Real Estate Fraud – A Victory for the Homeowner
Although not a rampant crime, real estate fraud will not go away. As we have explained in previous editions1 of Legal Issues, real estate fraud can result in a home being sold or mortgaged without the knowledge of the legal owner. Up until recently this has meant that innocent owners risk losing their home, since the scam artist is usually long gone by the time the fraud comes to light. However, a recent decision of the Ontario Superior Court of Justice provides some welcome news for property owners.
The Facts
In 2001, the Rs purchased a condo in north Toronto. Three years later, the property was mortgage free. Unbeknownst to the Rs, while they were paying off the last of their mortgage, fraud artists, posing as the Rs, purported to sell the condo to a bogus purchaser. The price for this fraudulent sale was $270,000. In addition, the bogus purchaser granted a mortgage on the Rs condo to TD in the amount of $247,860. The deed and the mortgage were registered at the Registry Office.
The fraud artists presented what appeared to be proper identification at the time of the sale.
When the Rs discovered what had happened, they sued the bank. Specifically, the Rs sought to have title to their condo restored to their names and the fraudulent mortgage set aside. Although the bank agreed that the fraudulent transfer was invalid, it argued that the mortgage was a valid charge on the property.
The Law
In 1885, Ontario adopted a land system whereby title to real property would be established by setting up a register. The register would guarantee that the person named as property owner had title subject only to any registered encumbrances. Although the government eventually enacted the Land Titles Act, the Supreme Court of Canada has stated that the statute did not abolish the original principals of the common law.
The Decision
The judge in the Rs’ case concluded that the mortgage was a fraudulent charge and was void. He recognized that the Rs and the bank were innocent parties, however only the bank had been in a position to do something which might have been able to prevent the fraud. In the judge’s view, the bank had failed to exercise due diligence by ensuring that a proper in-person appraisal was carried out prior to releasing the mortgage monies. He also found that certain anomalies should have put the bank on notice that something was not right. The end result was that the bank could not rely on the register in this instance.
The Caveat
Last year the Ontario Court of Appeal decided Household Realty v. Liu, another mortgage fraud case, in favour of the mortgagee. But unlike the Rs case, where the registered owners of the condo were completely innocent in the fraud, the fraud in the Household Reality case did involve one of the registered owners. Most cases involving a fraudulent mortgage are decided in the mortgagee’s favour. Therefore it is by no means certain that if TD appeals this decision that the appellate court will not rule in its favour. Having said that, this particular set of facts might be different enough to favour the homeowners.
What To Do?
Although this type of fraud is more common than ever before, it remains relatively insignificant when one considers the number of transactions that are registered on a daily basis in the Ontario Registry System.
The Ontario government recently amended the Land Titles Act to ensure that ownership of property cannot be lost as a result of the registration of a falsified mortgage, fraudulent sale or a counterfeit power of attorney. Any land titles obtained by fraudulent means will be null and void. The changes will also speed up financial assistance for victims of fraud, ensuring the title is returned and a decision on compensation is made within 90 days. In addition, the maximum penalty for real estate fraud has been raised to $50,000 from $1,000.
A proactive step that you can take to protect yourself from this kind of fraud is to purchase title insurance. It can be ordered through your lawyer during a refinance transaction or at any time during the course of home ownership. The policy is effective from the date on which you took title to the property until you sell your home.
If you would like to learn more about purchasing title insurance contact Stanley Landau.
See also . . .
What is Title Fraud? (Fall 04)
Title Fraud – The Sequel (Summer 05)
Keeping Your Identity Your Own (Spring 05)