Due Diligence and the Land Titles Registry
3 principles underlie the Land Titles Registry:
- the curtain principle, which stands for the proposition that it is unnecessary to examine the history of previous dealings with the land;
- the mirror principle, which stands for the proposition that the Register is an exact reflection of the current state of title; and
- the insurance principle, which stands for the proposition that the government guarantees the accuracy of the Registry and compensates those that suffer a loss as a result of inaccuracy.
The recent 2015 Ontario Superior Court of Justice decision, CIBC Mortgages Inc. v Computershare Trust Co. of Canada (the “Case”), appears to have altered the duties of mortgagees and purchasers in the Land Titles Registry with respect to the underlying principles.
In the Case, Computershare Trust Co. of Canada (Computershare), the first mortgagee, was granted a mortgage against the property by the owner of the subject property. The owner then acted fraudulently to discharge Computershare’s mortgage which gave the owner title to the property free of any encumbrances. CIBC Mortgages Inc. (CIBC), the second mortgagee, was then granted a mortgage on the property by the owner/fraudster believing that CIBC’s mortgage was a first priority mortgage on the property. Additionally, Secure Capital MIC Inc. (Secure Capital), the third mortgagee, was granted a mortgage to the property believing Secure Capital’s mortgage was a second priority mortgage.
The owner/fraudster continued to make payments on the Computershare mortgage to maintain the fraud. It was only upon default of the Computershare mortgage that the fraud was discovered. The Case was brought to determine the priority of the charges registered against the property.
It was determined that the Computershare mortgage was a valid charge that had been fraudulently discharged. The discharge was a void instrument as registration of a fraudulent instrument will not cure its defect. Both the CIBC mortgage and the Secure Capital mortgage were found to be valid instruments. However, the interest in the property granted to CIBC and Secure Capital could be defeated by a claim of a bona fide owner or mortgagee, namely Computershare.
CIBC and Secure Capital were considered intermediate owners, meaning that the mortgagees, as bona fide purchasers for value, gained an interest in the land from the immediate dealings with the fraudster and had the opportunity to discover the fraud. To rely on the Land Titles Registry, a party must demonstrate due diligence before registering a charge on a property. In the Case, the court considered that the intermediate owners should have at least inquired as to how the owners were able to pay out the Computershare mortgage given their current financial standing.
This decision at the very least erodes the principles that underlie the Land Titles Registry. No longer can a mortgagee or purchaser of interest in a property simply rely on the accuracy of the Land Titles Registry. To rely on the mirror and curtain principles, a mortgagee or purchaser of interest must demonstrate that the interest was acquired subject to a diligent examination into the history of previous charges and discharges on title. Additionally, due diligence must be demonstrated for remuneration from the Assurance Fund. Thus, due diligence appears to be a requirement for any reliance or protection afforded by the Land Titles Registry.
Of interest is the finding that, had a bona fide purchaser for value purchased the interest of the property from CIBC and Secure Capital, that purchaser would be said to hold title to the land better than anyone in the world. Thus, although a fraudulent instrument may not create good title to land, it is capable of establishing a chain to good title to land.
This decision is currently being appealed. The trial decision can be found by clicking here.