Since the inception of title insurance, I am seeing far fewer surveys in real estate transactions. The reason for this is simple. When title insurance was introduced into the Canadian marketplace in the mid 1990’s, it was first offered to lenders as an economical way to simplify refinance transactions by eliminating the lender’s requirement that the borrower provide an up to date survey of the property. Fast forward to today and it is commonplace for real estate purchase transactions to close without the buyer obtaining a survey of the property. This column will discuss both surveys and title insurance and address if title insurance is a substitute for a survey when buying a property.
In order to answer this question, it is first necessary to understand what title insurance is. Title insurance is a policy of insurance that, among other things insures title or ownership to the property. One of the benefits of obtaining title insurance is that it will, in most cases eliminate the need for the buyer to obtain a survey of the property. This means that the buyer can purchase a property without incurring the cost of obtaining a survey of the property which can cost approximately $1500. This does not mean that the buyer should not strongly consider buying a survey of the property. Aside from the Agreement of Purchase and Sale, a survey is the most important document in the real estate transaction. If this is the case, then why do most transactions close without one?
A survey is a document prepared by a surveyor which illustrates the dimensions of the property being purchased. It will also reveal what is built on the property including the dwelling, fences, additions and other structures. A survey will also show the dimensions of the property, the lot line, any easements or rights of way and any encroachments onto the lands or onto adjoining lands. The bottom line is that a survey will show you what you are buying.
Title insurance is a one-time premium which is paid by the buyer on closing.
Unlike other forms of insurance, there is no deductible when making a claim and the policy lasts as long as you own the property. Like many insurance policies, it is subject to limitations and exclusions. Its cost depends on the purchase price. The higher the purchase price, the higher the premium.
On a purchase transaction, your real estate lawyer will obtain the title insurance policy on your behalf.
A title insurance policy will provide the insured with broad coverage over a number of potential risks, many of which your lawyer cannot provide. The prime example of this is coverage for fraud or forgery and coverage for unpaid property taxes or common expense payments. With respect to title insurance and surveys, title insurance provides coverage for defects that would have been revealed had you obtained a survey of the property. The premise is simple. You purchase a property without a survey, but with title insurance, the insurance policy protects you for defects that would have been revealed by an up to date survey of the property. While this may be an oversimplification, the notion is that an insured should not be in a worse position by having obtained title insurance in lieu of a survey.
Title insurance provides broad protection, however, in my opinion it is not a complete substitute for a survey of the property. It has some limitations.
It may not compensate you in the event that the dimensions of the lot that you purchased are smaller than those set out in the Agreement of Purchase and Sale. Title insurance will also not compensate you for future use losses. Thus, it will not compensate you in the event that you are unable to construct an addition after closing. Title insurance may not fix a specific problem such as an encroachment. In cases like these, the title insurance company may respond by making a monetary payment rather than removing an encroachment. In many cases, without a title insurance policy, you are “going in blind” and may not know the extent of a problem until it is discovered after closing. Some people may want to uncover potential problems prior to closing and do not want to rely on an insurance company to fix the problem after closing.
Title insurance is a valuable tool to reduce risk and provide broad protection. My view is that every purchase transaction should include a title insurance policy. However, many people believe that title insurance is an adequate substitute for a survey. In my opinion, this is not entirely correct. We always recommend that buyers obtain a survey when purchasing property. This is particularly true when the buyer intends to build an addition or has future use intentions for the property. When acting for a buyer, a realtor should always try to include a clause in the Agreement of Purchase and Sale obligating the seller to provide a a survey of the property.
Buyers are well advised to have a discussion with their lawyer regarding the advantages and risks of closing with or without a survey of the property.