The Land Titles Register: Can it be relied on? Real Estate Fraud - you're the target
What may be more shocking than the brazen conduct of the fraudsters is the damage done by the fraud and how the authorities react to it.
The lawyer's first reaction is probably that this is a case for the Land Titles Assurance Fund since, of course, Land Titles guarantees titles and guarantees against fraud. Surely, the new lender and the lawyer were entitled to rely on the title register to take a mortgage from Mr. X. Surely Land Titles has responsibility for registering and vouching for the deed to Mr. X and the bank's mortgage discharge.
Most lawyers would, without hesitation, come to the defence of a lawyer who clearly followed accepted conveyancing practice. The lawyer relied on the Land Titles system that guarantees title to the registered owner and received photo identification from the borrower.
Unfortunately, the Land Titles system does not make guarantees, or if it does, it does so in a very limited way. The Land Titles system operates on certain legal principles and on statutory provisions contained in the Land Titles Act.
The two major principles of Land Titles, the mirror principle (the title register reflects ownership) and the curtain principle (one does not have to look behind the title of the person shown as registered owner) do not operate without qualification when there is fraud. A forged document is null and void even in Land Titles and, but for certain provisions in the Land Titles Act, it has no effect. It is for this reason alone that lawyers giving opinions on the validity and enforceability of documents should consider confirming the identity of signing parties.
The ability of lawyers to rely on the title register in Land titles has its theoretical roots in the interpretation of the Land Titles Act and the application of one of two doctrines: immediate indefeasibility and deferred indefeasibility.
The doctrine of immediate indefeasibility would find that once Mr. X was registered as owner of the land, he is, in fact, the owner, even if he became the registered owner fraudulently. That, however, does not appear to be the law in Ontario. The person who has fraudulently been registered as owner does not acquire good title. The title register does not guarantee good title to the fraudster simply by virtue of being named the owner on title.
With deferred indefeasibility, however, while Mr. X doesn't get title simply by being the registered owner, anyone who innocently deals with him as the registered owner, regardless of how Mr. X became the registered owner, and without actual notice of the fraud will acquire an interest in the land. It is the second person relying on the registered title and not the fraudulent titled owner that gets title. An indefeasible title is deferred to the innocent person dealing with the person registered as owner.
In our case, Mr. X never gets title to the property just because he is registered as owner. The mirror principle and the right to rely on the title register breaks down. However, the new lender can obtain a valid interest in land and can rely on the mirror principle and the curtain principle to obtain a valid interest in land since the lender relies on deferred indefeasibility. A good example of this principle is set out in the recently reported Durrani case where an innocent bank's mortgage was valid even though the borrower was held ultimately not to be the owner of the property.
However, there is a catch to this doctrine of deferred indefeasibility which explains why imposters, signing for registered owners, can never create valid interests in land.
The Land Titles Act specifies that only the person registered as owner can charge land. Thus, the new mortgage is valid according to the law of deferred indefeasibility only if the person who is the registered owner has signed the mortgage. If the person who is registered on title as Mr. X did not exist and Mr. X was a fictitious name and the fraudster used forged identification, the mortgage is invalid and deferred indefeasibility does not apply.
Similarly, if there was a real Mr. X, but the person who attended at the lawyer's office was an imposter for Mr. X, then the mortgage is invalid according to the doctrine of deferred indefeasibility and the Land Titles Act because only the registered owner has the right to charge the property. This is the common problem when Mr. X appears with his imposter spouse to sign a mortgage. The real spouse did not charge the property; the lender gets no interest in land.
If, however, the real Mr. X took title and signed the documentation, then the new mortgage would qualify for deferred indefeasibility. The new mortgage is valid vis a vis the bank mortgage. As for the owners who are no longer registered as owners, they are entitled, presumably, to be reregistered as owners but now they are subject to the mortgage that they had nothing to do with and their mortgage to the bank, on which they are still liable presumably on the covenant, is not registered on title.
What about the Land Titles Assurance Fund?
Many lawyers would react to these types of frauds by looking for relief from the Land Titles Assurance Fund.
The Land Titles Assurance Fund is a creation of the Land Titles Act; it is not an insurance company and it is not title insurance. An application to the fund can be made where a person has been "wrongfully deprived of land or of some estate or interest in land through fraud."
The threshold question, however, is whether the applicant had an interest in land that was lost through fraud. Since deferred indefeasibility operates only where one deals with the true registered owner, a mortgage signed by an imposter for the then registered owner is invalid and the lender never receives an interest in land. Since the lender has lost no interest in land (since he never had one), the lender does not qualify for compensation under the Act.
This is another reason why obtaining identification of the parties is so critical. To rely on the Land Titles system, one must be certain they are dealing with the registered owner. It is the reason why in all of the imposter cases, typically an owner signing a mortgage with an imposter spouse, the defrauded lender gets no compensation from the fund. The fund has jurisdiction only where one had an interest that has been lost.
Even if the party had an interest in land that was lost, the Land Titles Act does not make compensation easy. The fund is an assurer of last resort. In order to qualify for compensation, the applicant must first attempt to recover from the wrongdoer or from any other sources of compensation as may be available. Moreover, the Fund cannot compensate where the claimant is seen to have substantially contributed to its own loss.
In simple terms, one can rely on the Land Titles register only when one is dealing with the registered owner and not with an imposter. As for the government standing behind the system and guaranteeing good title, as the old song said, "It ain't necessarily so."