The New Marketability of Title Paradigm after MacDonald
On October 20, 2016, a panel of the Supreme Court of Canada dismissed the appeal arising out of MacDonald v. Chicago Title Insurance Company of Canada, the title insurance case where a title insurer was found liable under its policy for the costs of fixing illegal renovations that had been done to the insured property. The case itself raised some eyebrows (especially from title insurers who are all now scrambling to amend their policies going forward to expressly deny liability for physical defects in the property), but has largely flown under the radar for most real estate lawyers and other real estate professionals.
This is a mistake, since the case may in fact be ushering in a true paradigm shift in the common law of real property, not so much because of the ultimate decision as to liability, but more so because of the rationale adopted by the Ontario Court of Appeal in reaching its conclusion, which rationale has now been ensconced in the common law thanks to the Supreme Court of Canada’s refusal to hear the appeal.
The Ontario Court of Appeal found the title insurer liable to pay all of the costs of repairing a material latent physical defect in the property because that physical defect rendered the title to that property unmarketable, and one of the primary risks that title insurance insures against is title unmarketability. While it is trite that title insurance guarantees against title unmarketability, the conclusion that unmarketable title includes physical defects actually runs contrary to centuries of common law underpinning the concept of “marketability of title.”
As almost any real estate lawyer would conclude, “marketability of title” has a long history in the common law and means good title, not good physical quality. At least up until the MacDonald case, marketability of title was something altogether different than the marketability of the property or the value of the property. That is, any given property (say, a toxic waste dump, for example) may be utterly unmarketable in the real world (in the sense that it will have almost no buyers at almost any price) yet still have a pristine and totally marketable title (in the sense that the ownership thereof is totally undisputed and the title has not a single encumbrance or other defect). The Ontario Court of Appeal’s suggestion (since effectively ratified by the Supreme Court of Canada) that a house with significant latent construction defects then has an “unmarketable title” is a truly radical leap from the common law.
At the Six-Minute Real Estate Lawyer conference held by the Law Society in Toronto, Odysseas Papadimitriou, a condominium development and commercial real estate expert with Harris Shaeffer LLP, summarized the problem with the MacDonald v. Chicago Title Insurance Company of Canada decision as follows: “The Court in MacDonald may have arrived at the right equitable result, but in doing so it may have applied wrong legal reasons that could have significant impact for the real estate bar and title insurers for generations to come. MacDonald has effectively intermingled unmarketability of title with unmarketability of property….By blending these concepts, the Court has expanded the definition of unmarketable title…Furthermore, this blurring of concepts may have consequences far beyond the title insurance context, consequences which may not have been fully considered by the Court before reaching its decision.”
The unintended consequences alluded to by Papadimitriou can be far-reaching indeed. Consider, for example, a typical “as is/where is” sale. Since the Supreme Court of Canada put its imprimatur on the Court of Appeal’s interpretation of “marketability of title”, every real estate seller who represents and warrants that he/she has “good and marketable title” to the property might now very well be inadvertently guaranteeing that the property is effectively free from all latent physical defects and is fully marketable in the local real estate market!
With no opportunity to argue this point before the Supreme Court of Canada, “qualification” now pretty much has to be the goal going forward. One can expect all title insurers across the board to have already qualified their title policies so that the marketability of title coverage explicitly excludes latent physical defects, and does not actually scoop in by default, the marketability of the property generally. Likewise, it is likely that most real estate lawyers have revised their legal opinions to ensure that “good and marketable title” does not make lawyers de facto building inspectors and realtors. But it is important for realtors and their real estate clients to do likewise in their sale agreements – nothing would be more shocking than to be selling a property “as is/where is” only to find that one has inadvertently also guaranteed the absence of any latent physical defects or marketability of the property.
Of course, purchasers of real estate will be facing the opposite issue – by getting a warranty on “marketability of title” from the seller, a purchaser may also be getting a windfall guarantee against any physical defects and an assurance that the property will always be generally re-sellable in the open market. Wow, not bad if you can get from the seller when the seller didn’t even know that he/she was giving such assurances.
It is often the cases that “fly under the radar” that most impact how real estate transactions are conducted, and MacDonald v. Chicago Title Insurance Company of Canada may very well be one of those cases.