The land title registration system in British Columbia, which is based on the principles of the Australian ‘Torrens’ registry system (named after Sir Robert Torrens) allows one to register title against real estate in a central registry. This system, which has been used since the 19th century, was a significant improvement from earlier, more cumbersome methods of proving title which required tracing back the historical “chain of title” in order to prove that the land was unencumbered.
A key part of BC’s land title system is the principal of “indefeasibility of title” which allows purchasers, lenders and other parties dealing with land to rely on the validity of title. A purchaser or mortgage lender is only required to review the current title to the lands to determine the name of the owner and a description of any mortgage, lease, easement, covenant or other interest that may affect title to the lands. Not only has this aspect of the system allowed mortgage lenders to process loans more quickly, but it has also allowed them to do so without the additional cost of title insurance.
At least, that was the practice until recently. This past April, the BC Court of Appeal cautioned that not all parties who rely upon a title may be treated equally: the Court suggested that the safeguards the system offers to bona fide purchasers may not be fully extended to mortgage lenders.
In Gill v. Bucholtz, BC’s highest court determined on the facts before them that a mortgage granted by a fraudster over a property that did not rightfully belong to him was not an effective charge against the property, and as such the mortgage lender was unsecured and out of luck.
The Gill case involved real estate fraud perpetrated against Mr. Gill, the registered owner of the property. An unknown fraudster forged the signature of Mr. Gill and transferred the property to a female accomplice named Mrs. Gill. Once Mrs. Gill became the registered owner, she applied for a loan and granted a mortgage over the property in favour of the lenders, Mr. and Mrs. Bucholtz. The lenders verified the identity of Mrs. Gill, completed a title search through the Land Title Office, and registered the mortgage against the property before advancing $40,000 to Mrs. Gill.
Soon after this, Mrs. Gill granted a second mortgage in favour of another private lender. In this case, the lenders advanced funds ($55,000) before registering the mortgage in the Land Title Office, and Mr. Gill, who had learned of the fraud, filed a caveat which prevented the second mortgage from being fully registered. The fraudsters then disappeared with the proceeds of the loans.
It was clear that Mr. Gill would be entitled to have his property returned to him because section 23 of the Land Title Act (the “LTA“) provides that the registered owner’s title to property is “indefeasible” subject to certain exceptions including the right of a person deprived of land to show the registered owner participated in fraud. Therefore, Mr. Gill’s claim to the property was not defeated by the fraudulent transfer to Mrs. Gill.
It was less clear whether the lenders still had valid charges on Mr. Gill’s property. If the mortgages were valid, then Mr. Gill’s property would be returned to him encumbered by the two new mortgages. In that case Mr. Gill could be compensated through the Land Title Assurance Fund (funded by taxpayer money). If the mortgages were invalid, then Mr. Gill would get his property back free of the two mortgages and the lenders who relied upon the validity of title would be left without any security for the funds they advanced to Mrs. Gill.
The BC Court of Appeal decided against the lenders and found that although the LTA protects the genuine owner or purchaser of property who is relying on the register in respect of title to the property, it does not protect someone who has a lesser interest in the land such as a registered mortgage. The court concluded that the plain meaning of section 23 of the LTA reveals that mortgage lenders do not obtain the same protection of “indefeasibility” upon registration of their mortgage.
Following Gill, in order to mitigate the risk of title fraud, lenders should evaluate their internal procedures and due diligence protocols to ensure that a person claiming to own property did not obtain their title fraudulently. Extra care should be taken where the property was recently acquired by the borrower. If the property was recently acquired, the lender (or their solicitors) should review the transaction in which the borrower acquired title to the property and request copies of the purchase and sale documents (e.g. purchase agreement, statement of adjustments, appraisal, agency agreement). Lenders might also consider requiring title insurance to help protect against fraud.
It is possible that in the future, the LTA may be amended in order to extend protection to all parties that have an interest in land and who may rely on BC’s land title system. But until this happens, the onus is now on the lenders to take steps to protect themselves.