section 78(4.1). Second, the title insurance policy covers you for 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 your 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 you lose title or your title is 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 you to go through the process of showing that: a) you are unable to get compensation from other sources, b) you have met the obligation of doing reasonable due diligence (as set out by the Director of Titles) and, c) the claim has been made within a six year time limitation period. In addition to the cost and delay these are all possible ways to lose compensation. For a purchaser or lender initially acquiring title to a home, my general advice would remain the same – obtain title insurance coverage.

My advice with respect to an existing owner of a residential property would also stay the same. Bill 152 has added greater protection for an existing owner because the risk of the most extreme downside, that you could lose title to your home as a result of fraudulent activity, is now greatly reduced. Subsection 78(4.1) now provides that subsection (4) does not apply to a fraudulent instrument registered on or after October 19, 2006. For the owner who occupies the property that virtually eliminates risk because any transaction that dealt with your title would be fraudulent and it is hard to conceive of any subsequent one that would not also be held to be fraudulent because your presence at the property would always need to be explained. However, where you are not in possession of the property, I think it generally still remains prudent to title insure today unless you are very scrupulous and extremely comfortable with the persons who are occupying your property.

A Lang Michener LLP Example

Lang Michener LLP was recently successful for a client and the client obtained compensation for in a title fraud case in which the client leased its property to a tenant who committed the fraudulent act of conveying title to an innocent third party purchaser who put a charge on the property. The case was challenging because the Fund’s decision to pay compensation was reached this year, after the Lawrence case, but we needed to advise the client two years ago, before the Lawrence case was decided, whether they should litigate the innocent third party’s claim that he had good title. Relying upon the Household Finance case and concerned that costs incurred in the litigation would be disallowed by the Fund we advised the client to notify the Fund and not to litigate. The Fund’s decision this year confirmed that that advice was good and both compensated the client for their loss and paid the legal costs incurred.

Under Bill 152, if that situation were happening today, the conveyance to the innocent third party (“intermediate owner”) would be made by a fraudulent person, someone who held himself out to be the registered owner of the land but was not, so that conveyance would be void under Subsection 79(4.1), although the “intermediate owner” would be entitled to compensation from the Fund. Unfortunately, the charge from that “intermediate owner” (or a subsequent conveyance by that “intermediate owner”) to a “deferred owner” would likely have been held valid. I do not know what due diligence the lender did, but if it had visited the property it would have found the fraudulent person selling the property in possession. Subsection 78(4.2) says expressly that nothing in subsection (4.1) invalidates the affect of a registered instrument that is not a fraudulent instrument.

Accordingly, if those events had happened today, while Bill 152 would have given our clients title, the charge would be valid and our clients would still need to claim against the Fund to pay the charge. Notionally, the chargee could sell the property under the power of sale rights in its valid charge. Title insurance coverage would be useful to both pay the cost of litigating these matters and to provide compensation for the valid charge.

Bruce McKenna

May 7, 2007 in Title Insurance | Permalink

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Can you please email me this article, as I think someone has fraudulently registered a mortgage on a property I jointly own with my son-in-law in Alberta. Does Alberta have any similar relevant title fraud protection?

Posted by: Ken Putt | Aug 18, 2007 2:38:15 PM

What do you think to the new 2 lawyer rule that comes into effect at the end of this month in an attempt to combat title fraud?

Posted by: Felicia Tippins | Mar 27, 2008 8:46:33 AM

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