Assuming Title & Quality of Title in Real Estate Transactions

Quality of Title

The most important clause in the purchase and sale agreement is the title. This clause is intended to define the Seller’s title obligation and its quality. Suppose the Seller is unable to obtain the specified quality of title. In that case, they may be deemed to be in breach and will be liable for any damages to the purchaser.

Encumbrances and Permitted Encumbrances

This clause further provides that the title will be free from any impediment other than a list of permitted encumbrances the purchaser agrees to assume. These include easements registered by a municipality or condo by-laws. The purchaser accepts most such restrictions as they generally enhance the value of the land.

Restrictive Covenants

Many titles are subject to some form of restriction or covenant. For example, in certain subdivisions, the colour of the building cannot be changed, or satellite dishes cannot be erected. Suppose these restrictions are discovered at a later date. In that case, more than they will be needed to get the purchaser out of the contract. Performing a search on the title of the property title is the easiest way to ensure no surprises.

Municipal and Utility Agreements

In most subdivisions, the title is subject to municipal and utility agreements. Section 37 agreements, for example, are always registered against subdivision lands. All obligations to pay for development fees, installation services, creating road widening, building new roads or sidewalks, create landscaping and parks are set out in these restrictions. These restrictions generally remain on title forever. Most purchase and sale agreements require that the purchaser accept them as part of the sale. Refusal to accept such ordinary restrictions may result in a default being noted against the buyer.

The decision in Ridgley v Nelson, 2007

The issue of registered easements and their effects on title was addressed in the 2007 case of Ridgley v Nelson. To their surprise, the purchaser became aware that the gazebo located in the backyard of their newly purchased home could not be demolished as it belonged to the municipality. The court ruled that the disclosure of an easement to a potential buyer’s test had to consider whether such an encroachment materially affected the present use of the property. The court laid out a four-part test relevant to the materiality of whether or not such easements were material and needed to be disclosed:

  1. The location of the easement;
  2. The size of the easement;
  3. The point of access; and
  4. The owner’s enjoyment of the property.

When the court applied the above test to the case before it, it ruled that the gazebo constituted a material easement that ought to have been disclosed.

Remedies for Defective Title

While retaining traditional provisions, the current standard form agreement of purchase and sale poses potential risks for buyers. If the Seller is “unable or unwilling” to satisfy a valid objection to the title, they may end the transaction. However, if the Seller is in default of their promise to convey good title free of encumbrance, this will be deemed to be a breach of the contract. The buyer then has the option to remedy it by way of an abatement for the defect or to end the transaction and sue the Seller for damages. Upon discovering a defect, most sellers will terminate the agreement to avoid litigation later. In such a case, the buyer is entitled only to the return of their down payment and nothing else, highlighting the need for caution and the importance of seeking legal advice.

Fairness and Obligations in Title Defects

This, however, is seen as fundamentally unfair to the buyer. The Seller is in a better position to know the title details of their property and is able to advise the buyer of the same at an earlier date. The standard clause in the purchase and sale agreement, which allows for this “escape,” was introduced long ago when hard-to-access land title records did not allow for easy discoverability of such defects. Since then, the land title has mostly been converted to their electronic version, and a quick search at a lawyer’s office will disclose everything to the potential vendor. Accordingly, the courts have stopped allowing the Seller to use this termination clause unless they can show that they acted reasonably and in good faith in carrying out the contractual obligation to remedy the title defects. This relief is now only available to the Seller if the defect cannot be remedied despite the best efforts. Sellers have recently begun to rely more on title insurance to remedy the problem. Case law still needs to be clarified on whether a buyer is obliged to accept title insurance coverage in lieu of actually remedying the defect on the title.   

This blog post does not constitute legal advice and was written solely to provide information. If you would like to consult with a lawyer about the issues raised in this post, please contact Empel Law Professional Corporation at 416-500-1937.

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Arkadiusz J. Empel urodził się w Katowicah. Jako dziecko emigrował do Kanady, razem z rodziną, lecz wrócił jako student aby ukończyć Pracę Magisterską w Krakowie. Przez swoją pracę z polonią w okolicy Toronto utrzymał władność w swojim języku ojczystym. Jeżeli Państwo życzy się skonsultować prosto z adwokatem Polski, proszę przedzwonić na numer 416-500-1937.