When most lenders, owners and lawyers think of title insurance, they (quite rightly) think of insurance that covers risks associated with title matters. The answer is in the name, as it were.

1. TITLE INSURANCE AND UNPERMITTED WORK
DECEMBER8,2015
When most lenders, owners and lawyers
think of title insurance, they (quite rightly)
think of insurance that covers risks
associated with title matters. The answer is
in the name,as it were.
However, for the time being at least, one
may be able to entertain a more expansive
view of what constitutes an insurable risk
under a standard faun title insurance policy,
because the Ontario Court of Appeal in
MacDonald v. Chicago Title Insurance
Company of Canada, 2015 ONCA 842
(CANLII), has just released its written
judgment which, in a nutshell, supports the
position that work done without necessary
building peanits or governmental approvals
that is not discovered until after closing,and
which leads to loss to the insured purchaser,
can be a cause of such title not being
marketable by the insured purchaser, and
therefore can constitute an insured risk.
The relevant facts are as follows.
MacDonald purchased the property in 2006.
At the time ofpurchase they obtained a title
policy from Chicago Title. What
MacDonald (and Chicago Title) did not
know at closing is that structural work had
been done to the home prior to closing
without the required building penults or
approvals. In 2013 the City of Toronto
issued work orders to have work done to the
property so as to ensure its safety.
The standard fon'title policy provided that
it insured "against actual loss resulting from
the following covered risks, if they affect
your Title on the Policy Date, or to the
extent expressly stated below,ifthey affect
your title[sic] after the Policy Date".For the
SIMON CRAWFORD
BENNETTJONESLLP
purposes of the policy, "title" meant "the
ownership of your interest in the Land, as
shown in Schedule A.
Asthe basis ofits claim,MacDonald pointed to
the "loss of marketability" coverage in
article 11 of the policy, which language
provided for coverage where "your title is
unmarketable, which allows another person to
refuse to perform a contract to purchase or
lease or to make a mortgage loan". There were
other coverage provisions of the policy that
MacDonald purported to rely on,but the Court
found that, for the purposes of the appeal, it
was sufficientto focus on article 11 alone.
First and foremost, the Court predicated its
finding with confiimation that insurance
coverage provisions must be interpreted and
construed broadly.
It is also important to note that the Courtfound
that Chicago Title had not contested that the
faulty condition ofthe Property would meetthe
second part of the test, namely that it would
allow "another person to refuse to perform a
contract to purchase or lease or to make a
mortgage loan." With the satisfaction of this
part of article 11 apparently being conceded,
the case came down to two things: did the
faulty condition render the title "unmarketable",
and if so, did any of the express policy
exclusions exclude coverage.

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The Court made the following findings:
1. The fact that the property could,
despite the faulty construction, be
sold to a third party at a cheaper
price, does not make the property
"marketable".
2. The condition ofthe property flowed
"directly from the failure of the
previous owner to obtain the
necessary municipal approval.....and
that failure has made the appellant's
title unmarketable within the
meaning of clause 11 of the Title
Policy."
Curiously, the Court made an interesting
distinction in order to come to this
deteanination. Inherent in finding that this
was a matter ofthe marketability oftitle was
that the Court found that the underlying
defect was the lack of necessary building
permits/approvals, not the improper
construction ofthe building.
Having found MacDonald's title to be
unmarketable for the purposes of clause 11
of the policy, the Court turned its attention
to the exclusions and limitations in the
policy. Chicago Title pointed to only one
exclusion: that coverage was unavailable
where the risk first affected the title after the
policy date. The Court did not accept
Chicago Title's position, and instead found
that "title was unmarketable within the
meaning of the Title Policy from the
moment they acquired the Property, even if
they were not yet aware of the fact" such
that "the unpermitted construction was an
existing defect that crystallized when the
appellants became aware ofthe defect".
There are more than a few points of interest
thatflow from this case.
Firstly, is the issue of the intent of the policy
and the provision. Chicago Title argued
(unsuccessfully)that the improper construction
of the property was a latent defect and that it
was not the intention of the insurer to insure
against latent defects. Putting intention aside,
the Court focused on the overall bias towards
reading insurance coverage provisions broadly
and reading insurance exclusionary provisions
restrictively. The insurer, therefore, bears the
risk that its language can be read more broadly
than it intended. This raises the obvious
question of whether Chicago Title (and other
insurers) will need to amend their marketability
coverage to specifically addressthis point.
Secondly, it raises the question of how title
insurers are to underwrite the risk that a prior
owner has obtained all necessary permits and
approvals for work done.Ifan offtitle enquiry
is made to the municipality or region, and the
response is "clear", that is only an indication
that the municipality or region is unaware of
outstanding work orders or building permits. It
is not an indication (or confilination) that all
requisite penults or approvals were obtained
for the building.
Curiously, however, what the Court did not
address (because it stopped its analysis on
clause' 11 ofthe policy), was the coverage set
out in clause 16 ofthe policy, which provided
coverage where "you are forced to remove your
existing structure...because any portion of it
was built without a building permit from the
proper government office or agency".
One can only speculate that the Court avoided
this provision becausethe facts did not squarely
fit with the test "you are forced to remove your
existing structure". But what this clause 16
does provide is some colour on whatthe insurer
was prepared to insure against. Conceptually,
clause 16 is insurance against the failure of a

3. 3
prior owner to get a proper building per nit
or approval,and although the Court does not
say so (or even imply so) one might
speculate that this provision coloured the
Court's determination that clause 11
included coverage for defects existing due to
the lack ofpermits/approvals.
Another curiosity of this case, which is
perhaps also tied to the colour ofclause 16,
is that the Court made a point of expressly
denying Chicago Title's assertion that the
improper construction was the cause ofthe
lack of marketability and instead stated that
the specific cause was the lack ofrequisite
permits/approvals. This is an interesting
distinction because there was nothing in
article 11 (the provision on which the case
turned) that appeared to require this
distinction. Arguably, had the work been
property permitted and approved, but was
still faulty to the point of affecting
marketability, then such work would have
amounted to an uninsured latent defect. In
addition,in pointing the finger at the lack of
approvals/permits,the Court may have been
somehow identifying the risk as something
searchable and discoverable, in the same
nature as one searches and discovers open
building permits and work orders, and in
doing so, wrapping the cause in the blanket
of so-called title and off-title matters. Yet
there seems to be something broken in this
approach, because unlike work orders and
building permits, which are searchable and
discoverable, unpermitted work is not so
easily discovered. It certainly won't show up
in a municipal search because the
municipality doesn't know what it doesn't
know.And unpermitted work will more than
likely not show up in a customary property
inspection,unless it is so obviously deficient
that a reasonable inspection would discover
it. So really,whatthe Court has done,is take
what we would ordinarily consider a latent
defect, and recharacterize it as a "title
deficiency" because the defect occurred as a
consequence of building/renovating without a
permit. Or to put it another way,the Court has
effectively stated that title insurance
"marketability" coverage insures that the
building was built and renovated with building
permits. Whatthe case does not establish is that
title insurance "marketability" coverage insures
that the building is in compliance with the
building code for reasons other than the lack of
building permits (i.e. if the permit was
improperly granted, if the final inspections by
the municipality were faulty, or ifthe building
code has been amended to be more stringent
since the permit was granted).
The question then,is whatis the potential effect
ofthis case. It is not clear that only serious or
material unpermitted work is captured. While
on the facts of this case, the underlying work
was structural (rending the home unsafe), the
test in the policy was whether the deficiency
would "allow another person to refuse to
perform a contract to purchase or lease or to
make a mortgage loan". Lenders refuse to
advance loans for all manner of unpermitted
work, and certainly a purchaser can refuse to
close a transaction where portions of the
property have been built or renovated without a
permit (even if the work is not a matter of
safety or would otherwise be in compliance
with the building code). So it is difficult to
determine where the line for coverage is. The
approach,however,appears to be thatthe Court
will view the lack ofmarketability,not in terms
ofthe purchaser's inability to sell or finance the
property, but in terms of the purchaser being
able to sell or finance the property in the state
that it believed it purchased it in. And while
historically "state" was generally thought of as
being the state of title (and the accuracy of
certain municipal responses and the like), it
now encompasses the state of"compliance" of
the property with building code permit
requirements.From a policy perspective,this is
a difficult decision to reconcile, and it has the
hallmarks of so many other "deep pocket"
insurance claim cases that appear more result

4. 4
driven ("someone has to pay for this") than
good law. For my part,I would suggest that
the Court too quickly discounted the
introductory language in the policy...that
coverage is for risks that "affect your Title"
where Title means "the ownership of your
interest in the land",and expanded coverage
from defects in "ownership" to defects in
construction.
For insurers however, this does raise an
interesting question. The custom in
commercial real estate transactions, is for
the vendor to contractually authorize the
purchaser and its counsel to make written
enquiries of municipal authorities with
respect to building permits and work orders,
but such authorization typically expressly
prohibits the purchaser from requesting or
peunitting such municipalities to inspect the
property. Perhaps title insurers will require that
this practice be changed, and that purchasers
make reasonable efforts to have a building
inspection done by the municipality in order to
have the benefit of this "marketability"
coverage for peunits/approvals, so that, at the
very least,there is a diligence componentto the
risk being underwritten.
At the end of the day, this case is both fact
specific and policy specific, and so it matters
only for so long as there are policies that
contain language that can be similarly broadly
and expansively interpreted. And if the title
insurance community collectively considers
this to have been too broadly interpreted, then
they will have to clarify and narrow their
limited marketability coverage.

5. 5
Simon Crawford is a recognized leader in commercialreal estate law,
having acted onsome ofthe country's largest and mostcomplex real estate
transactions.In additionto being active inthe trading and financing ofreal
estate and real estate companies,Simon has extensive experience in private
equity structures,public real estate structures,and the issuance ofreal
estate backed securities,including the private placement ofasset backed
bonds and debentures. Simon has also authored various complex real estate
structures involving credit and synthetic lease vehicles,participating and
mezzanine loans,and structured debt stack solutions. On the development
and financing front,Simon has acted on many ofCanada's landmark properties,including
Toronto's TD Centre,First Canadian Place,Brookfield Place,Bay Adelaide Centre,Royal Bank
tower,and the Aura condominium project(being the tallestresidential projectto date in Canada).
Simon's contact particulars and additional details in respect ofhis practice can befound at:
http://www.linkedin.com/pub/simon-cravvford/14/116/878
This discussionpaper is notintended to provide legal advice, but to highlight matters ofinterest
in this area oflaw. Ifyou have questions or comments,please contactSimon Crawford directly.
Theforegoing discussion paper does not establish anyform oflawyer-client relationship with
Simon Crawford or any lawfirm at which he is a partner or is otherwise affiliated with. The
information contained in this discussion paper is public information and is not individualized
legal advice. Readers should not rely on or take any action based upon this information;
professional advice should be obtained. This discussion paper may contain errors or omissions
and any liabilityfor anysuch errors or omissions is hereby disclaimed.
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