Sep 29, 2019

Appeal Court Restores Indefeasibility of Land Titles in Ontario

1168760 Ontario Inc. v. 6706037 Canada Inc., 2019 ONSC 4702 (CanLII)

Houses are expensive in Ontario, but the legal fees to buy and sell them are relatively low. This is thanks in large part to an efficient body of law. The cumbersome and expensive process of searching ownership many decades back in time was abolished under Ontario’s Land Titles system. What you see in the Land Titles database as the current owner can be counted on as the truth. The government guarantees it, and backs it up with a compensation fund in the rare cases where there is a mistake.

That neat and simple system would have been threatened if an Ottawa court ruling, 2017 ONSC 5149, had been upheld in this appeal. Fortunately, Ontario’s Director of Land Titles prevailed, preserving the principle of indefeasibility. Outside of very limited circumstances, once a person is named as owner, that will stand. A subsequent purchaser is entitled to rely on it as an absolute truth.

The Facts of the Case

The defendants in this case were Mr. Bertrand and a company, 67006037 Canada Inc. (“670”), to which he had sold a 55 acre parcel of land in an outlying Ottawa suburb for $100,000 in 2005.

Mr. Bertrand was the only legal owner registered on the title to this piece of land. However, he was not the sole beneficial owner, as there were a few other co-owners, for whom he held the whole property in trust.

The principal of 670 was Mr. Joncas, a law school classmate of Mr. Bertrand’s son, but little more than an acquaintance. Nevertheless, it raised suspicions in the minds of the other co-owners, who believed it was an artificial sale at undervalue designed to defraud them. The parties brought competing appraisals to argue about whether the land was or was not worth much more than the purchase price (there being soil issues that suggest it has limited development potential).

The issue that the plaintiffs latched onto was, in legal terms, little more than a red herring. However, they were able to convince the judge that it was a serious flaw. As a result of this, the judge declared that the sale of the land by Bertrand to 670 was void, and the ownership should be restored to Bertrand in trust together with his previous partners.

Mr. Bertrand had personal debts unrelated to this matter. There is a system in Ontario whereby any creditor who is owed a debt, and has not been able to collect it, can register a writ of execution with the sheriff. Whenever a property is sold, the lawyer is supposed to search for the name of the vendor in the writs database to see if there is a writ of execution against him. If there is, rather than remitting the whole purchase amount to the vendor, the lawyer is supposed to send the amount owing to the creditor.

However, sometimes debtors are hard to identify from the database, particularly if they have a relatively common name such as Denis Bertrand. Therefore, there is a provision for somebody to swear an affidavit to say, “no, I am not the same John Smith who owes that debt,” and that is supposed to be the end of the matter as far at the real estate transaction is concerned.

In this case, Mr. Bertrand denied being the debtor. In court, he argued that he did not in fact swear a false affidavit about this. He said that he owed the debt in his personal capacity, while he was selling this land as a trustee, so he was indeed not the same Bertrand. Whether or not this fine distinction saves Mr. Bertrand from having committed fraud is not of concern to us. The trial judge believed he had committed fraud, and thought it was enough to make Bertrand a “fraudulent person” within the definition of the Land Titles Act, R.S.O. 1990 ("LTA"), allowing the transaction to be reversed. The Divisional Court reversed this, finding that this is not at all what the Act has in mind in its definition.

The Law on Rectification of Title

There have been a few high profile cases of forgery and identity theft in Ontario involving real estate, exemplified by the case of Lawrence v. Maple Trust Co., [2006] O.J. No. 2907, 150 A.C.W.S. (3d) 223 (S.C.J.), reversed 2007 ONCA 74.

In response to that, the legislature made amendments to the LTA in 2006. That allows the Director to restore title (“rectification”) to the rightful owner in cases where a property has been stolen from her through fraud or forgery. This is meant to be a very narrow class of exception where the person executing the transfer of ownership is pretending to be the legal owner who is registered on title, but is not really that person.

Section 1 of the LTA includes the following definition:

“fraudulent person” means a person who executes or purports to execute an instrument if,

(a) the person forged the instrument,

(b) the person is a fictitious person, or

(c) the person holds oneself out in the instrument to be, but knows that the person is not, the registered owner of the estate or interest in land affected by the instrument; (“fraudeur”)

Outcome of the Appeal

There is a good reason for the careful and narrow definition of fraudulent person in section 1 of the LTA. The aim of a Land Titles system is to provide finality and certainty and avoid disputes. The position of the Director was that, even if Mr. Bertrand attempted to defraud his creditors, he was not a fraudulent person within the meaning of the LTA. He was the actual legally registered owner of the property, and the buyer was entitled to rely on that.

The Divisional Court recognized the intent of the legislation. It was intended to apply only to acts of fraud that made the real estate transaction itself invalid:

[37] Moreover, interpreting “fictitious person” to mean a person who does not exist is consistent with the purpose of the 2006 amendments, which sought to deal with title fraud committed using fraudulent instruments. When one looks to the cases decided before the amendments, it is evident that a major legislative concern was fraud accomplished by someone who assumed a false identity in order to sell or mortgage property…

Mr. Denis Bertrand did exist. The Denis Bertrand who signed the transfer documents for the land was the real Denis Bertrand. Even if it had been true that he was trying to defraud his creditors, that unrelated event is not the kind of thing that could justify rectification of title under the LTA.

The Trustee Argument Also Fails

The alternative argument of the plaintiffs was that Bertrand held the land in trust for them, and so was not legally entitled to sell the property without their agreement. That is also wrong in law. Another feature (not a bug) of the LTA is that it does not recognize trusts or trustees. Ownership "in trust" cannot be registered.

The person registered on title is the legal owner from the viewpoint of the LTA. The LTA is totally unconcerned about whether or not he is also the beneficial owner.

This may seem harsh, but there is a good historical reason for it. Beneficial interests and the question of whether there had been notice about them were historically a frequent source of disputes in land law. Section 62 of the LTA has the aim of preventing such disputes from clouding title. The person who chooses to put land into trust bears the burden of risk. The person setting up a trust bears the burden of ensuring that reliable trustees are appointed.

[38] The respondents argue that Bertrand did not have authority, as a bare trustee, to transfer the property without the consent of the beneficiaries. However, the LTA does not recognize trusts (with certain exceptions that are not relevant here). Pursuant to s. 62(1) of the LTA, a notice of an express, implied or constructive trust shall not be entered on the register. Thus, an individual who holds land as a “trustee” may deal with the land as if that description had not been inserted. In other words, that individual is the legal registered owner of the land.

[39] In summary, Bertrand was the registered owner of the fee simple of the property conveyed to 670. He was a real person, not a fictitious person, and he had the authority to convey the interest in the property. In accordance with CIBC, the transfer should not have been held to be a fraudulent instrument. While Bertrand was found to have committed fraud in the affidavit respecting the executions, he nevertheless had the legal authority to convey the fee simple to 670.

People who are concerned about the unreliability of a trustee should simply not put their land in trust. There is a viable alternative, in the form of a legal co-ownership. A beneficiary who has been the victim of a breach of trust does, of course, have legal recourse. He can sue the trustee, assuming that the trustee is solvent. However, the LTA does not allow him to sue the purchaser of the land. That security of title makes property transactions under the LTA simpler and more reliable.

Conclusion

The aim of the LTA is to achieve the maximum possible degree of reliability of the Land Titles database at the lowest feasible cost. Very rarely, mistakes will happen, even without fraud. The Ontario government maintains a Land Titles Assurance Fund in connection with the LTA to compensate innocent victims. The amounts drawn on from the Fund by victims of fraud or error each year are quite small, indicating that the system rarely fails.

In a fine balancing act, the LTA allows restoration of title in instances of actual fraud or forgery that deprive the owner of title. That is only while the property is still in the hands of the fraudster. Once the property has been sold on to another person, the title is absolute. That principle was threatened by the lower court decision in this case. The decision of the Divisional Court has affirmed the most reasonable policy interpretation of the intent behind the LTA, which is consistent with the principles of Land Titles systems in numerous other jurisdictions.


The author was co-counsel for the Director of Titles in the lower court. He is Principal of Spiro Law P.C., www.peterspiro.com, and Counsel to Monkhouse Law.