Title insurer not obligated to cover all risks

by Bob Aaron

The problems caused by the strike of civic workers in Toronto last summer are now coming home to roost. Last June, John purchased a newly constructed $600,000 freehold townhouse in downtown Toronto.

When the transaction closed, city building inspectors were on strike and it was impossible for purchasers or their lawyers to determine whether or not occupancy had been granted by the city for newly built homes.

John closed his purchase in the belief that any outstanding issues would eventually be resolved by the city and the builder; but that in any event he would be fully protected by the title insurance policy his lawyer arranged with Stewart Title.

In October, John decided to downsize and sold the townhouse with closing scheduled for mid-December. I was retained to represent him on the sale of the property.

When the lawyer for the purchasers checked with the city building department prior to closing, she discovered that five building permits were still outstanding, and that final occupancy had never been authorized.

Even though the original closing had taken place and title transferred, the builder had never contacted the city to finalize the permits for construction of several new townhouses and their fire, plumbing and electrical systems.

Understandably, the new buyers of John’s home refused to close with the permits outstanding.

Efforts to resolve the matter with the city prior to closing were unsuccessful since final inspections required considerable coordination among the owner, the city and the builder.

I contacted the lawyer for the builder, who contacted his client. The reply I received from the lawyer was not encouraging: “It is our clients’ position that they are not responsible for the signing off of the active permits.”

I was told the builder would not provide an undertaking to sign off the permits, and that it was not obligated to do so, but that it would follow through with the building department to see whether it could assist.

When I filed notice of a claim with Stewart Title, the response I received was even more discouraging.

Stephen Piper, a customer service representative with Stewart, wrote to advise that the policy John had purchased on closing provided coverage for any adverse circumstance affecting the land, which would have been disclosed by a search with the city building department before closing.

However, Piper pointed out there was no coverage for “risks” that were “agreed to” by the buyers.

Stewart’s position was that according to the terms of the agreement of purchase and sale with the builder, John was obligated to complete the purchase of the home, even if open permits existed on closing.

As a result, Stewart advised that “we do not believe the claim inquiry falls within the… policy coverage.”

Despite this, the company offered to provide coverage for the new purchaser if I personally accepted part of the risk involved. Needless to say, I was not prepared to accept Stewart’s onerous conditions.

(Full disclosure: I am an elected director of the Law Society of Upper Canada, which owns TitlePLUS, a competing title insurer. I have no role in its operation except to vote on approval of its parent company’s annual reports.)

At the very last minute on the day of closing, with the moving vans loaded and the engines idling, and despite the builder’s lack of cooperation and the denial of title insurance coverage to my client, some sort of agreement must have been arrived at among the buyers, the builder and Stewart Title (I was not involved in those negotiations), and the transaction closed.

The lesson that emerges from this true story is an important one for buyers of all homes whether new or resale: if a purchaser closes a transaction and is aware of a title defect, an encroachment, tax arrears or any other adverse circumstance, the title insurer is not obligated to provide coverage for any resulting losses.

Bob Aaron is a Toronto real estate lawyer. He can be reached by email at bob@aaron.ca, phone 416-364-9366 or fax 416-364-3818.
Visit the Toronto Star column archives at http://www.aaron.ca/columns for articles on this and other topics or his main webpage at www.aaron.ca.

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Lack of contract invites heartbreak

Lack of contract invites heartbreak.

Bob Aaron

For Ken and Lori Bryden, the climax of a sad and costly tale is set for Jan. 29; that’s the day the local sheriff in Brockville is slated to auction off their dream home-turned-nightmare.
They never even got to move in.

The saga began in 2002 when the family hired a close friend, Bob Pollard, to build a house for them on North Shore Rd. in Westport, Ont. Relying on goodwill rather than a solid contract and detailed plans, the parties agreed to build the 2,000-square-foot house for $200,000.

Excavation was completed and the footings poured in August 2002. But it wasn’t long before disagreements arose about alleged defects with the footings, foundation, dormer framing, porch roofline and other issues. All work stopped in December of that year.

In 2003, Pollard sued the Brydens claiming $81,000 for work and materials supplied to the house, and the Brydens counterclaimed for $249,070, the amount they wanted to correct deficiencies and complete construction.

A seven-day trial took place last January before Justice Kenneth E. Pedlar in Brockville. After reviewing the evidence, the judge awarded the builder $78,000 for work performed, despite the owners’ claim that the work was defective.

In a 6,300-word decision, the judge ruled that a number of construction matters were incomplete and needed remedial work, but Pollard was entitled to be paid for work done to the date building stopped.

According to a statement issued recently by the Brydens, the former chief building official of the Township of Rideau Lakes declared in 2002 that the house met all building code requirements while it was under construction. The Brydens say he was wrong and recently commissioned four engineering reports that indicate significant deficiencies with the structure.

Based on those reports, the house is now subject to an Order to Comply, a Stop Work Order, an Unsafe Order and an Order Not to Occupy, all issued by the new chief building official of the township.

Today, the Brydens face a judgment against them for damages and costs totalling about $120,000, plus $300,000 or so to finish the house – on top of their lawyer’s bills. For five years they’ve paid taxes and a mortgage on an empty house, hoping for help from local and provincial politicians.

No assistance is available from the Tarion Warranty Corp. Tarion spokesman Robert Mitchell says there are two kinds of new home warranty coverage relevant to cases like this, where a property owner hires a contractor to build a house.

Financial loss protection is available when homeowners advance money to a builder who reneges on the contract, leaving them with less than they paid for. This wasn’t available to the Brydens, Mitchell says, because the court and the Licence Appeal Tribunal ruled “the value of the work done by the builder exceeded what (the Brydens) had paid” and, as a result, “the Brydens did not suffer any financial loss.”

Tarion’s construction coverage is not available to the Brydens until the house is finished. Under the governing legislation, an incomplete contract home is ineligible for the warranty until the construction contract is “substantially performed,” and the house is occupied.

In the fall of 2005, Pollard was convicted in provincial court and fined $750 for failing to enrol the home under the Tarion warranty program.

For now, the house is incomplete and exposed to the elements. The outstanding municipal orders will not permit occupancy until the problems identified by the engineers have been rectified.

To collect the money owed to him, Pollard has obtained a writ of seizure and sale. Acting on the writ, the sheriff will auction off the Bryden’s equity in the property.

The lesson to be learned from this tale is to never retain a contractor to build or even renovate a home without having a full set of construction plans prepared by an architect or engineer, and a detailed contract. Standard industry template contracts are available from the Canadian Construction Documents Committee (www.ccdc.org).

I also recommend hiring an architect or other professional to monitor ongoing construction.

Bob Aaron is a Toronto real estate lawyer whose column appears Saturdays. He can be reached at bob@aaron.ca. Visit his website at aaron.ca.

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