Selling a home can feel straightforward: sign the Agreement of Purchase and Sale, satisfy the closing conditions, hand over the keys and receive the sale proceeds.
Unfortunately, problems with the propertyβs title can sometimes appear only after the deal has already been signed.
Consider the following fictional case study involving βMaria,β a Toronto homeowner who believed that the mortgage on her family home had been paid off decades earlier.
The client, property and identifying details in this article are fictional. The scenario is based on issues that can arise in Ontario real estate transactions.
Mariaβs Toronto Home Sale
Maria had inherited a detached home in Scarborough from her mother. The property had been in the family for more than 30 years, and Maria understood that there was no mortgage owing against it.
After preparing the house for sale, Maria accepted a firm offer from a buyer. The transaction was scheduled to close approximately six weeks later.
From Mariaβs perspective, there was nothing unusual about the sale. There was no current mortgage to pay out, no tenant occupying the property and no apparent dispute involving the home.
However, when we searched the title to the property, we discovered that a mortgage registered in the 1990s was still showing on title.
Ontarioβs electronic land registration system allows authorized users to search property records and review registered instruments, including transfers, mortgages and discharges.
Although Maria and her family believed that the loan had been paid in full, no discharge of the mortgage had been registered.
Paying Off a Mortgage Is Not Always the End of the Story
There is an important difference between:
1. paying the mortgage debt; and
2. removing the registered mortgage from title.
When a mortgage is paid out, the lender will generally provide or register a discharge confirming that its security interest has been released. Until the appropriate discharge is registered, the mortgage may continue to appear in the property records.
That can create a serious problem when the property is sold.
A typical purchaser expects to receive title free from mortgages and other financial encumbrances, except for matters the purchaser has expressly agreed to accept. If an old mortgage remains registered, the sellerβs lawyer may need to arrange for its discharge before the buyer will complete the transaction.
Why the Old Mortgage Was a Problem
Maria did not have a payout statement, discharge document or bank letter from the 1990s.
The original lender was also no longer operating under the same name.
This meant that we could not simply assume the mortgage had been paid and ignore it. The registered mortgage had to be investigated.
We reviewed the mortgage instrument, searched for information about the original lender and requested any historical records Maria could locate. We also communicated with the purchaserβs lawyer to disclose the issue and determine what would be required for closing.
The main concern was timing.
If the mortgage could not be discharged or otherwise satisfactorily addressed before the closing date, the purchaser might refuse to accept title. Depending on the Agreement of Purchase and Sale and the surrounding circumstances, that could result in a delayed closing, additional legal expenses or a dispute between the parties.
Locating the Missing Records
Maria searched through her motherβs old financial papers and located correspondence suggesting that the loan had been paid out many years earlier.
Additional inquiries eventually identified the institution that had taken over the original lenderβs records.
After reviewing the available documentation, the institution confirmed that the loan balance had been paid. Arrangements were then made to have the old mortgage discharged from title.
The discharge was registered shortly before closing, and the sale was completed without the buyer inheriting the old mortgage problem.
Maria was relieved. She had originally assumed that a mortgage paid decades earlier could not possibly interfere with the sale.
The title search revealed otherwise
Could Title Insurance Have Solved the Problem?
Title insurance protects property owners and mortgage lenders against certain losses connected to the ownership or title of a property. The precise protection depends on the policy, its exclusions and the particular facts of the transaction.
In some transactions, a title insurer may be prepared to provide assistance or coverage relating to a historic title issue. However, title insurance should not be treated as an automatic solution for every registered mortgage.
The insurer may require evidence that the debt was paid, an undertaking to obtain the discharge, a holdback of sale proceeds or additional documentation. Coverage may also be refused or made subject to an exception.
The appropriate solution depends on factors such as:
the identity of the former lender;
whether the lender still exists;
whether proof of payment is available;
the wording of the registered mortgage;
the purchaserβs mortgage lenderβs requirements;
the title insurerβs underwriting decision; and
the amount of time remaining before closing.
What Happens if the Former Lender Cannot Be Found?
An old mortgage can be much more difficult to remove when the lender has disappeared, died or gone out of business.
Depending on the circumstances, it may be necessary to locate a successor institution, an estate trustee, a corporate successor or another person legally authorized to provide the discharge.
In more complicated cases, a court application or another formal title procedure may be required. These steps can take considerably longer than an ordinary real estate closing.
That is why sellers should not assume that an old mortgage can be removed with a telephone call.
Why Sellers Should Review Title Early
Many sellers do not contact a real estate lawyer until after they have signed an Agreement of Purchase and Sale.
That may leave only a few weeks to identify and resolve title problems.
A title search performed before the property is listedβor at least before the sale becomes firmβmay reveal issues such as:
an old mortgage that was never discharged;
a construction lien;
a writ or judgment affecting the owner;
an unexpected easement or right-of-way;
an incorrect ownerβs name;
a deceased owner who is still shown on title;
ownership through a dissolved corporation; or
an old agreement or notice registered against the property.
Ontarioβs land registry contains registered title documents, plans and instruments affecting properties. Reviewing those records early can provide more time to address an unexpected registration before a closing deadline is approaching.
Selling an Inherited Property in Toronto
Inherited properties can present additional complications.
The person selling the property may not have been involved when the mortgage was originally arranged or paid. Important documents may have been lost, discarded or stored under the deceased ownerβs name.
Before listing an inherited Toronto property, sellers should consider confirming:
who is currently registered as the owner;
whether probate or an estate transfer will be required;
whether any mortgages remain registered;
whether property taxes are current;
whether there are liens, writs or other title registrations; and
whether the estate has the legal authority to complete the sale.
Discovering these issues early can reduce the risk of an emergency immediately before closing.
The Lesson From Mariaβs Story
Mariaβs experience demonstrates a simple but important point:
A mortgage can be paid off without being properly removed from title.
The debt and the registered security are connected, but they are not the same thing. A seller must still be able to deliver the title required under the Agreement of Purchase and Sale.
Early legal review can uncover a problem while there is still time to investigate it, obtain documentation and arrange an appropriate solution.
Speak With a Toronto Real Estate Lawyer Before You Sell
If you are selling a home in Toronto or elsewhere in the Greater Toronto Areaβparticularly an inherited property or a home that has been owned for many yearsβit may be helpful to have the title reviewed early.
Capulli Law LLP assists clients with residential purchases, sales, mortgage issues, title searches and closing problems throughout Toronto and the GTA.
Contact Capulli Law LLP to discuss your upcoming real estate transaction.
Important Disclaimer
This article is provided for general informational purposes only and does not constitute legal advice. The client and facts described above are fictional and are intended only to illustrate a type of issue that may arise in an Ontario real estate transaction. Every transaction is different, and legal advice should be obtained based on the specific circumstances of your matter.
Related Articles:
Why You Should Have a Real Estate Lawyer Review Your Offer Before Signing
Buy, Sell & Close Your Home with One Team | Real Estate Agent and Lawyer in Toronto