For residential real estate transactions title insurance, in large part, has become an accepted part of the market. It is with respect to the commercial real estate market for title insurance that the principal players have now turned their attention. And, by all accounts, it is potentially a very lucrative market. Even the Law Society of Upper Canada has entered the market, providing commercial title insurance to income-producing farm properties through TitlePLUS, the program offered by the Lawyers' Professional Indemnity Company (LPIC), which is the Society's mandatory errors and omissions insurer.
In the last five years, commercial title insurance has played an important role in some of the largest, most complicated real estate transactions in the country. Among the most prominent are the Wendy's/Tim Hortons merger, involving some 1,200 sites across Canada; the Bitove family's purchase of Scott's Kentucky Fried Chicken assets and subsequent related transactions, a deal that involved 200 locations nationally; the $1.3 billion sale of Blue Circle Industries PLC's Great Lakes cement plant assets to South America's SA Industrias Votorantim; CP Hotels' sale of The Fairmont Empress in Victoria, BC and the Fairmont Le Château Frontenac in Quebec City to Legacy Hotel Real Estate Investment Trust; the financing of a large REIT's $500 million purchase of a Canadian mortgage portfolio; and a recently announced buyout of 160 commercial buildings valued at $300 million. "We've done pipelines, gravel pits, officer towers, hotels and plazas all across the country," says Wayne Lipton, Stewart's Vice-President and Senior Counsel, Canadian Division, "and many of these deals involve ten or more sites."
The institutional clients driving the demand for commercial title insurance are equally impressive. They include Column Canada Financial, Corporation, the commercial mortgage originator (CMO) owned by Credit Suisse First Boston; the Commercial Mortgage Origination Company of Canada, known as TD/CMO, which is TD Canada Trust's organizational foray into commercial mortgage backed securities; Sun Life Assurance Company of Canada; Manufacturers Life; and GMAC Mortgage Corporation.
Title insurers do not break out the commercial from the residential premiums in the statistics they publish. Industry sources, however, estimate that commercial premiums will generate $15 million of Canadian title insurers' $50 million in revenues in 2001. Using current premium rates, this translates into title insurance on approximately $15 billion worth of Canadian real estate sales and financings. Yet the market is barely out of the starting gate. "My anecdotal perception is that title insurance hasn't taken over the commercial market the way it has the residential conveyancing market," says Kathleen Waters, Vice-President of TitlePLUS. But pundits predict a mature commercial title insurance market in a healthy economy can generate about $150 million in premiums on $150 billion worth of Canadian real estate.
If that seems overly optimistic, it is well in line with the growth of residential title insurance as an industry, which had at least a five-year head start in Canada before title insurers began promoting commercial title insurance aggressively. "Only in 1996 or 1997 did we begin focusing on commercial title insurance in Canada," confirms John Rider, Director of First Canadian's Commercial Group and its National Commercial Title Insurance Services division.
In May 1991, First American, Canada's largest title insurer and the first company to institute direct operations in this country, sold its first residential policy. The company insured over a survey problem for the Royal Bank in a transaction engineered by Burlington, Ontario lawyer Miles Feltmate. That year, the company grossed $18,000 in premiums, mostly on similar deals. First American doubled its gross in 1992. By 1993, some lenders had changed their instructions to require title insurance and First American did $140,000 in business. That was nothing compared to 1994, when First American earned $2.2 million in premium income. In 1998, First American sold 108,000 policies and earned over $10,000,000 in premiums. By the end of 2000, the company was selling 180,000 policies, which represented a 40 per cent growth in policy numbers and a 52 per cent growth in premiums. Stewart's numbers are also "rising significantly," says Lipton. And there are no signs that industry growth is abating. The 27,000 policies that First American wrote this past July and August included "several hundred" commercial deals, according to Tom Grifferty, First Canadian's CEO and First American's Vice-President, International Operations.
Quite apart from the parallels with the growth of residential title insurance and the size of the untapped commercial title insurance market in this country, the influence of globalization and the spread of title insurance from the US to the UK, Australia and Asia are powerful factors influencing the continued rapid growth of the product.
Both Stewart Title and First American have a significant international presence and are well placed to take advantage of the globalization phenomenon. Stewart has operations in the UK, Central and Eastern Europe, Israel, Mexico, Central and South America and the Caribbean. First American has offices in England, Ireland, Scotland, Australia, Hong Kong and South Korea. Interestingly, although First American's home office is in California. First Canadian President Tom Grifferty directs First American's international operations from the Canadian office in Mississauga, Ontario. Chicago Title operates in the US and Canada and are the reinsurers for TitlePLUS. LandAmerica's operations extend throughout the Americas.
From the profession's perspective, this much is clear: any law firm or lawyer who wants to be a player in high-end commercial real estate had better be up to speed or getting up to speed on commercial title insurance. The large firms-unlike the smaller residential real estate practitioners who, at the outset, fought title insurance tooth and nail, fearing it would drive them out of business-have got the message. Indeed, many of them welcome title insurers as purveyors of new corporate business.
Desmond (Des) Mackey, Q.C., was a real estate lawyer with Torys for 35 years before joining First Canadian as Senior Title Counsel. "It's amazing how very few times commercial title insurance came up in private practice, because it just was not the way things were done," he says. "But there's been a real upswing in the last five years. Title insurance has gone from being something unusual-something that caused lawyers to raise their eyebrows at its mere mention-to an accepted part of a deal. Lawyers in all the major firms are familiar with it, know how it works and know how to ask sophisticated questions that will ensure their clients get a policy that has the proper endorsements."
To varying degrees, the phenomenon of commercial title insurance is countrywide. Not surprisingly, it has made the greatest inroads in Ontario, with its sheer transactional volume and patchwork of registration systems that are currently in transition. Commercial title insurance is also gaining greater acceptance in the Maritimes, where registration systems are sorely in need of updating and modernizing. Michael LeBlanc at Boyne Clarke in Halifax notes that commercial title insurance is becoming increasingly common in New Brunswick in large tract timberland deals. And according to Peter MacKeigan, Q.C., who practised commercial real estate in Halifax for 27 years before becoming an arbitrator and mediator, there is little question that "Commercial real estate lawyers in the Maritimes need to know how to use title insurance as a tool."
As more and more commercial deals become national in scope, title insurance grows in importance in all provinces. "Where the standards are set out of Toronto, title insurance will also come into play," says Ron Usher, a former real estate practitioner who is now a staff lawyer with the Law Society of BC.
So what is title insurance? Where did it come from? How did it get its start? And why is its importance, in Canada and globally, growing so rapidly?
Title insurance and a lawyer's title opinion letter both provide comfort to lenders or purchasers concerned with title problems. If the lawyer's opinion is wrong, the client can sue the lawyer, who looks to the deep pockets of his or her professional negligence insurer for indemnity. But the owner or lender has no direct claim against the lawyer's insurer, and frequently must establish fault on the lawyer's part by initiating litigation. If the lawyer has insufficient coverage, the client may be out of pocket unless the lawyer has the personal means to pay the claim.
Title insurance, on the other hand, is a no-fault financial product that compensates lenders or purchasers for title problems. The insurer simply agrees to indemnify over any defects, assuming the financial risk of a less-than-perfect title, whether the defect is discovered before or after closing. Bound by the insurers' duty to defend, title insurance companies pay the insured and then, if feasible, take on the burden of recovering from third parties who may be liable.
"Not having to prove negligence is what makes title insurance so attractive to lenders and purchasers," says Richard Corr, Director of Development for Connecticut Attorneys Title Insurance Company. Bruce Zeftel, a litigator with Buffalo's Saperston & Day, P.C., says title insurers defend third-party claims against title vigorously and imaginatively. Importantly, however, Zeftel goes on to note that the litigation skills of title insurers are not directed against their own clients, using the adjective "excellent" to describe their coverage practices regarding their own insured. "Title companies have a reputation for always making their insured whole," Zeftel says.
Historically, title policies are subject to important exceptions that vary from policy to policy and do not insure non-title matters or lawyers' advice that doesn't relate to title. On the other hand, title insurers protect consumers against defects not on the public record and arising after closing, like forgery, fraud, concealed marriages, survey errors, disputed boundaries, missing heirs, unregistered easements and adverse possession-all matters not covered by lawyers' opinions.
When push comes to shove, however, title insurance doesn't insure marketable title; lawyers' opinions do. But a full title opinion requires the intervention of at least one middleman throughout the transaction-the lawyer-which takes time and can be costly. Where buyer and seller have their own lawyers, title squabbles and vendor and purchaser motions can make closing dates uncertain and foster an adversarial environment that threatens to abort or delay the transaction, a kiss of death in an age of e-speed closings.
"Title insurance is ideal if there's only a short period to closing and there is not enough time for lawyers to do a full due diligence," says Des Mackey at First Canadian. In such situations, letting insurers bear the risk of title uncertainties makes sense because it facilitates closings and saves money. "Is title insurance a deal maker?" asks Sid Troister, a senior Toronto real estate lawyer with Torkin Manes Cohen Arbus LLP. "Of course it is. Most vendor and purchaser motions are lawyers' nonsense. Think of the deals lawyers have killed, probably because of their training, their wimpiness, their refusal to take any risk sometimes to the point of failing to exercise professional judgment."
But title insurance's greatest advantage, says First Canadian Vice-President and General Counsel Ed Frackowiak, is its chameleon-like nature. "It takes on different properties for different types of deals," he says. "On a multi-site transaction, it may play only the role of avoiding a cumbersome escrow on closing; on other deals, it may avoid, as it did in one of our deals, $130,000 in survey costs."
In the US, title insurance has been available since 1853, with the founding of the Law Property Assurance and Trust Society of Philadelphia. Today, title insurance is a routine component of real estate transactions in most states. Many American attorneys double as title agents, a practice prohibited in Canada.
Although available in Canada since 1956, title insurance has been, until recently, only an occasional feature of our real estate transactions. In the past, Canadian lawyers used the product chiefly to satisfy American interests who insisted on title insurance in large commercial transactions or to expedite closing in complicated deals with difficult title problems, usually survey related.
Jack Shumate, former Chair of the Michigan Bar's Real Property Section, says mortgage lenders drive the American commercial title insurance market. So long as local mortgage lenders held loans in local portfolios, they were happy with attorneys' opinions on commercial deals. But when local lenders tried to sell their portfolios to national or international securitized mortgage pools, they found that investors, unfamiliar with the certifying attorneys, preferred the comfort of title insurance.
Securitized mortgage pools, technically known as commercial mortgage-backed securities (CMBS), became popular in the US following the Savings and Loans (S&L) debacle of the 80s and early 90s. "There were several billions of dollars of commercial properties that needed to be dealt with," recalls Bill Schwan, V.P., Origination with TD/CMO. "There weren't too many lenders around who would advance against the properties. Wall Street came up with a securitization scheme that made commercial property pools liquid. That's not very different from securitizing credit card debts or other receivables."
In Canada, the chartered banks and the life companies dominated the commercial mortgage market, and the country had not experienced anything like the S&L disaster in the US. Commercial mortgage money remained more readily available here than it did in the US, meaning that CMBS were not in demand. A few years passed before Merrill Lynch introduced the concept to Canada. Eventually, American-based companies like GMAC and Column started up securitization businesses in Canada. Life companies, like Sun Life Financial and Manufacturers Life, became interested and more recently, TD Canada Trust has bought into the concept. "It's an opportunity to take new loans from existing and other customers, securitize them and sell them at a profit," Schwan notes. "Also, we now fund the commercial mortgages using medium-term notes, so they become an off-balance sheet item for us."
Schwan expects other chartered banks to enter the field soon. "We're a little further along on the learning curve, but most of the other banks have made their way to TD/CMO to look at our CMBS program." While Michelle Strom, LPIC's President and CEO, notes that Canada's chartered banks are not following the US securitization model yet, Glen Malcolm, GMAC Mortgage Corporation's Senior Director of Canadian Operations, believes that CMBS are "the wave of the future" in Canada. And the future, according to Malcolm, isn't that far off. "Securitizations will be common five years from now," he predicts.
Increasingly, Canadian-based CMOs are moving beyond domestic boundaries and marketing their product internationally, particularly in the US, where title insurance has long been a given in commercial real estate transactions. Ultimately, title insurance suits CMOs and CMBS investors because it is standardized, thereby relieving investors-particularly foreign investors unfamiliar with Canadian lawyers and legal practices-of the burden of determining the quality of the host of legal opinions backing title to the numerous properties in a commercial mortgage pool. That makes life much easier for institutions dealing with rating agencies, thereby enhancing the marketability of CMBS. "We have an international policy that is good in any country around the world," says John Rider at First Canadian Title Company Limited.
Even in Australia, where the government guarantees titles through a uniform Torrens System of registration, the country's financial institutions are resorting to title insurance to make their CMBS internationally marketable. "Just because there is a Torrens System doesn't mean there's no value to title insurance," says Wayne Lipton at Stewart Title. "There are title exceptions in all systems and lenders have come to recognize that, quite apart from the protection the policy offers, title insurance helps them deal with organizational issues, provides standardized coverage and allows them to secure their entire portfolio."
Charles McKee, Associate Counsel at Vancouver's Lawson Lundell, is of a similar mind despite the existence of a well-established Torrens System in BC, "To my mind, it would be better if commercial title insurance was called commercial transaction insurance," he says. "Even in the Torrens System, it's extremely useful when some unusual title problem happens." In one case, McKee resorted to title insurance where a significant encroachment threatened a $15 million deal. "It seemed insoluble until I suggested title insurance. The parties agreed, the transaction closed and everyone was as happy as a clam." Another transaction, valued at $40 million, involved five properties. One of the properties was in Saskatchewan where six weeks can elapse before the status of a title is determined. After the parties insured the Saskatchewan property, the transaction closed as scheduled.
"When there is an international context to a real estate deal or financing," says Bruce McKenna in the Toronto office of Lang Michener, "title insurance is the language everybody speaks." When Bitove purchased Scott's Canadian assets, McKenna acted for Bitove. His clients purchased title insurance with an eye to future international financing and securitizations. "There are no ifs, ands or buts about using title insurance in the securitization world," says Pam Spackman, President of Column Canada Financial Corporation.
Quite apart from securitizations, the international ubiquity of title insurance has impacted on purely domestic transactions as well as deals where international refinancings are not an issue. "I find that when I'm acting on loans for Canadian subsidiaries of US-controlled entities, the US counsel is insisting on title insurance," says Luigi Macchione of McMillan Binch, whose experience with title insurance includes acting for the lender on a $500 million loan to a REIT buying a portfolio of cross-Canada mortgages. Canadian clients, on the other hand, "often had to be persuaded to use commercial title insurance in the past," says Brian Bucknall of Osler, Hoskin & Harcourt LLP's Toronto office. "But nowadays they are looking for title insurance more frequently in circumstances where the legal opinion has identified a problem that can't be resolved or will be difficult to resolve, and also as an alternative to a legal opinion on title."
Although commercial title insurance is still a long way from becoming the name of the game in purely domestic, single-property transactions, more and more buyers and lenders are beginning to appreciate the fact that title insurance facilitates future dealings and refinancings involving the insured property, particularly when the arrangement is complicated or unconventional. "Once you get into the title insurance regime, it's easy to do subsequent transactions involving the same property," says McKenna. When Toronto's SkyDome was sold from public to private interests for $300 million, lawyers turned to First Canadian for help after uncovering a very complex title involving a large number of rights and easements around the property.
Title insurance is, however, particularly useful to buyers and lenders in multi-site, multi-jurisdiction transactions; and from the insurer's perspective, the underwriter's risk can be spread over the full range of properties. In the Wendy's/Tim Hortons merger, 660 of the 1,200 sites involved were either freeholds or significant leaseholds. "The standard of due diligence accepted by First American Corporation, who underwrote the risk, proved far less costly than full title opinions," says McKenna, who represented Wendy's. And apart from the obvious cost savings achieved by avoiding a multiplicity of full title searches, title insurers also provide what is known as "gap insurance" to facilitate closings. As explained by Mackey: "If you have a multi-jurisdictional transaction everybody can get around one board table and exchange the necessary documents. Then gap insurance covers the delay from closing to registration in the various jurisdictions, making it possible to complete a transaction instantly without cumbersome escrow arrangements."
"Ultimately," says Geoff Ritcey, Manager, Mortgage Investments for Sun Life, the standard his company uses in determining whether to use title insurance is "whether it meets the needs of the client. The real benefit of title insurance is that it assists in the process of closing a loan, particularly when the element of time is important."
In today's rapid-fire world, time is a vital commodity. Because title insurance can save time, it is increasingly utilized to facilitate transactions. "Title insurance is so diversely useful that lawyers who don't recommend it to their clients are missing the boat," says Mackey. In five years, he predicts, the "vast majority" of commercial property transactions will embrace title insurance-"simply because it makes sense to do so."
Julius Melnitzer is a Toronto legal affairs writer.