Real estate fraud has been a hot topic in Ontario recently. There have been a number of stories reported in the Toronto area where innocent homeowners have had their title transferred to fraudsters and/or have had fraudulent mortgages registered on title to their properties. There was a particularly alarming case reported last year in the Toronto Star where an elderly homeowner had his property transferred to a fraudster and then subsequently transferred to an innocent third party purchaser without his knowledge. Given the state of the law in Ontario at that particular time, the gentleman ended up losing title to the property and he had to make an application to the Land Titles Assurance Fund (the 'Fund') to seek compensation. We will discuss the Fund later.
There are more than two million real estate transactions that occur in this province every year and the instances of real estate fraud are relatively low. That said, the province and in particular, the Ministry of Government Services, have taken the position that any level of fraud is unacceptable. The value of these fraudulent transactions are generally very high as they relate to either title to registered property or mortgage amounts that are in to the hundreds of thousands of dollars. The innocent victims in these cases are the existing homeowners who lost their property and/or financial institutions whose mortgage security is invalid.
There are generally two types of real estate fraud. The most common form of real estate fraud is what is known as title fraud in which case a fraudster using a stolen identity or forged documents transfers title of a registered owner to himself or herself without the owner's knowledge. The fraudster then obtains a mortgage from a financial institution using the fake identification of the current owner. Funds are advanced under the mortgage and the fraudster disappears. The homeowner ends up receiving notices that his or her mortgage payments with an unknown mortgage company are in default. The existing homeowner contacts his lawyer who conducts a subsearch of the property and determines that in fact there is a mortgage registered on title and that the property is no longer in the name of the original homeowner.
The second type of fraud is what is known as mortgage fraud. The most common form of this mortgage fraud is a 'value flip' in which fraudsters flip a property to one another artificially inflating the value of the property. Upon the value of the most recent transaction, the current owner applies for a mortgage. The fraudster will generally apply for a low value mortgage or secured line of credit on the property knowing that the lending institution will not require an appraisal or walkthrough for credit approval purposes. The result is a mortgager greatly exceeding the true value of the property. As such, there is no equity remaining in the property, the fraudsters disappear and the mortgage lender is forced to foreclose or power of sale on the property and recover substantially less than their mortgage advance.
The most interesting policy issue to address in the case of mortgage fraud is how to apportion loss amongst two innocent parties. In virtually every mortgage fraud or title fraud situation there are two innocent parties. There is generally the innocent homeowner who has had no knowledge that his or her property has been transferred to a fraudster and/or subject to a fraudulent mortgage and then there is the innocent purchaser or innocent mortgagee who is lending on the basis of the fraudster's representations. In all cases, the fraudster has generally disappeared with the funds and the two innocent parties end up waging war over the most valuable asset that remains, the real property. In most cases, either the innocent homeowner or the mortgagee/innocent purchaser ends up obtaining registered title to the property and the other innocent party is forced to resort to the Fund. The Fund is established under Section 57 of the Land Titles Act (Ontario) and allows for a person to apply for compensation for certain loses suffered as a result of real estate fraud and other matters. The process has always been very arduous and time consuming for applicants, often resulting in minimal recovery for innocent parties. More on this later as we address the revamped Fund pursuant to Bill 152.
So what is being done to stop identity theft? Bill 152 is the province's legislative response to increasing incidents of real estate fraud. We will discuss the Bill in more detail later. However, practically speaking, lending institutions, existing homeowners and solicitors are all becoming more diligent now than ever in relation to preventing real estate fraud. Parties to real estate transactions have started to realize that this is an increasingly important issue. As most real estate fraud is related to identify theft or fraudulent identities, all parties now are becoming more diligent in relation to reviewing, obtaining and ascertaining the identity of parties to a real estate transaction either from a purchase and sale perspective or from a mortgage lending perspective. The Law Society of Upper Canada has recently issued new guidelines governing the real estate profession so that two real estate lawyers must be involved on every real estate transaction, subject to some limited exceptions.
THE LAW IN ONTARIO
The three competing models of real property title are deferred indefeasibility, immediate indefeasibility and 'nemo dat'. The law in Ontario for well over a century has been the deferred indefeasibility model of title. Before I explain the current law in Ontario (which is now deferred indefeasibility), I will explain to you the other two competing doctrines.
The doctrine of immediate indefeasibility means that once a transfer of title to a purchaser is registered that title is good and is not subject to challenge even if there were previous fraudulent conveyances in the chain of title. Of course if the purchaser had actual knowledge of previous fraud, then your title is not good however, in all other cases you can rely on the parcel register for the property to ensure that you are obtaining good title. The law of immediate indefeasibility places all the risk on the current owner in that if a fraudulent transfer is registered, the original homeowner who had no knowledge of the fraud would be required to make an application to the Fund for compensation . The innocent purchaser/mortgagee gets good title. The law of immediate indefeasibility was approved by the Ontario Court of Appeal in a case of Liu v. Household Realty Corp. (Ontario Court of Appeal 2005) ('Household Realty Corp.'). This decision disrupted over a hundred years of previous case law which had ruled that deferred indefeasibility was the existing law in Ontario.
'Nemo dat quod non habet' is another competing doctrine which has been thoroughly rejected in Ontario throughout the years. 'Nemo dat' means that one cannot give that which one does not have. In effect, under this model if a conveyance is made to you by someone who did not have the right to convey the property because of a previous fraud, your title is void even though you had no knowledge of the fraud. In this particular case, one would have to investigate the entire series of property conveyances throughout the years in order to determine that no fraud had been purported previously. This rule goes against the purpose of the Land Titles Act (Ontario) which is that one should be able to rely on the parcel register as to the current state of title to a property. The law of 'Nemo dat' has been discussed in a number of recent cases involving mortgage fraud but has been rejected in all court decisions.
As mentioned above, the law in Ontario up to the time of the Household Realty Corp. decision was that of deferred indefeasibility. Pursuant to this doctrine, once a transfer is made to an innocent purchaser or a mortgage is registered in favour of an innocent lender from a fraudster, those entities have the right to convey good title to a third party however, the original purchaser or mortgagee (the 'Intermediary') may or may not have good title depending on the circumstances. If title is not transferred to a third party from the Intermediary and the fraud is discovered, the original homeowner will have title restored to them and the Intermediary will have to resort to the Fund for compensation. The rationale is that the immediate party to the fraud, the Intermediary, has the best opportunity to detect and prevent the fraudulent transfer/mortgage and therefore they should be the party bearing the risk. The Ontario Court of Appeal in the case of Lawrence v. Wright (Ontario Court of Appeal 2007) reversed its own decision in Household Realty Corp. and therefore, rejected the doctrine of immediate indefeasibility. In this particular case, an innocent homeowner lost title to imposters who conveyed her home to a fictitious person who in turn mortgaged the home and disappeared with the proceeds. At trial, the original homeowner lost her fight with the mortgage company and the mortgage was deemed to be valid. The original homeowner lost title to the property. The Ontario Court of Appeal reversed this ruling and determined that the original homeowner would have title to the property restored to her and the mortgage company would have to resort to the Fund for compensation. The Court held that the mortgage company was in the best position to detect the fraud (i.e. identify the imposter) and prevent it from occurring.
BILL 152
Bill 152 received royal assent on December 20, 2006 and has been enacted as chapter 34 of the Statues of Ontario. The act amends a number of statutes including the Land Registration Reform Act, Land Titles Act and Registry Act. The majority of the amendments relate to issues relating to real estate fraud. Bill 152 is the Ontario government's response to the growing problem of real estate fraud in Ontario. Generally speaking, ownership of a property now cannot be lost as a result of the registration of a fraudulent mortgage, transfer or counterfeit Power of Attorney. The new Bill deems that any of these fraudulent instruments will not have any effect on title and can be deleted from the parcel register for a property as the order of the Director of Titles. Bill 152 also improves the ability of the Director of Titles to rectify issues of suspected fraud and the Director of Titles can register cautions on title or prevent any dealings with properties in cases where fraud is suspected. Bill 152 also permits the Director of Titles to suspend the authorization of any person submitting documents if fraudulent transactions are suspected. Bill 152 also streamlines the procedure for an application to the Fund because as addressed above, there is always an innocent party that will be resorting to the Fund in the case of real estate fraud. Applications to the Fund, instead of taking years, are expected to be resolved in only a matter of months. Finally, the penalties for fraud related offences have been increased under both the Land Titles Act and the Registry Act from $1,000.00 to $50,000.00 and imprisonment for up to two years. Corporations can be fined up to $250,000.00. Finally, Bill 152 most importantly reintroduced by statute the law of deferred indefeasibility as it relates to real property in Ontario.
TITLE INSURANCE
The changes made pursuant to Bill 152 are important. But how can you as a homeowner or mortgagee protect against real estate fraud? Obtaining title insurance coverage for residential real estate transactions has become the norm in the past few years. Your title insurance company gives you excellent protection in relation to fraud related matters. For instance, your title insurer has a duty to defend your title, which will include paying your litigation costs associated with defending your title should a fraud issue arise. Also, if you lose title by way of a fraudulent conveyance or your title is subject to a fraudulent charge, the insurer has an obligation to pay to rectify title in most cases. The most important thing about title insurance is that you have coverage from the time you acquire the property going forward. If you are a homeowner prior to the advent of title insurance, all major title insurers offer what is known as an existing owner's policy. This type of policy gives you coverage for fraud on a go-forward basis. In all cases, it is important to discuss your particular situation with a lawyer to see how best to protect against the growing problem of real estate fraud.
