Money, Mortgages and Mayhem: The highly anticipated appeal on indefeasibility and housing fraud
Controversy surrounding new provincial legislation in British Columbia to curb foreign investment in the housing market and talks of similar measures for Ontario have kept all eyes on the red-hot housing markets across Canada. Furthermore, new federal mandates will take effect starting October 17, 2016 for the purchasing of homes, which will likely cause further distress for first-time home buyers struggling to gain a piece of the real estate pie.
Questions of what to expect in this market in the months and years to come are on the forefront of many Canadians’ minds. As the population in Toronto’s major cities continues to grow and construction development becomes more and more lucrative, one can only guess the impact this will all have on the cost of living in the city and the ability to secure a home.
This week, the Ontario Divisional Court (a branch of the Superior Court) will render a highly anticipated decision in the appeal of CIBC Mortgages Inc. v. Computershare Trust Co. of Canada, 2015 ONSC 543 [Computershare]. This case highlights a current issue in the housing industry that could result in a significant departure from previous judicial reasoning if the lower court decision is upheld. The case deals with the land title registry system in Ontario, focusing on the issue of whether the court will move to protect certain parties that rely upon erroneous title information found in the registry.
In the past, it was expected that the party conducting a search investigate each and every title or discharge ever connected to the property. On a very old property, this could mean having to go back decades or even a century. The purpose of this laborious process was to make it the duty of the searching party to ensure that all previous titles on a property were “good title.” This confirmation would be required in order to proceed with a bona fide purchase (or loan) on a property without undue risk of losing it. A purchaser who accepted the title to a property without having made what a court may consider “reasonable inquiries” into the circumstances of title was considered to have accepted title subject to all pre-existing interests that may have encumbered the property.
The old system was considered an onerous one, and was subject to legislative change in the form of the land titles system, established in Ontario in 1885 (currently known as the Land Titles Act, Act R.S.O. 1990, c. L.5). The land title registry system was premised, and continues to operate, on the basis of three basic principles: (1) the mirror principle; (2) the curtain principle; and (3) the insurance principle. These principles are meant to make the process of conducting business involving real estate much less burdensome by removing the need to investigate the potentially extensive title history on a property.
The mirror principle stands for the proposition that the information in the land registry system on a given property is complete and accurate. Searching parties can ascertain basic information—such as the identity of the property’s title holder and the existence of any encumbrances—by merely looking at the register of title. This information is considered “indefeasible” from the titles encumbering the land itself, reflecting or “mirroring” the true state of the title to the land.
The curtain principle removes the need for a searching party from having to conduct searches beyond the information contained in the land registry. The “curtain” is essentially the separation of the current and previous history on a property. Under the curtain principle, a searching party can accept and rely on what they found in the registry system, without having to worry about unregistered interests.
Finally, the insurance principle ensures that, in the event title to land is taken away from someone fraudulently, the Crown will insure the innocent party.
A husband and wife duo acted fraudulently in conspiring with individuals with access to the registry system to discharge a mortgage on their home even though the mortgage had not actually been paid off. Their lender (Computershare) had no idea the fraud occurred.
Subsequently, the couple took out a mortgage on the same property with CIBC who, after reviewing the registry and seeing that the previous mortgage was discharged, agreed to the loan. CIBC was under the impression they had first priority title on the property should a default occur.
To add a layer of complexity, the couple took out what appeared on the land registry system to be a second mortgage (but was actually a third) on the same property with another lender (Secure Capital). This lender was aware of the CIBC mortgage but was not aware of the fraudulent discharge with Computershare and was left with the impression that they had second priority title to the property in the event of a default.
Eventually, when the couple defaulted on all their loans, the jig was up and the court had to decide which lender should be given priority in securing the property. It goes without saying that while all three lender institutions were victims, not all could be treated equally. The amount owing in default was significantly more than the value of the property.
CIBC made the argument that they had a right to rely on the registry information showing that there was a discharge on the mortgage. Computershare’s position was that the discharge was fraudulent and therefore void, entitling them to first charge on the property.
Ultimately, the court found that Computershare had first priority, CIBC second, and Secure Capital third. In coming to this result, the court applied the theory of deferred indefeasibility well articulated in Lawrence v. Maple Trust Company, 84 O.R. (3d) 9. This theory is the hallmark of mortgage fraud cases in Ontario. It saves individuals from having to go behind the registry and investigate titles.
As cited from paragraph para 54:
“Pursuant to the theory of deferred indefeasibility, registration of an invalid instrument does not make the instrument valid in favor of an immediate purchaser but if the purchaser becomes the registered owner, a purchaser from the immediate purchaser is protected by the statute because the second purchaser is entitled to rely upon the register and need not go behind it.”
In other words, the first innocent party that dealt directly with the fraudster will not have its interests protected but anyone that subsequently receives the title (i.e. a secondary innocent party) from the first innocent will have their interests protected. The first innocent party, also known as the intermediate owner, is viewed as having the only opportunity to investigate and stop the fraud from occurring.
In present case, the Court found CIBC to be the intermediate owner because it had first-hand dealings with the fraudsters after the fraud had occurred. Therefore, CIBC’s interest, according to deferred indefeasibility, would not be protected. A bad title cannot be made “good” in such circumstances. Computershare was accordingly restored to the primary position.
Implications of the upcoming Divisional Court decision
One of the most problematic aspects of the lower court’s decision was its comment that CIBC should have done a better job of reviewing previous title history on the land. This is problematic because it flies in the face of the mirror and curtain principles that allow title searchers to avoid that very responsibility.
If the Ontario Divisional Court chooses not to address this aspect of the lower court’s, it could mean that parties might now be expected to revert back to the old order of things and the mirror and curtain principles could be jeopardized.
But is this realistic? How far must a lender in the shoes of CIBC go to protect their interests in granting a mortgage loan? Can we really expect a party to have to review every single title or discharge on a property even if it dated back over 100 years?
The amount of time and exorbitant expense involved with conducting such a thorough investigation would have wide reaching ramifications. Lenders may become much less willing to agree to loans for potential homebuyers or require new draconian clauses in agreements in order to lower risk.
Furthermore, how can lawyers advise their lender clients if there is no longer a guarantee that the three principles (mirror, curtain, insurance) connected to the registry system will be upheld? The ability of lawyers to help their clients manage risk is deeply affected given the ambiguity the lower court’s reasoning has created.
Following the decision in Computershare, the only certain way a lender can protect its priority is to either conduct searchers outside the land registry system or to have extensive title insurance—neither of which are particularly appealing to lenders.
Hopefully the Ontario Divisional Court decision will provide much needed clarity on this critical issue, which only serves to exacerbate the effects of the current rollercoaster ride of Toronto’s housing market.