All things RPR! AREA’s own Andrea Gibson and Stan Galbraith of Galbraith Law review when to use strikeouts, the pros and cons of RPRs and title insurance, and who to call on when you aren’t sure what to do.
All things RPR! AREA’s own Andrea Gibson and Stan Galbraith of Galbraith Law review when to use strikeouts, the pros and cons of RPRs and title insurance, and who to call on when you aren’t sure what to do.
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Andrea:Welcome to in your AREA, a podcast for Alberta realtors on the move. Podcasting from the board room of the Alberta Real Estate Association, I'm Andrea Gibson, your host for podcast, episode number three, Adventures in RPR and Title Insurance. I'm a former realtor. I spent nine years in member practice at the Calgary Real Estate Board and I'm currently a Senior Program Development Adviser here at AREA. Joining me today, Stan Gilbraith of Gilbraith law based in Edmonton. Stan began his practice at Gilbraith Law in 1987 working closely with the real estate community in Edmonton and currently sits on the AREA Forms and Practice Committee. Stan, tell us a little bit more about yourself and why you have graciously joined us today.
Stan:Thanks so much Andrea. It's a pleasure to be a part of this podcast and it's a first for me so I'm enjoying the opportunity to do my first ever podcast with AREA. My background, as you said, I've been a lawyer since 1987 and worked in real estate ever since then. Everything from single family up to larger commercial projects. One of the things that I really take pride in is putting a lot of effort into making documents into plain language and understanding what they say so people can understand them. That's why as a result, developed an interest in working with AREA on the forms of practice. Making sure that the documents, people understand what they say. This area here with real property reports and title insurance and that whole piece as an area where there's still a disconnect between what the documents say and what people understand on a day to day basis in their practice.
Andrea:Okay, so let's start there. Talking about the basic contract and what warranties are offered by the seller was in that contract.
Stan:Great topic, Andrea. The basis of this whole thing is, in a standard residential real estate purchase contract, what is happening? Of course first and foremost we're conveying title and then secondly the seller offers several representations of warranties to the buyer. Of course those are listed in 6.1 and everybody's familiar with those, things like that seller has a legal right to sell the property, etc. The ones that we're concerned about today, are Sub D, where the seller represents warrants that the current use of the land and buildings complies with existing municipal land use bylaw and any restrictive covenants. Then Sub E, the location of the buildings and improvements is on the land and not on any easements. I'm summarizing here, complies with any restrictive covenants on title and municipal bylaws. Those are the two warranties that we're dealing with today.
Andrea:Talk to me about the reason for the RPR. How does it provide that concrete proof of some of those warranties that you were just mentioning?
Stan:It's really great that there's a warranty in the contract. How do we know that the actual facts of the matter support that warranty? Well, if we're going to show that there's no encroachments on the adjoining property, the best way to do that is to get a survey or real property report. It becomes concrete proof that the structures don't encroach on utility right-aways or on neighboring properties. That's what the real property report is all about. That's all it does. There are certain things that it doesn't do, what it does do is prove those two items.
Andrea:When it comes to title insurance. How can it help support or supplement the RPR or at least cover issues that aren't part of the warranties in the contract?
Stan:Well, let's look for a minute, what does a real property report do, what are the drawbacks? For starters, it doesn't provide any information on the interior portion of any of the structures of the property or any other hidden matters. It doesn't provide information on hidden items such as septic tanks or anything like that. What title insurance can do is ensure and cover over some of those items. For example, there was a payout on a title insurance policy where the buyer bought the place, found out the septic tank was halfway under the neighbor's land. Well that would have never shown up on a real property report in any event. Once the buyer was forced to move that septic tank to put it back under their land, title insurance covered it. It covers a number of items that are not shown on a real property report. The other example of interior items, I had a client who phoned me six months after the deal closed. They said, we just had an inspector from the city come and talk to us because the previous owner did extensive renovations in the basement and didn't get a final inspection. Turns out the electrical wasn't done properly and the city then issued an order to say that hose had to be fixed. Title Insurance paid the entire cost of fixing those deficiencies. Again, real property report would never have even disclosed that information.
Andrea:In supporting Alberta Realtors and knowing how to address RPR and title insurance intricacies, I understand that you worked with the Realtors Association of Edmonton to develop some guidance for their members, which RAE has graciously allowed AREA to share with our members as well. Can you tell us about that?
Stan:That's right. Because one of the issues is that if we can't get exactly the ideal scenario, which is a current real property report with current compliance and there's some other variation involved, what do we do? How does that impact the contract? Sometimes it's just some little minor amendment that we have to make it. However, it's crucial that we have some common understanding of what those amendments are depending on whether the real property report is outdated and we can't get a new one or there is just no compliance or a number of different scenarios.
Andrea:Perfect. Let's talk about some of those scenarios. What if a current real property report is available without compliance? We've heard some jurisdictions don't offer compliance. What happens when you've got a current RPR with no compliance and the municipality doesn't offer compliance?
Stan:Okay. I'd like to start by talking about what we should not do. What I've seen happen far too often is you have either a current real real property report or an older one that's still valid and you can't get compliance. As a result, I've seen realtors will then just cross out all the warranties with respect to compliance, setbacks and encroachments. No, no, no, no, no, no. As a buyer, I still want those warranties so that if it turns out that the garage encroaches on the municipal land or encroaches onto utility right away, I have a remedy. If we have a current real property report and there's simply no compliance, then all we're going to do is in 10.2, stroke out the words with evidence of municipal compliance or non-conformance. Then 10.2 will still then read, the closing documents will include an RPR showing the current improvements and the warranties will still all be there. The only thing we've done now is to put a line through the words with evidence of municipal compliance or non-conformance.
Andrea:Do you need to add anything about the title insurance piece in there?
Stan:Yes. Oftentimes the seller will agree to pay for title insurance due to their inability to provide compliance. In that case we add something extra as a term to the contract. Again, the wording in this document that AREA has prepared, where what we want to say is, the seller agrees to pay for the cost of the title insurance because you got to remember in all cases, the title insurance is purchased by the buyer's lawyer, right. It was purchased by the buyer or the buyer's lawyer. I've seen contracts where it says the seller will provide the title insurance. Well no the seller can't. The seller can pay for it, but the only party that can go out and buy it is the buyer.
Andrea:What about when an RPR was compliance is available but not current? Maybe there was a gazebo and the gazebo was removed. What does a realtor do in those situations?
Stan:In that case, we go back to the fundamental issue that we talked about at the beginning of our discussion. What is that Real Property Report with compliance there for? It's there to prove the truth of the warranties. If we have an RPR with compliance and certain structures had been removed, it still complies. If it complied when that gazebo was there, guaranteed, it complies when the gazebo was gone. When we have an RPR with compliance and certain structures have been removed, nothing further is required. A new RPR is not required. The one that's there shows compliance. How can it be non-compliant just because we've removed something.
Andrea:Do you need to make any changes to 10.2? I noticed it says current. Would you recommend striking that out?
Stan:Yes, I recommend that you strike the word current and then you can add in the terms that the RPR shows structures that have now been removed from the property and the buyer agrees that is acceptable. Next, Andrea, let's talk about a situation where we have an RPR with compliance. However, it's not current because now instead of removing structures, structures have been added. We have two scenarios there. One is a municipality that no longer offers compliance so we simply cannot go and get compliance on that new structure. Let's talk about that first off. On that one, we can still ask the seller to provide us with a new RPR that shows that new gazebo or garage or addition to the house. The reason we want that is because we don't need the municipality to sign off on that. If they don't provide compliance so what? We can still look at that new updated RPR to make sure that sunroom gazebo or garage is not sitting on a utility right of way or not encroaching on the next door neighbor's property. In those cases where we cannot get an updated compliance and there's new structures added, we still as a buyer, want to get a new updated RPR because we can confirm from a lot from that. Lack of encroachments being first and foremost. Then we'll provide some exception for the fact that compliance is no longer available. That doesn't change the warranties. We still want a warranty from the seller that everything complies. We just can't actually go to the city and get solid proof in that regard.
Andrea:Just on the side, I know there are some municipalities that do offer compliance services, but we're hearing more and more of ones that don't. What kind of impact does this have on our members?
Stan:Well, first and foremost, they just have to pay attention and make sure that they follow the scenarios as outlined in this document that AREA has prepared and modify the contract accordingly. If you'd modify the contract accordingly then you've done your job and you've done your due diligence. There should not be any impact on the members.
Andrea:I remember when I was practicing, I had a seller that was refusing to update an RPR and it was an RPR that didn't have compliance to begin with. What do we do in a situation like that?
Stan:One alternative is to say, bye bye and move on to a new property. The other is to agree that it's acceptable and move forward with title insurance and it's still allows the deal to close. It does certainly leave some uncertainties for the buyer. That's where I want to make sure that the members are aware of the limitations of title insurance. I know that in talking to REIX, they have a number of claims that come forward to do with title insurance. Invariably, it's because the realtor has said to the buyer, don't worry, title insurance will look after it. My advice don't tell people to not worry. I know that's a double negative, drop that from your vocabulary. As long as people understand what they're doing, as a member, you've done your job. They've accepted the responsibility and they can make their own decision.
Andrea:You were talking about the warranties and how we want the warranties to remain intact. In this situation that we're discussing, it sounds like the buyer is almost waiting the warranties.
Stan:Well, it depends on certain situations. Sometimes they do. Somebody that's buying the place to knock it down and rebuild, they don't really care about the warranties. They can waive the warranties with respect to setbacks, encroachments and all these issues because they don't really care. However, to me, if I really am going to live in that house long term, why would I waive the warranties? Unless I'm getting a huge discount on the purchase price, but even then I say, well, there's something going on here that doesn't pass the smell test. I'd be very wary of waiving any warranties unless I'm going to tear the place down.
Andrea:Okay Stan, we've heard from members generally in remote areas that the cost of updating an RPR is prohibitive to the selling process.
Stan:Yes, and in those cases, a lot of times the buyer and the seller will agree to waive the requirement for an RPR and compliance. However, the buyer in my view, should still be expecting and asking for the warranty to stay in place. To say that there's compliance, it provides a remedy. If it turns out that there's not, then they have a remedy. Let me give you an example. From the world of title insurance where our law firm was retained by the title insurance company and this was in a smaller municipality north of Edmonton. There were only two houses on the whole one side of the street and so again, it was outside the city and the cost of an RPR was quite prohibitive. The buyer looks at it and said how could there possibly be anything towards as there's only two houses in there, a long ways apart from each other and close the deal. Well, it turns out that in fact that block was four separate lots. The next door neighbor owned three of them. What the buyer bought was only one lot at the far end of the block and then the house was partly on that lot and partly on the lot that the next door neighbor owned. In that case, the title insurance company stepped up and just paid whatever costs it took for us to negotiate with the next door neighbor. I can't remember whether we subdivided that third lot and actually I think that's what we did, created a new title so that the buyer ended up with one lot and a strip from the other one. That's a case where the warranty should still be there so that you have a remedy against the seller if it's appropriate to do so. Now in that particular case, the title insurance company looked after it and didn't cost them a whole lot of money. As I understand, they never did go after the seller to recoup any of the money they had paid out. Certainly you don't want to close that door by waiving the warranties.
Andrea:No, absolutely not. Okay, so you talked a bit about the tear down situation. What if the seller has confirmed to the buyer that there are no permits on the structure and the buyer accepts the structure as it is? What kind of changes do we need to make then?
Stan:Well then you really want to put some extra wording in to protect the seller in that case. To say that the seller has disclosed that the certain structures don't have any development permits. Typically this doesn't apply to everything on the property. The case that I dealt with a couple of years ago was they had an RPR with compliance for the house and then they went and built and it was a lake front property. They went and built this lovely gazebo right down near the shoreline and I can guarantee you that that was beyond the property limit and on the municipally owned shoreline of the lake. There were no permits for that structure because they never would've got a permit because it was built illegally and it was outside the property line. It had been there for 10 or 15 years. The municipality had never asked for it to be removed. If we had gotten updated RPR and sent it to the municipality, we know the result, they would've asked for it to be removed.
Andrea:Being specific to the structure in the modifications is important then.
Stan:100%, because we still wanted that RPR with compliance for the house because that's the structure that matters. We still wanted all the warranties with respect to that house. The buyer was quite willing to take that gazebo with no permits and if they got to enjoy it for one or two years and then the city or county said you got to move it or tear down, they knew full well that could be the case. Maybe they'd get to enjoy it for ten years or more. Who knows? That's the key here, is doing this with your eyes wide open. The buyer was quite willing to say, I don't want you to get a permit for that gazebo because I know the result will be I'll lose the gazebo. They went ahead and closed and we supplemented the fact the RPR with compliance on the house. We supplemented it with title insurance. Title Insurance does not cover known defects. In that particular case, the buyer was informed and knew full well that there were no permits for that structure, can see from looking at it that it encroached onto the shoreline. In that case, if the municipality came along sometime later and asked for that gazebo to be torn down, title insurance would not cover any of the costs. It was a known defect. It was a known shortcoming.
Andrea:That's perfect. That's my next question actually. The coverage of that title insurance for those structures that have been named in the contract.
Stan:Right. Let's elaborate a little bit more because that's where I've seen issues where again, we go back to that where the realtor will say to the buyer, don't worry, title insurance will cover it. No, they won't. They will not cover known defects. As a realtor, what I would do is make sure that there's an email somewhere or something to show that if this issue comes up a year from now and the buyer loses their gazebo and says well, I'm going after the realtor for this, that there's an email there confirming, we confirmed that the sellers told us there's no permits for the gazebo. We can close the deal using title insurance however, the title insurance will not cover the gazebo. That's the protection that the realtors should afford themselves. Also that's the realtor doing their job and making sure that buyers are fully informed so that they know exactly what they're doing and what they're getting into.
Andrea:Let's take that one step further where you're not in compliance either with or without an RPR and both a buyer and seller specifically agree that the warranties are waived. How does that affect title insurance?
Stan:Just go back to the beginning and say, what does title insurance say? One of their catchphrases is we covered defects that would have been disclosed if you had done all the proper and necessary searches and reports. If we have no RPR and no compliance and it turns out there's an encroachment, then the title insurance should step in and cover that. However, I don't want the members to go out and guarantee that to people because if the title insurance company looks at the scenario and says, hey, this is so obvious that it encroached, we're not paying for it. That's an obvious defect. You didn't need an RPR for that. Then they may not provide coverage. We go back to the if it's just something like a garage sitting on top of a utility right away and now the gas company says you've got to move that garage, if there was no RPR, the title insurance will cover that. I hope that I've established the distinction there.
Andrea:Absolutely, and the buyer does assume some risk in that.
Stan:Yes, the buyer does assume some risk and it's like anything in life where someone assumes a risk, we have the option of purchasing insurance to cover that risk. Will the insurance pay out in every case? No. You gotta remember insurance companies are there to bring money in and avoid paying money out. The title insurance policy has certain limitations on it and if the claim doesn't fit squarely within the coverage that's provided, then they're going to deny coverage and say it's not a covered claim. Title insurance is a useful tool. In my view, everybody should, given the small cost of a title insurance policy, you should always get title insurance. You should just be aware of the fact though that this is insurance, not a guarantee that every problem will be fixed.
Andrea:I think that's really important and I want to touch on that again because you keep going back to the realtors conversations with their clients and really how important it is for them not to make these guarantees and refer them to the professionals instead. Those are the right people who can advise them on the pros and cons, the pitfalls and perils of title insurance.
Stan:Exactly. To me, it's very useful to have this kind of document that AREA has produced showing the different ways of dealing with the contract. It's also for the realtor in dealing with their clients. They can always refer the client to the lawyer however, most times these issues come up before it's even to the stage where it's going to the lawyer. Well, in that case you can always get brochures from the title insurance companies or just provide your client with the website, www.stewart.ca or www.chicagotitle.ca and First Canadian Title are the three that are the big players and let the client go on read for themselves. There's another situation where by doing that, by sending an email to the client saying, here's the coordinates for the websites where you can find out about title insurance, the member is protecting themselves against a future claim and providing a further enhanced level of service to their clients by providing them with that information and letting the client discover for themselves what title insurance will and will not cover.
Andrea:Well Stan, we've talked about some specific situations, let's talk about general limitations of RPR and title insurance.
Stan:First of all, on the RPR, as I mentioned before, they only provide information on the exterior structures on the property. They don't provide any information on hidden items or interior. The other disadvantage is that especially in rural areas, they can be really costly and time can be a factor. It can take several weeks to obtain, even if a rush fee is paid. That's the real limitations on RPRs. With compliance, we have to remember what is this telling us? It's only telling us that there's compliance with building permits that have been issued and setbacks and zoning. It doesn't provide any information on anything else that might be on title. So many properties these days have restrictive covenants and architectural guidelines and all these things. Well, a compliance certificate doesn't talk about that. The compliance certificate has nothing to do with that. We're not providing any assurance to the buyer regarding anything to do with, and those are mentioned, of course, in some of the warranties. There's a warranty that the properties comply with any registered agreement on title. Well, we're not getting that from you to the RPR or compliance. There is limitations on what that offered. Finally on title insurance, the biggest limitation is to remember it is an insurance product. That means when an issue arises, it may not be covered by the policy. If there is coverage, the insurance company gets to decide the method used to solve the problem. Just because you want it to be solved one particular way, if they decide they're going to solve it another different way that costs them a few dollars less, they're spending the money to fix it, they get to decide how to speak to the problem. Secondly, there's no coverage for known defects.Those are the two big issues on title insurance.
Andrea:The bottom line here is?
Stan:As far as I'm concerned, title insurance, always RPR and compliance, almost always.
Andrea:Thank you for your wisdom, Stan. AREA members, we want to hear from you. Your feedback and suggestions for future podcast episodes will be critical to make sure we make this the strongest resource for you. We invite you to send that feedback through communications@albertarealtor.ca. Thanks to all who took the time to listen. We hope to see you the next time we are In Your AREA!