And the Consumer Protection and Service Modernization Act, 2006

By: Jayson Schwarz

The media seemed to have no shortage of fearsome accounts of real estate fraud involving innocent home and condominium owners during the past year.  Generally, real estate fraud presents itself in two principal forms:

(a)    Title Fraud: This ordinarily involves criminals using stolen identities or counterfeit documents to illegally transfer ownership of a property away from the registered owner to themselves.  The criminal(s) then register a mortgage on the subject property and abscond with the funds leaving the lenders and owners to take the hit.

(b)    Mortgage Fraud: This type of fraud normally harms lending institutions; it involves a criminal acquiring property and then artificially increasing its value through a series of sales and re-sales involving the fraudster and an accomplice.  A mortgage is then obtained based on the artificially inflated price.

Readers of previous articles of mine will know that title insurance policies provide coverage for title related risks associated with real estate transactions; and specifically cover forgery and fraud.  However, since title insurance did not gain mass appeal in Ontario since the late 1990s there are many homeowners throughout this province with no such protection.

It is bad enough that fraudsters have profited from this new form of identity theft without the courts making the problem worse for the distressed homeowners.  This, in fact, is exactly what happened at the Ontario Court of Appeal in the November, 2005 decision of Household Realty Corporation Ltd. v. Liu  This case considered the validity of a mortgage that was fraudulently executed by a wife who signed her husband’s name on the strength of a forged power of attorney.  The Court ruled that the registration of the mortgage rendered it binding against the innocent husband.  This decision went on to compound the grief of numerous victims of title fraud the following calendar year as many now faced the very real prospect of losing their homes.     

The publicity surrounding this situation and the public’s fear led the McGuinty government into action with the passage of the Consumer Protection and Service Modernization Act, 2006 ("CPMSA").  This legislation amended the Land Titles Act to ensure that ownership of a property cannot be lost on the strength of a fraudulent sale, falsified mortgage or a forged power of attorney.  

The CPMSA also implemented a streamlined and expedited Land Titles Assurance Fund (“LTAF”) process for title fraud victims so that title is returned and a decision on compensation is made within 90 days. The LTAF was created under the Land Titles Act to compensate people for certain financial losses due to real estate fraud, omissions and errors of the land registration system.  In the past, the Land Titles Assurance fund was a last resort attempt for compensation by defrauded homeowners; available only once aggrieved homeowners had exhausted all other means at recovery – including suing the fraudster! 

The CPMSA also has punitive measures to penalize the fraudsters as it has raised the maximum penalty for real estate fraud from the currently nominal $1,000.00 to a more serious $50,000.00.   The Act also seeks to place a higher onus of due diligence on banks and other financial institutions.  If a bank is deemed not to have made the proper inquiries and investigations prior to registering a mortgage which turns out to be fraudulent the lender will be effectively shut out of making any claims under the LTAF.

All in all, the CPMSA seems a step in the right direction.  Our judicial system also seems to have corrected itself on this issue as the Ontario Court of Appeal effectively reversed its decision in Household Realty with its February, 2007 decision in Lawrence v. Maple Trust Company.  In Lawrence, an impostor posing as the property owner retained a lawyer to sell a property.  A forged agreement of purchase and sale was prepared along with forged title documents and the property sold to another fraudster.  The “purchasing” fraudster arranged for a mortgage with Maple Trust Company.  In ruling in favour of the aggrieved property owner and setting aside the registered mortgage, the Court stated that “both the result and [the] reasoning” in Household Realty were “incorrect”.  The “purchasing” fraudster was held to have never taken valid title to the property because he obtained it by fraud.  He was, therefore, not a registered owner and, as such, could not give a valid charge on the land.   

Jayson Schwarz is a Toronto Real Estate Lawyer.

 Good luck and happy home hunting!!!!!!!!!!!!!!!!!!