Title Insurance: Peace of Mind for the Commercial Lender
Title insurance is available for a wide variety of commercial and residential transactions. In the commercial lending context, a lender may secure a loan against real property of the borrower. The risk of loss to the lender is only diminished if the property can be realized at a value equal or close to that of the loan. Issues affecting the quality of title, the use and enjoyment of the property, and the legalities surrounding the property transaction can prevent the lender from realizing on the full value of the property and in some instances can lead to significant financial loss for the lender. A lender may mitigate against these risks by obtaining a title insurance policy.
Title insurance can protect against unknown or pre-existing defects that may not show up on title. Coverage against such issues affecting the quality of title, known as title issues, include protection against losses related to encumbrances, liens, and other competing claims or interests in connection with the real property. The following example helps illustrate the role title issues can play in the commercial lending context:
A commercial lender takes a mortgage over a shopping center as part of a financing. The corporate borrower is unable to meet the mortgage obligations and the lender forecloses on the property. During foreclosure, the lender discovers that the corporate borrower failed to remit HST payments in the course of its business. As a result, the Canada Revenue Agency has a lien on the property that ranks higher in priority than the lender’s mortgage. This could result in a shortfall for the lender.
In such a scenario, title insurance may protect the lender by paying out the amount owing to the Canada Revenue Agency as of the date of the policy, limiting the lender’s shortfall.
Title insurance can also protect against issues affecting the use and enjoyment of the property, which are known as off-title issues. These issues can arise with respect to zoning and municipal by-law compliance, regulations, lack of legal access and boundary issues, lack of building permits, and non-compliance with subdivision and development agreements. An example of how an off-title issue can affect a commercial lender is as follows:
The lender in a commercial transaction takes a mortgage over an apartment complex. The lender subsequently discovers that the apartment complex has been constructed with too many units and is not in compliance with zoning by-laws. As a result of this, the value of the property will likely decrease until the building is brought into compliance with the applicable zoning by-laws.
In this instance, a title insurance policy would insure against the loss or damage resulting from a zoning violation in existence as of the date of the policy and would help limit the lender’s loss should the borrower default on the loan prior to the issue being resolved.
A title insurance policy can also protect against issues that relate to the legality of the property transaction. These issues, referred to as transactional issues, often involve instances of fraud or duress. An example of this in the commercial lending context is as follows:
A commercial lender agrees to mortgage a property to a borrower on the understanding that a pre-existing mortgage from a private lender that is registered against the property will be postponed. The lender obtains a postponement of the pre-existing mortgage and advances funds to the borrower. However, the private lender subsequently claims that the postponement was forged and is therefore invalid.
In this circumstance, title insurance allows for an investigation to determine the validity of the claim. If it is determined that the postponement was forged, the lender would be covered for the resulting losses to the extent specified in the policy.
As the above examples help to illustrate, each commercial transaction presents its own set of challenges and complexities. Despite best efforts and thorough due diligence, there are certain issues that may arise in commercial transactions involving real property that can have an adverse effect on the lender. To mitigate against the risk of financial loss, a lender should be cognizant of these issues concerning the quality of the title, the use and enjoyment of the property, and the legalities of the transaction. Title insurance is one tool that can offer lenders a certain peace of mind and can help address many of these issues to the extent of the coverage specified in the policy. As such, title insurance should be carefully considered by the lender before extending a loan.