Do building permits affect title to real estate?

1. DO BUILDING PERMITS AFFECT TITLE TO REAL ESTATE?
(A Consideration ofMacDonald v.Chicago Title)
Simon P.Crawford,Partner
Bennett Jones LLP
No,although unfortunately,we have to overcome a December2015 decision ofthe Ontario Court
ofAppealin orderto supportthat"no".A decisionthat,in orderto square withthelegalframework
ofreal estate law,will need to be either overturned or distinguished,filed away and forgotten as
being applicable to a very particular set offacts. Butfor the time being,the decision is recent and
hascaused something ofastirinthereal estatelegalcommunity andthetitleinsurancecommunity,
notso much because ofthe result,but because ofhow the Courtcameto the result.To understand
the topic however,one has to take afew steps back in order to consider generally, what building
permits are,and whythey would ever come up in aconversation related to a person's title to their
real property.
1. Whatis a Building Permit?
In Ontario, the Building Code Act' provides that no-one shall construct or demolish a building
unless a permit has been issued. As general rule,a building permit is required when constructing
a new building, adding to or renovating an existing structure, making structural alterations,
includingopening doorways,relocating walls,foundation work,changing heating,airconditioning
or plumbing work,and the like.Depending onthe nature ofthe building permitand the work,one
or moreinspections are required by agovernment(or government-appointed)inspectorto confirm
that the work has been completed in accordance with the building pemtit,following which the
building penultis closed.It may bethatinthe course ofthatinspection,the inspector mayidentify
other work thatis required in orderfor the building to comply with applicable laws,giving rise to
the issuance ofa work order.Until such building permit has been closed,it is commonly referred
to as an open building permit.
2. How does a buyer discover ifall requisite building permits have been obtained?
In short,a buyer cannot.It is customary,both in residential and commercial real estate purchases
for buyer's counsel to make written enquiries of municipal authorities (which enquiries we
commonly call "Off-Title Searches")requesting that the authorities disclose outstanding work
orders,open building permits,deficiency notices or other orders to comply thatthey have in their
files. Off-Title Searches may reveal to a buyerthe existence ofopen building permits,but will not
ordinarily disclose whether construction,renovation, demolition or other work has been done at
the property without a building permit (which work we will call "Non-Permitted Work").
Generally speaking,Non-Permitted Workindicatesthatthe owner or its contractor did not wantto
go through the hassle, cost or formalities required in order to obtain and comply with a building
peimit. So Non-Pellnitted Work is, for lack ofa better phrase, illegal work. A home inspection
(and even in the context ofa commercial transaction,a third party building condition report)will
1992 S.O. 1992,Chapter23
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2. not necessarily discover whether there is any Non-Peiiiiitted Work, especially if that work is
hidden behind walls and ceilings.
3. Does an open building permit affectthe seller's title?
When we think oftitle matters, we think ofregistered title to the property: registered ownership,
encumbrances,easements,transfers, conveyances and the like, and in some cases we may even
think ofunregistered interests,butstill thingsthat go to the enjoymentand quality oftitle,such as
unregistered easements or liens. What we do not often think ofas title matters are government-
issued work orders, deficiency notices and open building permits. More often than not, we think
ofthese matters(which solicitors diligence by conducting Off-Title Searches)as so-called "Off-
Title Matters".Even in the name is evidencethat we have historically categorized these issues as
being something other than issues related to or arising from title itself.
Inthe standardform ofpreprinted residential purchase agreementissued bythe Ontario RealEstate
Association(OREA),the following are stated to be the basis ofa valid requisition:
"...any valid objection to title or to any outstanding work order or deficiency
notice...is made in writing to Seller and which Seller is unable or unwilling to
remove, remedy or satisfy or obtain insurance...(Title Insurance)infavour ofthe
Buyer and any mortgagee,(with all related costs at the expense ofthe Seller), and
which Buyer will not waive, this Agreement notwithstanding any intermediate acts
or negotiations in respect ofsuch objections, shall be at an end...[and]save as to
any valid objection ...and exceptfor any objection going to the root ofthe title,
Buyershall be conclusively deemedto have acceptedSeller's title to theproperty."
Which is to illustrate, that standard foun requisition language also distinguishes between title
issues,work orders and deficiency notices,recognizing that work orders and deficiency notice do
not,in and ofthemselves,constitute title issues proper.
Requisitionsthat go to the"rootoftitle" are a special animal,and are generally qualified by being
soimportantasto go tothe heartofthetransaction,such thatthere is atotalfailure ofconsideration
on the partofthe seller. To putit another way,afailure in the root oftitle is afundamentalfailure
ofthe seller to be able to convey title. Think ofsuch fundamental problems as:the seller does not
exist,does not have the authority to sell the property,does notown and cannotcompelthe sale of
the property oris prevented bylaw from selling'the property.Over the course oftime,courts have
cautiously(although inconsistently)expanded the definition ofwhatcan constitute a"rootoftitle"
issue,but have generally remained consistentthatthe issue mustbe so significant asto constitute
afailure ofconsideration.
So we havetwo questionsto consider:are open building permits/Non-permitted Work title issues,
and ifso,arethey "root oftitle" issues?
In 2013,two cases influenced our understanding ofhow an open building pel it can or should be
treated in the contextofa conventional residential purchase and sale undera standardfoul"OREA
purchase agreement. In Thomas v. Carreno,2 the Ontario Superior Court ofJustice considered a
2 Thomas v. Carreno(2013 ONSC 1495)
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situationin which,in accordance with a customary requisition process,the buyerrequisitioned,in
a timely fashion,evidence that an open building permit had been closed. The seller made efforts
to close the permit in time but was unable to by closing. The standard OREA foiin purchase
agreement would have allowed the buyer to teiminate the agreement had there existed "valid
objectionsto title, or to anyoutstanding workorder or deficiency notice" made bythe buyerwithin
the requisition period(or any requisition after such period that went to the root oftitle)that the
"Seller is unwilling or unable to remove,remedy or satisfy or obtain[title]insurance"for.
Atclosingthesellerdeniedthatthe buyercouldrefuseto close becauseoftheopen building permit,
on the basis that an open building permit is not a "valid objection to title, or to any outstanding
work order or deficiency notice", but in any event(despite such denial)obtained a commitment
from atitle insurer(for the benefitofthe buyer)to insure the issue. The seller obtained this policy
by agreeing with the title insurer to set aside in escrow $100,000to attend to the problem.
The Court found in favour of the seller (and the buyer lost its deposit) on the basis that title
insurance was made available; and that the requisition provision in the agreement did not peiinit
termination where the valid requisition was insurable by title insurance. Whatthe Court appeared
to do in this case,is accept that an open building was a valid requisition(presumably,either as a
title matter or as a "precursor to a work order"). Interestingly, on appeal,the Ontario Court of
Appeal dismissed the buyer's appeal for the return ofits deposit,and found that the lower Court
had concluded correctly that "the requisition in relation to the open building permit could be
satisfactorily answered by a commitment to provide title insurance as contemplated by the
Agreement of Purchase and Sale", which is to say, that the Court of Appeal also tacitly
acknowledged the validity ofthe underlying requisition.
The Superior CourtofJustice in 2013 heard the case 1854822 v. Estate ofManuelMartins,3 which
involved the urgentrequestfrom the buyerofthe real estatefor an order ofthe Courtthatthe seller
had"notshown good title in the premises"on closing because there was an active building peimit
regarding work proposed to be done to the garage. During the requisition period,the buyer had
requisitioned thattheopen building permitbe closed,and the seller had responded thatthatrequest
was not a valid requisition. The seller took the position that, having regard to the language in the
standard form ofOREA purchase agreement,an open building permitis neither a work order nor
a deficiency notice, inasmuch as a building permit constitutes peiinission to do work, not a
requirement to do work. The seller also stressed that not only was a permit purely peunissive in
nature, but that no work had actually been commenced by the seller in furtherance ofthe open
building permit.
The Courtfound thata building permit,even ifnot acted upon(or even ifonly acted on to a small
extent),not only affects title but goes to the "root oftitle". Its rationale was that"the existence of
an open building pennit which enables the city to inspect premises and make work orders does
make a difference to the buyer"...and "clearly an inspector has the authority under the Building
Code Act to make an order that certain work be undertaken immediately to bring the garage into
compliance with the code".
1854822 Ontario Ltd. v. The Estate ofManuelMartins(2013 ONSC4310(CANLII))
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The implications ofthis finding are significant,because it not only stands for the proposition that
open building peg nits can be validly requisitioned as title matters, but that they are not merely
clouds on title or minor defects —they go to the "rootoftitle".
In my view,these decisions are a direct result ofstandard form requisition language that allows
for only three types ofrequisitions:title, work orders,and deficiency notices,forcing the Courtto
struggle to find a way in which to shoehorn building permits into the "title" category.
Butis it good law? In my view,itis suspectlaw. As mentioned above,there are mattersthat go to
title,and there are mattersthat are so fundamental,thatthey go to the root oftitle. And the reason
thatthe standard OREA form specifically provides thatrequisitions may be made for work orders
and deficiency notices, is so that they are (as a matter of contract), elevated to the level of
importance oftitle,forthe purposes ofa buyer's requisitions.This does notmakethem title issues,
but merely contractually putsthem on the same level ofimportance as title matters.In this regard
we take some guidancefrom the Ontario High Court ofJustice in Kolan v.Solicitor4:
"...breaches ofzoning by-laws orfailure to conform with an officialplan can be
considered defects of title which will entitle the purchaser to rescission, even
though they relate to the actualphysical condition ofthe land. But in the case of
zoning by-laws orplanning controls, and in my opinion also in the case offailure
to conform with housing by-laws, to affect the marketability ofthe title they must
be expressly mentionedin the contractofsale asgroundsforavoidance"{emphasis
added}
They must be expressly mentioned in the contract of sale as grounds for avoidance, which is
precisely why the standard OREA faun mentions work orders and deficiency notices as additions
to title issues in the requisition section. They don'tthereby become title matters,butthey become
elevated to the level ofimportance oftitle matters.
This,ofcourse,leadsto an interesting question: why doesn'tthe standard OREAform ofpurchase
agreementinclude open building petinits in the list of"elevated"issuestogether with work orders
and deficiency notices? In short,it should,and atthe very least, buyers'solicitors would do well
to add reference to them.
However thanks to the decision in 1854822,there is(for a time being),a cloud hanging over the
law as it relates to open building peunits,inasmuch as an Ontario court has mistakenly elevated
them not only to being title matters,butto being rootoftitle matters.
4. Doesthe lack ofa building permitfor Non-Permitted Work affecttitle?
Ifone accepts1854822as being goodlaw andthatopen building permitsconstitute a"rootoftitle"
issue,then a requisition under a standard requisition provision(and for that matter,a requisition
undersection 4(c)ofthe Seller's andBuyer'sActRSO 1990,c V2)maybe validly made byabuyer
in respectofan open building pelmit(and presumablyin respectofNon-Peimitted Work)right up
until closing. However,if a prudent buyer's solicitor considers the decision in 1854822 to be a
questionable result, then that solicitor would not want to rely on the decision as a basis for
Kolan v.Solicitor[1970] 1 O.R.41-54,1969 CanLII406(ON SC)
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requisitioning open building permits, or for that matter, Non-Permitted Work as title matters
proper.Assuggested above,the better view,isthata buyer's solicitor should add provisionsto the
purchase and sale contract that contractually elevate the importance ofthese issues by way of
requisition language and/or closing conditions/representations.
In Cinram Ltd. v. Armadale Enterprises Ltd.',the Ontario Court ofAppeal considered a seller's
warranty in a purchase and sale agreementthatread that on closing the buyer would obtain"good
and marketable title thereto,free and clear ofall mortgages, liens, charges, security interests,
adverse claims,pledges,encumbrancesanddemands".Thatrepresentation was given bythe seller
despitethefactthatthere wasan outstanding building by-law contravention and an ordertocomply
issued by the municipality. More specifically, the seller had constructed two additions to the
property without building peiiiiits and had received a notice to comply.The Courtfound that:
"On a simple reading ofthis clause, it is clear that title alone has been made the
subjectofthe warranty andthatthe use ofthe lands was notcontemplatedtherein.
Therefore, a determination mustbe made asto whether theparticulareventsin this
case can be said to affect title. ifthey do nottouch title, Cinram cannotrely on the
warranty in the action to recover damages relating to such events".
Then,relying on the Kolan decision(considered above),the Court stated that:
"...while land use controls which are not registered against the lands are not
normally considered matters oftitle, they can be elevated to thatposition by the
language used by theparties in the agreement".
And with that being the premise,the Court denied that the underlying facts(the Non-Permitted
Work and the municipal notice to comply)constituted a breach ofthe representation to give good
and marketable title.
So despitethe2013 decision in 1854822,a better view ofthe law isthatNon-Pemritted Work does
not constitute a title issue, but(like open building permit issues) can be elevated to the level of
title matters by specific language in the purchase agreement.
While the above discussions are informative for practitioners,they are collectively the prologueto
the purpose ofthis paper,because in December 2015 the Ontario Court ofAppeal considered the
issue of"title" and Non-Permitted Work in a very different context--the contextoftitle insurance
-- and rendered a decision that has had,and will have,an impact on title insurance policies issued
by all major Canadian title insurers. The following sections ofthis discussion address this Court
of Appeal decision by exploring how customary title insurance policies (both residential and
commercial)address matters ofopen building permits and Non-Permitted Work.
5. Do residential owner title policies customarily provide express coverage for open
building permits?
Generally speaking, residential title policies fall into two categories: single family dwelling
policies and policies for buildings(or groups ofbuildings)with more than one residence.For the
'Cinram Ltd. v. Armadale Enterprises Ltd., 1996 CanL11608(On CA)
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most part,a single family home policy will not require the owner or its solicitor to conduct Off-
Title Searches, and will insure the buyer for problems associated with defects that would have
been discovered had those Off-Title Searches been done. As a general rule,title policies will not
insure compliance defectsthat would nothave been discovered by conducting Off-Title Searches.
If,despite having the coverage,the buyer doesthe Off-Title Searches and discovers a defect,such
defect is excluded from the coverage,as coverage is typically exclusive ofdefects that the buyer
was aware ofatthe time ofclosing(what we call,"Known Defects").This presents something of
a conundrum for some solicitors and their buyer clients however, because this coverage against
Off-Title Searches is based on the theory "what you do not know will not hurt you",which is to
say,that buyers willintentionally notdo Off-Title Searches so asto get betterinsurance coverage.
Why does this matter? Other than the fact that we generally approach real estate purchases with
the notion that more information is better than less,one can imagine thatcertain buyers may have
intentionsforthe property(redevelopment,renovation,addition)that may be specifically affected
by what would have been discovered had the Off-Title Searches been perfoiiiied, and which
intentions are notinsured/guaranteed by the policy.
6. Do residential owner title policies customarily provide express coverage for work
done without a building permit?
It is not uncommon for residential owner policies to provide express coverage against Non-
Peiiiiitted Work(other than Known Defects). An example title policy expresses the coverage like
this:
"Youareforced byagovernmentoffice to remove orremedyyour existingstructure
or anypart ofthem other than a boundary wall orfence, because anyportion ofit
was built withoutobtaininga buildingpermitfrom thepropergovernment office."
We refer to this type ofcoverage as"No Permit Coverage",and in the context ofresidential real
estate, this is one of those areas of coverage that can be valuable to a homebuyer because, as
discussed above, Non-Peimitted Work is very difficult to discover. Off-Title Searches are
unhelpful and building inspections are not deteiminative.In fact,ifa building inspection is done
and the reportreveals a defectthat was an indicator(or could reasonably have been expected to be
an indicator)that Non-Peitnitted Work was done,the building inspection report may itself be a
defence to coverage to the extentthatit was a Known Defect atclosing.Keep in mind,not all title
policies are created equal,but as a general rule,the larger Canadian title insurers provide this(or
similar)coverage in their single family home owner policy.
7. Do commercial owner title policies customarily provide express coverage for open
building permits?
Commercial (i.e. non-residential) owner title policies are fundamentally different that their
residential cousins,andforgood reason.The buyers are moreoften sophisticated buyers,thescope
ofdue diligence is different,and the risks and policy costs are different.Unlike residential policies
thatallow abuyerto avoid doing Off-Title Searchesand enjoyinsurance againstdefectsthatwould
have been discovered had Off-Title Searchesbeen done,commercial policiesgenerallyinsure only
in respect of there being inaccuracy in the responses received from governmental authorities.
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Which is to say, that buyers of commercial real estate conduct Off-Title Searches, review the
responses and enjoy title insurance coverage only in respectofany errors in those responses.
In some cases, and with prior discussion with the title insurer, a buyer can negotiate a specific
endorsementto cover itagainstthe risk ofa particular matterthat has been disclosed in aresponse
to an Off-Title Search. Recall the case described above(Thomas v. Carreno)in which the seller
had negotiated(with the title insurer)and offered to pay for the buyer title insurance in respect of
an open building pennit,whichinsurance was underwritten on the basisthatthe seller was putting
aside in escrow sufficientfunds to securethe closure ofthe building permit.
8. Do commercial owner title policies customarily provide express coverage for work
done without a building permit?
A standard commercial title policy does not include an express No-Permit Coverage clause and
generally speaking,it is notthe intention oftitle insurers to insure againstNon-Pellnitted Work in
commercialtransactions,ifforno otherreasonthanthatthe costofremedying and rectifyingissues
with commercial properties could be exponentially different from residential properties,and that
such risk is not priced into the policy premium. This is not to say that creative title insurers will
not insure specific peunit issues with specific owners and custom-craft policies in certain
circumstances. But the general position historically, has been that commercial policies do not
insure ownersfor Non-Permitted Work.However,andthis isa big however,as will be seen in the
next section,the Ontario Court of Appeal decided in December 2015 that the title marketability
coverage provision in a residential policy provides insurance against Non-Permitted Work on the
basis that Non-Permitted Work can affectthe marketability oftitle, which decision now is having
a ripple effect that runs through all title policies, residential and commercial, potentially
unintentionally broadening their scope to cover Non-Permitted Work.
9. Non-Permitted Work and Title Marketability Coverage
In a 2014,the Ontario Superior Court ofJustice heard the case ofMacDonald v. Chicago Title
Insurance Co ofCanada,6 which case was based on the following undisputed facts:
(a) the MacDonalds acquired a home without knowledge that the seller had removed
load bearing walls in the home without a building permit;
(b) the MacDonalds had purchased an owner's policyfrom Chicago Title;
(c) some years later the City of Toronto determined that the home was unsafe as a
consequence ofsuch wall being removed,and issued an order to them to remedy
the problem by installing shoring to "temporarily supportthe floor structure";and
(d) Chicago Title refused coverage.
6 MacDonald v.Chicago Title Insurance Co ofCanada(123 O.R.(3d)789,248 A.C.W.S.(3d)471,43 C.C.L.I.(5th)207)
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The title policy contained two provisions that are of particular interest. Firstly, it provided No-
Permit Coverage when:
"16. You areforcedto removeyour existingstructure — other than a boundary wall
orfence — because anyportion ofit was built without obtaining a buildingpermit
from thepropergovernmentoffice or agency".
Notethatthislanguage differsfrom the No-Permit Coverage language in many current residential
policies inasmuch as it omits the words"or remedy" as set outin the example below:
"You areforced by a government office remove or remedy your existing structure
— other than a boundary wallorfence — because anyportion ofit was built without
obtaininga buildingpermitfrom thepropergovernmentoffice."{emphasis added}
This difference appears to be crucial because, with the additional words "or remedy",the policy
would have likely covered the Non-Permitted Work as:
(a) the City ofToronto is a"government office";and
(b) it"forced"the MacDonaldsto"remedy"the existing structure,because"it wasbuilt
withoutobtaining a building permitfrom the proper government office".
Butthe words"orremedy"were notinthe policy and the Courtdetermined that Section 16 did not
provide coverage because "while a portion ofthe applicants'home, being that part deficiently
renovated, was "built without obtaining a buildingpermit"from the city, nothing hasforced the
applicants to "remove"their existingstructure".
The Court then considered coverage under Section 11 of the policy which provided coverage
where:
"Your title is unmarketable, which allows another person to refuse to perform a
contracttopurchase, to lease, or to make a mortgage loan".
For our purposes we call thistype ofcoverage"Title Marketability Coverage".In general WI ns,
it provides coverage where the insured is unable to sell its property or obtain a mortgage due to a
covered title issue.
The Ontario Superior Court found that the Title Marketability Coverage did not cover the
MacDonaldsfortheir loss.
But it is this Title Marketability Coverage that became important on appeal.The Court ofAppeal
ofOntario heard the appeal ofthe MacDonalds and issued its decision in December 2015. Like
the court below it,the Court ofAppeal did nottry to expand or apply the No-Permit Coverage in
Section 16 ofthe policy(presumably because ittoo could notfitthe facts to the provision).
Instead, the Court of Appeal determined that Section 11 (the Title Marketability Coverage
provision)was all that needed to be considered. To set the groundwork for its finding,the Court
decided that the lower court had adopted "an unduly restrictive interpretation ofthe coverage
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9. 9
provisions in the Title Policy" and outlined that the following principles of interpretation for
insurance contracts are "wellsettled in Canadian Law":
(a) "the Courtmustsearchfor an interpretationfrom the whole ofthe contractandany
relevantsurrounding circumstances thatpromotes the true intent and reasonable
expectations oftheparties atthe time ofthe entry into the contract;
(b) where words are capable oftwo or more meanings, the meaning that is more
reasonable inpromotingthe intention oftheparties will be selected;
(c) ambiguities will be construed against the insurer havingregard to the reasonable
expectations oftheparties;
(d) an interpretation that will result in either a windfall to the insurer or an
unanticipatedrecovery to the insured is to be avoided,•
(e) coverageprovisions are to be construed broadly, which exclusion clauses are to be
construed narrowly;
(g)
the contract of insurance should be interpreted to promote a reasonable
commercialresult; and
a clause should not be given effect ifto do so would nullij;the coverage provided
by thepolicy".
With these principles ofinterpretation in hand,the Court then directed its attention to Section 11
ofthe title policy(the Title Marketability Coverage). Chicago Title had argued that the property
was still marketable, albeit marketable for less value as a consequence ofthe defect. The Court
disagreed and stated that marketable meant,on theterms ofSection 11,that"a potential buyer can
refuse to close an agreement ofpurchase and sale on learning ofthe defect". The Courtfound that
Chicago Title had not disputed thatthe condition ofthe property would allow a potential buyer to
refuse to close a purchase transaction,implying thatthe insurer had effectively conceded thatthe
test was met. And in addition, the Court denied Chicago Title's position that the cause of the
problem was the faulty construction(a "latent defect in construction")and instead found that the
"unmarketability" oftitle wasthe directresultofthe failure ofthe prior ownerto obtain a building
permit.
The Courtalso considered Chicago Title's argumentthatthe policy wasneverintended by Chicago
Title to cover the type ofloss suffered in this instance, on the basis that the insurer's subjective
intentions are irrelevant. I would venture however,that Chicago Title's argument on this point
likely did notring true in large part because ofthe existence ofthe separate No-Permit Coverage
contained in Section 16 ofthe policy.Had itnot been forthe technical wording(the provision said
"remove" and not"remove or remedy"),this was exactly the type ofsituation that the policy was
designed to cover. It just was not meant to cover it under Section 11 (the Title Marketability
Coverage).
This decision(not unlike the decision in Thomas)was result driven,and the legal concept oftitle
was bent to do it. In Thomas,the Court could not call an open building a work order or deficiency
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notice, so it called it a "root oftitle" issue so that it could be validly requisitioned. Similarly in
MacDonald,the Court could not call the new supporting wall a "removal" under the No-Permit
Coverage,so it squeezed itinto the Title Marketability Coverage,which is meantto deal with title
issues.Right equitable results perhaps,but wrong legal reasons.
Let's putthe pieces together then.Ifyou recall, we began this discussion by looking at cases that
had found or suggested that open building permits were title issues. So in the lineage ofthose
cases,it may notbeso incredibleto somethatthe CourtofAppealfound thatthelack ofa building
per impaired the marketability oftitle for the purposes oftitle insurance.
However,if we consider the broader context ofthe discussion and the cases discussed above,it
becomes apparentthatopen building permits,and Non-Permitted Work are nottitle matters at all,
and do not go to the marketability oftitle, but may be elevated by the insurer to the level oftitle
matters ifit expressly provides for coverage in the contract. Which is to say,that the title insurer
can make open building permits and Non-Permitted Work insured risks, and cover them in the
same manner as title risks,butthat does not makethem title matters.
This, of course, is exactly what the No-Permit Coverage provision in residential policies is
designed to do. It sets out specific circumstances in which risks associated with Non-Permitted
Work are insured.It"elevates"(as it were)Non-Permitted Work to the level ofinsured title risks.
It does not,however,make it a title risk.
Curiously,as shown above,the Courttook great effort to spell outthatinsurance coverage should
be interpreted broadly,and exceptions narrowly,with an overall view to giving effect to the true
intent ofthe coverage.And in my view,the Court(and forthat matter,Chicago Title)would have
done better to give a broader interpretation to Section 16 ofthe policy(the No-Permit Coverage)
and broadly interpret"remove"so as to include removal,in whole or in part,or as part ofa larger
remedy by the insured. That would have been the better result, would have provided coverage to
the insured,and would have been consistent with the overallintention ofthe No-Permit Coverage
and the title policy generally.
For the time being then,we are faced with a decision that potentially:
(a) renders specific No-Permit Coverage language in residential owner policies
redundant where there is marketability oftitle coverage;
(b) specifically extends coverage for the marketability oftitle, both in residential and
commercialtitle policies to cover Non-Permitted Work(which is, by all accounts,
an absurd result);
(c) opensthe doorfor other mattersthat are notconsidered title matters atlaw(such as
zoning compliance,work orders, deficiency notices and the like)to be elevated to
the status oftitle matters,notwithstanding that they were intended to be excluded
or may otherwise be included in other specific sections ofthe policy;and
(d) imposes on the Canadian title insurance community the unwelcome challenge of
revisiting their title policy language so as to more particularly circumscribe those
matters that go to the marketability oftitle.
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11. Returning to basics, title to real property is different than the real property itself. Putting aside
historical semantics of property law for a moment, there remains a difference between what
constitutes one's title in land, and the land and building itself. And the marketability oftitle and
the marketability ofland and building are two very different things. A careful read ofmany title
insurance policies(and the more mature U.S.jurisprudence on title insurance)gives us guidance
that there is a stated and intended difference between coverage that goes to whether the title is
rendered unmarketable and whether the land (or property)is unmarketable. It is not uncommon
for residential title policies to provide coverage for specific Off-Title Matters (survey issues,
zoning violations and the like)that havethe resultofrenderingtheland or property unmarketable,
and such language is specifically differentfrom the language that describes coverage for matters
oftitle unmarketability.
Butnoneofthisappeared to be considered bythe Ontario CourtofAppeal.And so,in onedecision,
the case law now exposes title insurers to numerous unintended consequences of their Title
Marketability Coverage,the impact ofwhich may be moderate in residential policies, but which
in the context ofcommercial policies is notionally massive.
10. Building Permits Closed in Error
Mostofyou will stop reading here.Butforthe benefitofthose who have endured thisfar,there is
another situation that we have not considered in this paper,and which merits mention,even ifas
an afterword. We have considered the problem ofopen building permits and Non-Permitted Work,
but have not considered the problem of building permits that were issued and closed, but were
improperly closed by the building inspector due to an error or omission ofthe building inspector
(what we will call"Negligently Permitted Work").
Without further discussion, I will suggest that given the decision in MacDonald,and the broad
interpretation ofTitle Marketability Coverage,title insurers must also be mindful as to whether
they have been exposed by the decision ofthe Ontario Court ofAppealto claims for Negligently
Permitted Work. While there may be reasons to distinguish this from Non-Permitted Work,the
issue is live.
Thatsaid,there has been some developmentin recent yearsinthe law related to municipalliability
for Negligently Permitted Work.InIngles v. Tutkaluk,7the Supreme Court ofCanada considered
the situation ofa homeowner who had hired a contractorto renovate his basementand foundation.
The homeowner was persuaded by the contractor to allow the work to commence without a
building permit.By the time the inspector was called to inspectthe work,much ofthe foundation
work had been covered and could no longer be seen. Instead ofcausing the contractor to dig up
the work so that it could be inspected, the inspector took the builder's word that certain
requirements had been met. Later, the homeowner discovered that the work was deficient. The
homeowner sued the municipality.
Unlike much ofwhat we have discussed above,this issue is based not in contract law,but in the
law of torts, which is a regime that depends on establishing a duty of care from one person to
Ingles v Tutkaluk Construction Ltd.[2000] 1 SCR 289
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another. The Court found the following (which continue to be the general tests of establishing
municipal liabilityfor Negligently Permitted Work):
(a) the municipality had aprimafacie duty ofcare,as it is reasonably foreseeable that
adeficientinspection ofwork atahome could resultin damage or injuryto persons
and property;and
(b) the municipality had made a general policy decision to inspectconstruction evenin
situations where the work had already begun, and when it exercised its power to
inspectthis work,it owed a duty ofcare to all such persons who might reasonably
be injured by the negligent exercise ofthat power.
Interestingly,the courts have expanded the duty ofcare set out above to third parties(which is to
say, persons other than the home owner). For example,in Mortimer v. Cameron,8 the Ontario
Court of Appeal found that a third party visitor to a home who was injured due to Negligently
Permitted Work fifteen yearsfollowing the inspection,wasincluded in the scope ofthose persons
who are owed the duty ofcare my the municipality. I mention this case, because,in my view,it
forms the basis for a sound argumentthat any buyer ofa home(and its mortgagee)may similarly
be included in the scope ofpersons who may have a claim against a municipality for Negligently
Permitted Work done priorto its period ofownership.Ofcourse,being one step removedfrom the
facts ofthe work,any subsequent buyer may have a difficult evidentiary task in proving that the
work permit was negligently granted and may be barred by applicable limitation periods.
However,as always,"buyer beware".In 2010the decision in Theriault v.Lanthier9 was rendered.
In that case the claimant had purchased a home that had foundations below the watertable.Before
closing the buyer had had a home inspection done and the inspection evidenced potential water
leakage. Despite the home inspection report the buyer did not do additional investigations and
boughtthe home. When he suffered additional damage following closing as a consequence ofthe
faulty construction he claimed against the building authority. In dismissing his claim the Court
stated that no action can be brought against the building authority for failing to detect the defect
where such defect could have been discovered in an inspection of a reasonably diligent buyer.
Which is to say,that the Courtfound that thatthe municipality was relieved from liability where
the defect was discovered or reasonably discoverable.
1 1. Closing Thoughts
Real estate law is afunny animal,with a unique and tortured history,and the case law in Ontario
has evolved to address commercial realities despite any number ofjudicial hiccups.In December
2015 there was one such hiccup.Ascoined above,rightequitable results,but wrong legalreasons.
And is so often the case, the decision reflects a mature judicial understanding of commercial
intentions, but lacking the right contractual or legal pieces,forces a round peg in a square hole.
The result in MacDonald,is that long established basic principles oftitle insurance(long ifone
includes their U.S.heritage)have been clouded in Ontario(and potentially elsewhere in Canada),
8 Mortimer v. Cameron(1994), I1 1 DLR(4th)428(OntCA)
Theriault v. Lanthier[2010]O.J.No 1545(S.C.J.)(QL)
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unnecessarily requiring the Canadian title insurance industry to revisit their existing policy
exposure and their future policy language.
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