Hundreds and hundreds of real estate transactions take place every year in this province and each transaction contains a multitude of details. Unfortunately, lawyers who practise real estate are more likely to have a complaint or negligence claim against them than lawyers in other practice areas. The difference in the number of claims and complaints may be because the practise of real estate law often involves carrying more files than other practice areas and time lines are often short. In addition, the practice is very process-oriented and one missed detail can delay or sink a transaction. This practice resource has been developed to touch on the most common issues and topics that must be addressed in a real estate transaction. The topics covered are:
And if you are reading this resource because you want to act for a client in a real estate transaction here and there – beware! Dabbling in an area of law is not a good idea and you may be violating your duty of competence in doing so (see sections 3.1 and 3.2 of the Code of Professional Conduct).
At the start of the lawyer-client relationship, it is really important to gather as much information about the transaction as possible, including details about the client, the property and the transaction. In addition, because of the speed at which these transactions often take place, it is vital that you clarify and confirm the client’s expectations about your role and the work that you will do. Misunderstandings waste time, can frustrate the progress of a file and may result in a complaint or negligence claim against you.
Aside from the general information that you normally get from a client during your first meeting (e.g. name, address, phone number), you should also ask questions that will inform you as to whether the transaction requires specific searches, authorizations or clearances. For example,
In addition, don’t forget about your obligation to collect the information required under Rule XVI of the Law Society Rules in order to identify and verify the identity of your client (see the practice resources on Client Identification and Verification for more information). Throughout the progress of the file, it is also a good idea to take steps to confirm the identity of everyone who signs a document as a witness or swears an affidavit in the transaction to ensure that you are guarding against fraud.
This information is helpful to get you started and to get an understanding of what the client knows about the property and expects to receive in the transaction. Also keep in mind that the earlier you can gather information from the client, the less likely you will be caught off guard later in the transaction.
Client Identification and Verification Requirements: Rule XVI (Law Society Rules)
Certifying or giving an opinion on title is one of the most important roles a lawyer plays in a real estate transaction and, as a result, it cannot be delegated (Law Society Rules, rule 12.02 and Code of Professional Conduct, section 6.1-3(b)). The level and scope of due diligence for a transaction may vary but in all transactions lawyers are required to keep their clients reasonably informed about the steps that are taken: Code of Professional Conduct, section 3.2-1 commentary (a).
Certifying title may not always be necessary – it will depend on what kind of transaction it is, who your client is and their instructions. It will be necessary for most, if not all, transactions where you are retained by the purchaser of the property and is more likely to be required when acting for the mortgagor. It is also possible in certain circumstances that you will need to certify title when acting for a lender in a transaction. The question to ask in determining whether certifying title is necessary is whether your client needs (or wants) to know who the lawful owner of the property is.
There are several aspects to certifying title for a client – several of them are set out below but there may be more. Lawyers must use their professional skill and judgement to determine whether there are other issues that must be investigated and resolved prior to certifying title.
Important Items to Review
(a) Legal Description
The legal description of the property on its own does not conclusively answer the question of whether your client is getting good and marketable title to the property but the value in reviewing the legal description is the ability to identify a problem early on in the transaction. For example, if you client tells you that the property they are buying is located in Corner Brook and the legal description clearly states that it is within the boundaries of the town of Gander, then you know there is a disconnect between what the client thinks they are buying and the legal description found in the agreement of purchase and sale.
Another marker that there might be a problem is that the legal description doesn’t create a closed boundary to the property. This issue is something to highlight as soon as possible because the legal description may be incorrect or there may be other issues with the property.
As a result, it is always a good idea to read the legal description to make sure nothing jumps out as an issue that must be addressed. In addition, always be careful that the legal description is accurate on all closing documents to ensure that the transaction closes as expected.
(b) Surveyor’s Real Property Report
A surveyor’s real property report is a valuable tool in a real estate transaction. It shows the property in context of the surrounding properties as well as where any structures are located. The lawyer should review the report with the client to ensure that the buildings are actually located on the property and the type and location of the buildings are in line with the client’s expectations and knowledge.
If a surveyor’s real property report has been provided by another party, the lawyer must also discuss with the client whether a new report should be arranged. There are dangers to relying on a real property report prepared for another person, especially if that report was prepared before buildings were constructed or improvements were made to the property or a lot of time has passed since it was prepared. If an existing surveyor’s real property report is relied on, it is recommended that you get an affidavit from the vendor stating that there have been no changes in the size or location of the buildings, fences, access, etc.
Purchasing title insurance may be an option instead of relying on a surveyor’s real property report. Lawyers should advise their client of this option and explain how title insurance works, its advantages and disadvantages as well as the exceptions to coverage.
As with all advice and instructions, it is strongly recommended that you document your discussions with respect to the surveyor’s real property report and title insurance in the file. Having your client confirm instructions in writing is a great practice and can be invaluable if there is a question in the future with respect to what transpired between you and your client.
(c) Root and Chain of Title
The process of certifying title starts with an acceptable root of title – for example, a grant or lease by the Crown to the first owner, a court decision quieting the title of the property when there is a dispute or possessory title under section 36 of the Lands Act or otherwise.
It is very important to document in your file what the root of title is and that you’ve determined that it is valid. With possessory title, documenting the file would include evidence of possession to satisfy the common law test and, where possible, affidavits from persons who are knowledgeable about the land but are not related to the parties involved in the transaction. These affidavits should refer to the area of land in question and provide as much detail as possible concerning who possessed or occupied the land and when. In assessing whether there is sufficient evidence to establish possessory title, the lawyer must exercise professional judgment and consider the quality of the evidence as a whole in the circumstances.
After root of title has been established, the investigation turns to how title has changed and been affected from that time until the present day. Reviewing this information is important because it informs your opinion on whether the title your client receives to the property is good and marketable and will not likely be challenged.
(d) Title Searches
Your opinion on title is also affected by other instruments. A title search will show what has been registered against the property and therefore, what might affect the client’s title to the property or impose restrictions on how the client uses it.
Title searches may be performed by the lawyer, the lawyer’s staff or by an independent title searcher but the lawyer must review them and explain to the client their effect on the client’s title to the property as well as the client’s use and enjoyment of the property. These tasks cannot be delegated to a legal assistant or paralegal (Law Society Rules, rule 12.07).
An often-overlooked part of reviewing the title search is a confirmation of the current owner’s name and how title is held. This information is important because it should match the information found in the documents required to close the transaction.
In order to provide advice to your client and keeping with the duty of competence in sections 3.1-1(f) and 3.1-2 of the Code of Professional Conduct, the lawyer should, at a minimum, review the following considerations in relation to each instrument that appears on the title search:
Keep in mind that it may be necessary to review title for adjoining properties as well to get a full picture of the property and to ensure that
A copy of all title searches should be kept on file (either a hard copy or an electronic version) and the file should evidence that the lawyer did review them and should contain the lawyer’s notes on any issues or items for follow up. Having confirmation in the file from your clients indicating that you reviewed the title search with them is also recommended.
Issues that May Affect Good and Marketable Title
Through a review of the survey, the legal description and the title searches, lawyers should be mindful of the following issues that may affect the client’s title to the property:
(a) Mortgages and Encumbrances
In order to provide an opinion on title to the client, a lawyer must review the information found in the title search respecting mortgages and other encumbrances affecting the property and determine whether some or all of them must be discharged before closing. Making a determination on this question may require some digging so it is a good idea to review the mortgages and other encumbrances on the property as early as possible. And once the mortgages and encumbrances have been discharged, be sure to register them.
As noted in the practice resource entitled Procedure for Real Estate Transactions, the lawyer acting for the vendor is generally responsible for handling payment to the bank to discharge a mortgage and will provide an undertaking to remit the discharge or payout amount to the mortgagee or security holder. This undertaking helps to ensure that the lawyer does not release the funds provided for the payout of the mortgage or encumbrance to the vendor or a third party.
It is just as important to document what steps were taken with respect to mortgages and encumbrances on the property as it is to document the rest of the transaction. The file should clearly show your review of the instruments and that the mortgage and encumbrances have been addressed (discharged or otherwise). Best practices dictate that the original or a true copy of registered discharges be kept in the file but where that is not possible, your file should contain evidence from the Registry of Deeds that the discharge has been obtained and registered along with the date it occurred.
(b) Mechanics’ Liens
A mechanics’ lien can be registered on property where a person does work or provides materials to be used in constructing, repairing or altering land or a structure on land for an owner, contractor or subcontractor and does not get paid for that work or materials. It is important to check for undischarged liens pertaining to the property as a part of forming your opinion on title because they should be addressed as part of the transaction. Mechanics’ liens can be addressed, for example, by discharging the lien before title to the property is transferred, by paying money into court to address the lien or by way of a holdback to ensure compliance.
If the property is newly constructed, lawyers should also consider and advise their clients on whether the Mechanics’ Lien Act applies to the transaction and whether a holdback is required.
(c) Easements and Encroachments
Easements and encroachments may be discovered either through the title search or when reviewing the survey for the property. No matter how they are discovered, the lawyer must assess any material encroachments on or by the parcel of land that is the subject of the transaction and review them with the client. The lawyer must explain the effect of any encroachments and easements on the property to the client to ensure that they are acceptable. Keeping the client informed is part of the expected standards of practice found in the quality of service provisions in the Code of Professional Conduct (see section 3.2-1).
It is important to document that you discussed the easements and encroachments with your client in advance of closing as well as the client’s instructions to you. It is also a good idea to have the client confirm their instructions to you in writing.
Matters Requiring Professional Skill and Judgement: rule 12.02 (Law Society Rules)
Delegation: section 6.1-3(b) (Code of Professional Conduct)
Quality of Service: section 3.2-1 (Code of Professional Conduct)
Adverse Possession Abolished: section 36 (Lands Act)
Legal Assistants: rule 12.07 (Law Society Rules)
Competence: sections 3.1-1(f) and 3.1-2 (Code of Professional Conduct)
Aside from your opinion on whether your clients are getting good and marketable title to the property, purchasers are also concerned about how they will be able to use and enjoy their property.
As a result, lawyers should review the following issues with their clients to ensure that the property they buy aligns with what they understand that property to be.
(a) Restrictions on the Use of the Property
Restrictions on the use of the property, such as a restrictive covenant, can easily thwart the transfer of property if the purchaser was not aware of it before agreeing to buy the property and it interferes with the purchaser’s intended use or enjoyment of the property or its marketability in the future. As a result, lawyers should always examine and discuss any restrictions on the use of the property with their clients as soon as possible in order to ensure that the client can live with those restrictions. Leaving this conversation until right before the transaction closes is not recommended because if the restriction is not acceptable to the client, the client will likely be unhappy that the transaction has progressed that far without knowing this important information. Be sure to document that you discussed these restrictions with your client and the instructions the client provided. It is also recommended that you get the client to confirm the instructions in writing.
Clients will generally assume that there is access to property; however, many properties do not have access or access is through adjoining property. As a result, when you are representing a purchaser, it is important to confirm the nature of access to the property and whether the access is public or private. Generally, the title search and real property report will provide the information you need about access.
If access is only available over private land, you should investigate whether the access that has been granted is satisfactory and discuss your opinion and the nature of a private right of way with your client. Keep in mind that the goal is to ensure that clients understand exactly what the property entails and what they can expect when they become the owner of it.
(c) Municipal Zoning and Compliance
Depending on the circumstances of the transaction, municipal zoning may be a topic that you investigate for your client. It is recommended that you generally explain to your client how zoning works and how it can affect the client’s use of the property. If you are concerned that the client’s use of the property will be different than its current use, this discussion will be especially prudent.
When the transaction involves new construction, it is also wise to ensure that an occupancy permit has been issued.
(d) Tax Assessments and Municipal Services
Tax information should be obtained from the municipality in order to determine if there are any outstanding assessments or other amounts levied against the property. The lawyer should bring any outstanding issues found in the tax information to the client’s attention and ensure that they are rectified before the transaction closes.
(e) Property Outside a Municipality
If the property is not located within a municipality, the lawyer should advise the client of additional fees that may be invoiced to the client such as waste management and local service district fees.
Title insurance does not change the standard of care required by lawyers in real estate transactions. It may affect the searches that are performed by lawyers as part of their due diligence in determining whether clients will get good and marketable title to property, but it has not changed a lawyer’s responsibilities to those clients.
In accordance with your obligations under section 3.2-1 of the Code of Professional Conduct, you should advise your client of the availability of title insurance, the options with respect to title insurance and the coverage it would provide. If the client chooses to buy title insurance, the lawyer should make it clear to the client which searches will not be completed as a result and what those searches might reveal about the property (e.g. encroachments, issues with the survey).
Lawyers must have a thorough knowledge of the title insurance policies offered in order to advise their clients. They must also be aware of their obligations and responsibilities to the title insurer.
Keep in mind that if you receive a fee from the title insurance company, you may be acting on behalf of the title insurer. There are ramifications to this arrangement because you now have a joint retainer with two clients and those clients may be in conflict. For example, imagine your client tells you information that would negatively influence whether the title insurer would be willing to provide title insurance and the client also asks you not to tell the title insurance company. This situation puts you in the difficult situation where the interests of your client who is the purchaser and your client who is the title insurance company have diverged. These situations are governed by the provisions in the Code of Professional Conduct with respect to conflicts (see section 3.4 generally and sections 3.4-5 to 3.4-9 with respect to joint retainers, see also Conflicts of Interest and Joint Retainers).
In addition, your duty of candour requires that you disclose any fee that you receive from the title insurer to the client in order to comply with section 3.6-1 of the Code of Professional Conduct. For more information, see also Commissions and Discounts and Money Matters in a Real Estate Practice.
It is also recommended that you document the discussions that you have with your client about title insurance, the advice that you give to the client and the instructions that the client gives to you. If the client decides to purchase title insurance, you should review the terms of the draft policy before your client signs it and document your file accordingly.
Quality of Service: section 3.2-1 (Code of Professional Conduct)
Conflicts: section 3.4 (Code of Professional Conduct)
Joint Retainers: sections 3.4-5 to 3.4-9 (Code of Professional Conduct)
Reasonable Fees and Disbursements: section 3.6-1 (Code of Professional Conduct)
The practice resource entitled Procedure for Real Estate Transactions provides that lawyers should abide by the two-cheque process in both residential and commercial real estate transactions if there is a mortgage or other realty security on the property. That process requires the purchaser’s lawyer to deliver to the vendor’s lawyer a cheque or bank draft in favour of the mortgagee or security holder in an amount sufficient to discharge the mortgage or security. In order to determine what that amount is, the vendor’s lawyer provides a payout statement to the purchaser’s lawyer.
The second cheque is also from the purchaser’s lawyer and sent to the vendor’s lawyer. This cheque should be a trust cheque payable to the vendor’s lawyer or the lawyer’s firm in trust for the balance of the monies payable in the transaction.
In return, the vendor’s lawyer undertakes to remit the discharge amount to the mortgagee or security holder and to obtain a release of mortgage for deposit with the purchaser’s lawyer. The vendor’s solicitor should also make arrangements for registration of the release of mortgage after the transaction closes.
As noted above, lawyers are expected to abide by the two-cheque process; however, in the rare circumstance that the two-cheque process is not followed, the lawyer for the purchaser continues to have a responsibility to their client to ensure that the client is getting title free of the mortgage or other security. This responsibility can be discharged in several ways and the lawyer must assess the risk in each situation and determine how to appropriately close the transaction while also ensuring the mortgage or encumbrance is removed from title to the property. The risk assessment the lawyer does should always take into account the number and severity of red flags in the transaction. For more information on red flags relating to mortgage fraud, see the practice resource entitled Mortgage Fraud – Red Flags. It is a good idea for lawyers to review this resource on a regular basis in order to become as familiar as possible with the warning signs of mortgage fraud.
Undertakings are governed by the Code of Professional Conduct and common law. Section 7.2-11 of the Code of Professional Conduct provides that a lawyer “must not give an undertaking that cannot be fulfilled and must fulfill every undertaking given and honour every trust condition once accepted.” Given this level of accountability, all undertakings should be clear, concise and timely. They should be documented in writing and unambiguous in their terms (see section 7.2-11 commentary  of the Code of Professional Conduct).
A lawyer should not give undertakings for matters outside of the lawyer’s control or that cannot be completed. It is strongly recommended that lawyers who have given undertakings document all efforts to fulfil undertakings and promptly communicate any issues that arise with the recipient of the undertaking. Best practices dictate that all lawyers maintain a system to track and follow up on undertakings given and received in the course of a transaction.
One other important consideration with respect to undertakings is delegation. As noted in section 6.1-3 of the Code of Professional Conduct and rule 12.04 of the Law Society Rules, a non-lawyer is not permitted to give or accept undertakings except in certain circumstances.
Undertakings and Trust Conditions: section 7.2-11 (Code of Professional Conduct)
Delegation: section 6.1-3 (Code of Professional Conduct)
Legal Assistants: rule 12.04 (Law Society Rules)
A real estate transaction is not complete without registering the documents that affect the transfer of title. As such, lawyers should ensure reliable, timely and accurate registration of documents as soon as possible after the transaction closes. A good standard is to register the documents the same day the transaction closes or by the end of the following day.
As noted in the practice resource entitled Payment of Disbursements and Expenses, the restrictions found in rule 5.05(2) mean that lawyers are not permitted to transfer release of mortgage registration fees from the trust account to their general account before the release is available. In order to be considered an expense incurred on the client’s behalf and eligible for payment from trust, it must be immediately necessary and therefore the release must be available before the funds can be transferred or withdrawn from the trust account.
If a credit card is used to pay for the fee to register documents, lawyers are reminded of their obligations with respect to their use: see Credit Card Transactions and Using Credit Cards with a Rewards Program for more information.
If you are registered to file documents electronically with the Registry of Deeds, ensure that you keep your username and password safe and do not share it with others. Users of the e-filing system are also required to notify the Registry of Deeds if their account becomes compromised to any degree.
Withdrawals and Transfers from Trust Accounts: rule 5.05(2) (Law Society Rules)
Mortgage fraud and money laundering are huge issues and both are becoming more and more common in this province. This fact is one of the reasons why the client identification and verification rules (Rule XVI) as well as the cash transactions rule (Rule XV) were introduced – they are small measures but can go a long way in preventing these crimes.
There are several red flags that lawyers should be aware of in relation to mortgage fraud and money laundering. Guidance with respect to mortgage fraud can be found in the practice resource entitled Mortgage Fraud – Red Flags. The Federation of Law Societies of Canada has prepared several documents to help lawyers play their part in preventing money laundering including Risk Advisories for the Legal Profession and Risk Assessment Case Studies for the Legal Profession. More information about money laundering is also available on the Anti-Money Laundering practice resources page. Lawyers should review these resources on a regular basis to increase their knowledge about the types of situations that can foster mortgage fraud and money laundering.
When a red flag does exist in a file, lawyers should pay attention and take extra precautions to ensure that they are not facilitating mortgage fraud or money laundering. It is also recommended that you document the situation in detail in your file along with the measures you take to guard against mortgage fraud and money laundering.
Client Identification and Verification Requirements: Rule XVI (Law Society Rules)
Cash Transactions and Record Keeping Requirements: Rule XV (Law Society Rules)
(Posted: January 8, 2021)