There are a host of unknown obligations that can pop up when buying a commercial property. To combat these issues, and in addition to due diligence completed by your legal team, there is always the option of title insurance to fill in the gaps. Unfortunately title insurance is not always enough to deal with some of the more complex issues that are now arising, particularly in respect of property taxes and levies and more particularly where they are deferred.
On December 7, 2022, the Alberta Court of Appeal made an interesting decision regarding title insurance policies and whether they cover local improvement charges that become payable in the years after the closing of a transaction, even if the levy was assessed and not reported prior to the closing date. Ultimately, the Court of Appeal found that local improvement charges assessed before closing that become payable after the date of policy are not covered by title insurance. It is paramount that companies purchasing property take all the necessary steps in completing due diligence as title insurance cannot always be relied upon in these situations.
In 1921645 Alberta Ltd v FCT Insurance Company Ltd and First American Title Insurance Company, 1921645 Alberta Ltd. purchased a parcel of land which was subject to a local improvement charge. The total improvements were originally budgeted for $3.7 million in 2011, payable over 15 years from 2013 to 2027. However, due to cost increases, the charge was ultimately increased to $5.1 million, payable from 2016 to 2030. The transaction for the sale of the lands closed on December 2, 2015, after the levy had been assessed but before it became payable and would have shown on a standard tax search. The first annual installment of the local improvement charges was due in June 2016.
1921645 Alberta Ltd purchased a policy of title insurance on November 13, 2015 (the “Policy“), just over two weeks prior to close. The Policy stated:
Subject to the exclusions from Coverage, the exceptions from Coverage contained in Schedule B and the Conditions, FCT Insurance Company Ltd., and First American Title Insurance Company, . . . insure, as of Date of Policy and, to the extent stated in Covered Risks 9 and 10, after Date of Policy, against loss or damage, not exceeding the Amount of Insurance, sustained or incurred by the Insured by reason of:
1. Title being vested other than as stated in Schedule A.
2. Any defect in or lien or encumbrance on the Title. This Covered Risk includes but is not limited to insurance against loss from:
(b) The lien of real estate taxes or assessments imposed on the Title by a governmental authority or public utility due or payable, but unpaid
Exclusions from Coverage included defects, liens, encumbrances, adverse claims or other matters and any of the forgoing attaching or created subsequent to Date of Policy.
The Court of Appeal noted that it is implicit in the terms of the Title Policy, that all of the covered risks are subject to the general proviso that they must exist “as of Date of Policy” since that was the wording in the Title Policy. It is important to note that the term “as of Date of Policy” was integral to the Court of Appeal’s analysis.
The impugned provision highlighted above includes but is not limited to loss from the lien of real estate taxes or assessments imposed on the Lands by a governmental authority or public utility due or payable, but unpaid (“clause 2(b)“). 1921645 Alberta Ltd. argued that the policy ought to cover the local improvements charge due in June 2016 since it was created prior to the Date of Policy. However, the Court of Appeal concluded that that, in reading clause 2(b) in light of the Policy as a whole, the coverage offered is not provided for defects that arise after closing.
The Court of Appeal goes on to assert that taxes that become due or payable after closing are excluded by the overriding guideline as to time that coverage is only available for defects “as of Date of Policy”. As such, the Court of Appeal believes clause 2(b) makes it clear that property taxes that become due or payable after closing are not covered, even if they are created prior to such date. Furthermore, the Court of Appeal stated that the Policy contemplated taxes becoming due or payable in future years cannot be seen as being a defect or lien on the title since every title in Alberta is subject to the expectation that property taxes will be due or payable in future years as a matter of course. Ultimately, the Court of Appeal found that the local improvement charges of $5.1 million that became payable commencing in 2016 were not covered by the Policy.
With the deferrals on a number of fronts in government resulting from COVID-19 relief measures, it is crucial companies seek out experienced due diligence lawyers prior to purchasing property, particularly commercial properties, as title insurance does not insure against all matters of potential concern.
Additional research by Farhan Ahmed