Buying a home isn’t cheap. If you’re like most, careful planning around the affordability of a new home is one of your top concerns.
Yet it’s still surprising how few purchasers know about title insurance until they hire a lawyer. At this point, it’s not surprising that some real estate lawyers are met with blank stares and questions about its necessity. After all, as a purchaser you’ve probably spent months arranging your personal finances around deposits, down payments, and professional fees. The last thing you want to hear about is another expense that might burn a hole in your wallet.
While many would tend to agree that the process and cost of buying a home isn’t as straightforward as you’d hoped for, title insurance is one of the most important facets in protecting your new home. It’s important to have a background understanding of title insurance’s capabilities and coverage so that your discussions with a lawyer can be focussed and effective.
What is “Good and Marketable” Title?
Before getting into a discussion about title insurance, it’s probably worthwhile to briefly cover what this phrase means in the context of residential real estate purchases.
At its simplest form, “title” refers to a person’s legal ownership in property. A ‘deed of transfer’ evidences this ownership status and is recorded in the government’s database. A buyer’s primary concern is whether the seller has the right to sell the property and on what terms. As such, one of the first tasks a lawyer embarks on is completing a title search. First, this type of search confirms whether the municipal address on the Agreement of Purchase and Sale matches the legal address listed by the government. More importantly, a title search clarifies whether the seller is the legal owner and/or has the right to deal with the property.
If Jack is purchasing a condo from Jill, Jack’s lawyer will want to ensure that Jill is indeed the person listed in the government registry. If Jill’s name is not on title, Jack’s lawyer will need to investigate whether Jill goes by another legal name, if Jill is dealing with the property on behalf of someone, or if she is simply a fraudulently selling the property! Imagine Jill is a con artist and sells a condo unit that doesn’t belong to her.
Apart from ownership status, title to a property confers certain rights and restrictions. This is where the issue of marketability comes into play. A buyer is concerned about maximizing their rights to use the property while minimizing its restrictions. Mortgages, liens, and rights of way are viewed as restrictions. In legalese these restrictions are commonly known as encumbrances and are registered against the property.
Having confirmed that Jill is the legal owner on title to the condo unit, Jack’s lawyer notices there is a registered mortgage on the unit in the amount of $300,000.00. Additionally, there’s a right of way for a telecom company to run its cables through the unit to distribute internet and phone services.
In this scenario, there are two encumbrances that Jack will be concerned about. The first is the mortgage. Jack needs to ensure that Jill discharges the mortgage by closing since the debt is tied to the land. Unless Jack is made of gold and doesn’t mind paying for other people’s debts, he must demand it be removed for fear that the bank deems him the new debtor. The second encumbrance is the telecom company’s right to run cables through the unit and the condo building. In this example, the condo developer agreed with the telecom company that it would be the internet and phone supplier for the building. In this case, Jack will probably have little say on the choice of his internet provider. Likewise, it has a marginal effect on further resale of the property unless future buyers are so adamant about this issue that it is a dealbreaker.
To summarize, ensuring that a property has “good and marketable title” essentially means that your lawyer is concerned about protecting your potential ownership stake. Your lawyer will investigate the title to ensure that the seller has the right to sell the property and determine what, if any, encumbrances need to be removed or that you would be subject to even after closing.
What is Title Insurance?
In general, title insurance is an insurance policy, usually purchased as a one-time premium, that protects buyers and mortgage lenders from a variety of issues on title. In essence, title insurance indemnifies a purchaser (and possibly lender) up to its face amount in the event that loss arises from one or more outlined causes. The value of title insurance is that it allows purchasers and lenders to insure over certain problems rather than insisting on a repair of the problem, often at a greater cost and time commitment.
Where most forms of insurance forecast and protect future events, title insurance usually covers damages that were created from a defect on title that was undiscoverable before closing but later came to light. While each title insurer provides different coverage and exclusions, here is a list of general items that are typically included:
- Existing liens (i.e.- previous owner had unpaid utilities, property taxes, or condo fees)
- Encroachment (i.e.- structure that needs to be removed because it is on neighbor’s property)
- Title fraud (i.e.- someone pretending to be the owner and fraudulently selling the property)
- Issues that would otherwise be raised by an updated survey
Is Title Insurance Mandatory?
The short answer is: yes and no. Yes, it is mandatory if a specific mortgage lender requires it before it advances any sale proceeds. Where title insurance coverage is not mandatory, buyers have an alternative choice- a solicitor’s opinion.
A solicitor’s opinion is exactly as it sounds. In the alternative to a policy, a lawyer investigates title, conducts the requisite searches necessary to satisfy itself of the risk, and drafts a letter to the buyer reporting the findings. It’s important to note that the lawyer’s opinion on title can only speak to the state of the property up until closing.
Advantages of Title Insurance
Fewer and fewer people are relying on a lawyer’s opinion as the method of protecting title. While this post doesn’t cover the sales climate between the legal profession and title insurers, it should be noted that every lawyer must outline the choices for a purchaser. Additionally, a lawyer can’t receive compensation from a specific insurer for recommending its product.
There are 3 main advantage for opting to purchase title insurance over a solicitor’s opinion:
Generally speaking, the coverage offered by many insurers reaches beyond the assurances a solicitor’s opinion can provide. A lawyer’s opinion relies on the accuracy and availability of public records and searches. In that case, if a lawyer’s opinion relied on inaccurate public information, buyers are left with no recourse if a defect on title is discovered.
In contrast, title insurance generally applies regardless of whether information received was accurate. Additionally, for matters that are generally unverifiable by a lawyer (searches that are unobtainable), many title insurers agree to insure over the risk. This is especially helpful in cases of fraud.
2. Cost Savings:
If you are considering a solicitor’s opinion, be prepared to shell out a considerable amount of money for an up to date survey. Apart from the time investment in sourcing a certified professional to draw the survey, the cost of obtaining a survey usually ranges into the thousands.
Many lenders will require an updated survey if title insurance is not obtained. In essence, the cost of a one-time premium may be a fraction of what it costs to acquire a survey! Title insurance also rebalances cost considerations by foregoing certain searches that a lawyer would otherwise need to conduct, such as zoning and tax accounts.
In the case of a solicitor’s opinion, the purchaser only has a claim against the lawyer. The purchaser will need to demonstrate to the lawyer’s professional indemnity insurer that the case of the loss fell within the scope of the lawyer’s role in the retainer and acted negligently.
Apart from this high threshold of proof, it’s almost unimaginable anyone would want to go through a laborious litigation process to recover loss, often at a disproportionate cost, if there are easier and faster methods of claiming a loss from defective title.
Most title insurers offer no fault policies meaning that if a matter is covered under a particular policy, a purchaser can make a claim for the loss to the title insurance provider directly. Apart from saving a purchaser money and time, this claims procedure obviates the need for a purchaser to endure prolonged litigation battle to prove a claim.
It is important to note that while title insurance seems at first glance to be a superior choice, many title insurers generally exclude the following items from coverage:
- Native land claims
- Environmental concerns
- Matters known before closing as listed in the Agreement of Purchase and Sale
- Matters you have already agreed to accept
- Construction quality of the home
There are a number of title insurance providers available. Most lawyers have a professional relationship with a particular few due to positive feedback from both clients and other industry professionals. Regardless of whether you opt for one form of coverage over another, your lawyer needs to provide you with a breakdown of the options available and ensure that they fit your particular circumstances.
Disclaimer: Information made available on this website in any form is for information purposes only. It is not, nor is it intended to replace, legal advice. Contact Chu & Huang Law to discuss a specific legal issue and please note that contacting Chu & Huang Law, on its own, does not create a lawyer-client relationship.