Title Insurance Won’t Always Protect You

Rachel Loizos in Legal

I will relay a sad story about how a home buyer got swindled by an unethical vendor in a resale transaction in the City of Toronto recently.  In August of 2007, a purchaser closed a real estate transaction and bought a very cute little bungalow in the east end of the city.  Unfortunately, the vendor did not pay the water bill.  The arrears did not show up on a search and the fact that the account was overdue was only discovered after the transaction closed.

At the request of the bank, the purchaser was required to get title insurance and did.  The policy of title insurance stated that it would cover water arrears, but ONLY if they were the kind of arrears that would be revealed by a search.  Unfortunately for our purchaser, these were the kind of arrears that are not revealed by a search, and thus not eligible for compensation under the policy.

Water arrears, like tax arrears, will be registered as a lien against the property – meaning that the unsuspecting purchaser foots the bill when the unscrupulous vendor flees. 

Certainly small claims court is an option, but it will be difficult to collect the funds even if the purchaser is successful in their suit because the vendor has moved to another country.

This story made me particularly annoyed for a variety of reasons, not the least of which is the fact that when you use someone's utilities without paying for them it is called stealing, plain and simple, and I have no tolerance for it.

The moral of the story?  If you are purchasing property being sold under a power of attorney, protect yourself and ask your agent to insert a clause allowing for a reasonable holdback for utilities.  The same can be said if you know the vendor intends to move to another province or country following the closing.  Unfortunately, there is no way to ensure you will find out and it is almost impossible to collect these funds after closing.  Truly, buyer beware.

Rachel Loizos is an associate lawyer at Sotos LLP in Toronto. She practices in the area of real estate law.
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Related Post:

Why Home Buyers Need Title Insurance

Comments

[Dane Caldwell]

The potential this represents to purchasers is startling. I have to ask how a city water bill is not searchable.
The first house I ever bought had no water until just 2 or 3 days prior to closing (water line was broken where it goes in to the meter). The house was an estate sale with the grandson in Alberta being the executor. There were multiple charges by the city for returning to the property to turn on and off the water until the problem was fixed.
Naturally the charges would not show up on any search the lawyers did because the charges where not billed till after we had taken possession.
Our title company had no problem covering the old owner’s water bill which we did not get till about a year later (but that is another story).
Perhaps not all title insurance companies are created equal and as home owners we need to do research before just taking the one we are offered. I know I will definitely be looking closely at the different offerings on our next purchase.
BTW, this post is quite timely as we are looking at buying in the next month...if any *frickin* houses come on the market...slim pickings for buyers.

Dane

[Rachel]

The title insurer in this case was First Canadian Title. To be fair, I called TitlePLUS and they said that they too would have denied coverage. It is possible that your circumstances warranted coverage because by that time the arrears had already become a lien on the property, which, ironically is covered. To be clear, the insurers will cover items once they have became a lien - but not for the actions that lead up to it becoming a lien.

Good luck in your house hunting – you may want to insert a clause in your agreement that allows you to examine the last water bill, at least you will have a date from which to begin to calculate – for example if the last bill was issued in April and your closing is in early May, there will be less time for the bill to accumulate additional arrears.