The standard real estate purchase contract in Alberta requires a seller to provide the buyer with a Real Property Report ("RPR") along with evidence of municipal compliance (or non-conformance).
In recent years, many sellers have chosen to offer to provide the buyer with a policy of title insurance instead of providing an RPR with compliance (which is often a more costly process for the seller).
This article explains, at a high level, what title insurance provides and compares this form of insurance with what information a buyer would obtain by insisting on obtaining an RPR and compliance stamp.
A. Title Insurance
As its name suggests, title insurance is a form of insurance policy. Like other kinds of insurance, title insurance provides reimbursement if the insured suffers a loss which falls within the covered losses set out in the policy.
In this way, title insurance doesn't actually "fix" a compliance or title issue. It simply provides reimbursement if the insured suffers a covered loss.
The types of "covered losses" that a title insurance policy will cover will depend on the terms of the specific policy.
The type of losses covered by a title insurance policy may include:
- Title fraud: For example, if the landowner loses title to a property they legally own through fraudulent paperwork.
- Deficiencies that would not show on a Real Property Report, like unregistered utility easements;
- If a government authority (for instance, a municipality) requires the landowner to remove/remedy an existing structure (other than a boundary wall or fence) because that structure lacks a building permit; and
- If the landowner is required to remove or remedy a structure (other than a boundary wall or fence) because the structure violates a zoning bylaw or encroaches onto the neighbour's land or an easement.
Title insurance will often not cover risks such as:
- Risks which are known to the buyer but not disclosed to the insurer at the date of the policy;
- Risks which are created/accepted by the landowner; and
- Risks arising after the date of the policy.
B. RPR and Compliance
In contrast, a Real Property Report is a document prepared by an Alberta Land Surveyor. An RPR clearly illustrates the boundaries of a property and the location of improvements, such as buildings, garages, sheds, and fences, relative to property boundaries.
An RPR with a stamp of municipal compliance shows a home buyer what lands they are buying and that the property complies with municipal regulations. The RPR will also show if there are any encroachments from or upon the lands being purchased.
The compliance stamp is obtained by sending the RPR to the municipality to be evaluated against the municipality's Land Use Bylaw and other development requirements. Provided the property complies with these regulatory requirements, the municipality will issue a compliance stamp or certificate.
C. Comparing Title Insurance and RPR/Compliance
The main reason for the recent widespread use of title insurance is because of its convenience and relatively low cost for sellers of real estate.
A standard owner's policy of title insurance often costs a few hundred dollars. This is almost always less expensive than the cost of obtaining an updated Real Property Report and a compliance review from the municipality. If any compliance issues are raised by the municipality's review, addressing these would further add to the seller's costs.
For this reason, many sellers will simply choose to offer to pay the cost for the buyer to obtain title insurance in exchange for the buyer releasing the seller from the obligation to provide an RPR with compliance.
Although title insurance may offer some peace of mind to a buyer of real estate, whether any compensation is actually paid out in the event of a loss depends on whether the loss falls within the coverage available under the policy.
In contrast, an RPR with compliance provides more security to a buyer, ensuring no unknown encroachment issues and that all improvements have the proper permits. That being said, not all sellers are willing to incur the cost of providing an RPR with compliance.
To summarize, the benefits of title insurance are:
- Relatively low cost for sellers to provide
- Offers protection to buyers if they suffer a loss covered by the policy
- Facilitates real estate transactions
On the other hand, the drawbacks of title insurance are:
- Widespread reliance on title insurance disincentivizes property owners (and potential purchasers) from inquiring into the status of title defects or compliance issues and taking steps to remedy those issues;
- Only covers those risks set out in the policy;
- May involve inconvenience and cost to the insured property owner if there is a dispute with their insurer over whether coverage is available under the policy
Conclusion
When entering a contract to purchase real estate in Alberta, buyers should consider whether to accept title insurance or insist on receiving a Real Property Report with municipal compliance. While title insurance is often a cost-effective and convenient option for both buyers and sellers, it may not provide the same level of certainty for the buyer as an RPR. Buyers should weigh the potential risks and coverage limitations of title insurance against the certainty that an RPR with compliance can provide. Ultimately, the decision will depend on the buyer's tolerance for risk, the information known about the property, and the willingness of the seller to accommodate the buyer's preferences.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.