Avoiding Fraud in Real Estate Transactions

Avoiding Fraud in Real Estate Transactions

With the implementation of electronic processes to complete real estate transactions, technology has changed how real estate deals are conducted. Titles can be searched and mortgages registered and discharged from our desktops. While technology has made lawyers’ work more efficient, it has left the door for abuse wide open as it is now easier for a fraudster to operate in the impersonal electronic environment. Further, real estate transactions are often “one-off”, where the lawyer has no pre-existing relationship with the client.

The two most common types of fraud lawyers may encounter are value fraud and identity fraud. Both are prevalent in real estate transactions, and so lawyers must be astute when dealing with either buyers or sellers so that they can prevent its occurrence. The former occurs when the value of a property is inflated, resulting in a third party advancing funds for a bogus purchase. The latter occurs when a fraudster facilitates the hoax by assuming the identity of another.

Several warning signs of a fraudulent transaction exist which can alert the lawyer and any innocent purchasers to a possible scam. The presence of these indicators does not necessarily mean a fraud is occurring, nor does the absence of these factors suggest a clean transaction. Professional judgement should always be utilized.

Some of the more popular avenues include:

-          Clients paying with cash only

-          Documents not being available (survey, purchase docs, etc.)

-          Not using the same lawyer(s) for the purchase and mortgage

-          Title searches revealing recent transfers of the property at much higher prices

-          The Agreement of Purchase and Sale containing no amendments

-          The deposit paid to the vendor (not the lawyer)

-          No real estate agent is being used

-          The client has not obtained fire insurance

-          Clients willing to pay higher legal fees (even offers more $$$)

-          Scheduling a closing for the Friday before a long weekend

These factors should be a red light to all property lawyers. Certain tips to prevent such fraud from occurring are:

-          Obtain photo ID of borrowers and retain ID of the client in your file (professional requirement anyway)

-          Obtain title insurance

-          Question any unusual instructions

-          Safeguard Personal Security Packages/Teraview passwords to ensure lawyers do not share them

As with most legal scenarios, ethical issues arise where a lawyer suspects his or her client of engaging in a fraud. The Rules of Professional Conduct clearly state that, in such circumstances, lawyers should discuss their concerns with their client. If unsatisfied with the explanation, the lawyer should withdraw from representation, citing a serious loss of confidence between the lawyer and client as the reason for doing so. Further, lawyers must only disclose the details of such fraud if such disclosure is permitted or justified under the Rules. In the unfortunate circumstance where a lawyer is duped by a borrower in a mortgage transaction, he has an obligation to notify any insurer or other indemnitor so that the lender’s protection is not prejudiced.

If you have any questions regarding this post, feel free to contact Mullun. You can learn more about Mullun at www.mullun.com.

 

 

 

 

 

Independent Legal Advice

The lawyers’ Rules of Professional Conduct (lawyers’ Rules) outline circumstances in which a lawyer must recommend or require the client to obtain independent legal advice. While the lawyers’ Rules summarize the situations that require independent legal advice, the necessity of independent legal advice will always be a situation-specific inquiry since it is important to consider all the surrounding circumstances in relation to one another. The case law identifies two types of independent legal advice (Connell v. Connell, 2011 ONSC 4868; MacKay v. Bank of Nova Scotia, 1994 CanLII 7328 (ON SC); Dyck v. Boshold, 2009 CanLII 65813 (ON SC)): (1) advice as to understanding and voluntariness; and (2) advice as to the merits of a transaction. What this means is that whether or not someone requires independent legal advice will depend on two principal questions: whether they understand what is proposed to them and whether they are free to decide according to their own will.

Refinancing Home Loan

In a real estate context, for example, it is not uncommon to obtain independent legal advice in relation to the mortgage documents when individuals refinance their existing home loan.  The necessity for such advice will depend on the particular facts and circumstances of a given case, such as, but not limited to:

  • age
  • background
  • business experience
  • financial position
  • relationship with a lender
  • what part an individual played in the negotiations for the loan
  • awareness of the terms and conditions of the loan agreement
  • direct benefit to a borrower
  • transaction being clearly contrary to the best interests of an individual or placing a substantial portion of his/her net worth at risk in return for little or no benefit, etc.

Payment of Proceeds After Closing

If two or more individuals are selling a property, prior to closing Mullun Law requires them to confirm in writing how the net sale proceeds are to be payable, e.g. if they wish separate cheques to each vendor. Without instructions, the vendors will be provided with one certified cheque for the entire net sale proceeds payable to all registered vendors/owners. Should the vendors prefer separate cheques to each vendor, they should consider obtaining independent legal advice before directing Mullun Law in writing as to how such funds are to be divided.

If ownership of the sold property is in only one spouse’s name but the property has been a matrimonial home, the other spouse (who is not a registered owner) shall not only sign a consent for the sale completion but also sign a direction that the net sale proceeds are to be payable to the spouse who is the registered owner. In such an event, Mullun recommends that the consenting spouse obtain independent legal advice prior to signing a direction; otherwise, all net sale proceeds will be paid to both spouses even though one spouse is the registered owner. Note: this rule only applies to a property that is a matrimonial home.

The author, Elmira Chimirova, is a real estate lawyer with Mullun Law. Do not hesitate to contact her if you have any legal questions. Elmira can be reached at Elmira@mullun.com or (800) 878-1630 ext. 102.

Buying a Home? Don’t Forget the Title Insurance.

Where there is insufficient time to obtain an up-to-date survey of the property or the client simply wishes to avoid the expense of a new survey, consideration should be given to a title insurance policy. However, a lawyer should make sure that the client understands that title insurance does not fix any problems but merely provides coverage against financial loss and insures over the risk to the purchaser and the lender.

Subrule 5.01(5) of the Rules of Professional Conduct stresses the important role of the lawyer in respect of title insurance. It prohibits a lawyer from allowing a non-lawyer to give legal opinions regarding the insurance coverage obtained or to do any of the following without supervision:

  • provide advice to the client about title insurance;
  • present insurance options or information regarding premiums; or
  • recommend one product over another.

Under r. 2.02(10) of the Rules of Professional Conduct, a lawyer is required to assess all reasonable options for assuring title when advising a client. While the lawyer must advise the client that title insurance is not mandatory and is not the only option available to protect the client’s interests, it is obvious that real estate lawyers cannot disregard the availability of title insurance.

The rule further provides that the lawyer must not receive any compensation from a title insurer for recommending a specific insurer (r. 2.02(11)) and that the lawyer must disclose to the client that no commission or fee is being furnished by the insurer (r. 2.02(12)).

Where title insurance is being obtained, the lawyer’s role in a transaction may involve the following:

  • determining which insurer to deal with
  • negotiating the premium, if possible
  • reviewing the initial report or commitment, including the following:
    • is the “insured” named correctly?
    • is the legal description correct?
    • would it be preferable for the owner to have any specific problems resolved as opposed to “insured over”?
    • what coverage is excluded from the policy, etc.
  • advising whether the insured should obtain an up-to-date survey
  • advising whether the purchaser should have more than one policy. This becomes an issue if the policy is going to cover more than one site and how the coverage will be allocated under the policy
  • advising about the  amount of insurance being purchased
  • reviewing the final policy once issued to ensure it complies with any re-certified or amended report/commitment issued following negotiations or the resolution of existing title problems
  • advising whether there is a way to complete the existing transaction without an entirely new title insurance policy. This appears to be a particularly relevant consideration when there is a corporation on title, etc.

The author, Elmira Chimirova, is a real estate lawyer with Mullun Law. Do not hesitate to contact her if you have any legal questions. Elmira can be reached at Elmira@mullun.com or (800) 878-1630 ext. 102.

 

The Two-Lawyer Rule Regarding Transfers of Title to Real Property

A vendor and purchaser of real property have asked that one lawyer act for both of them in the transfer of title to real property. May an individual lawyer act for both?

An individual lawyer cannot act for or otherwise represent both the transferor and the transferee with respect to a transfer of title to real property except in certain limited defined circumstances and only if the lawyer is able to comply with Rule 2.04 regarding conflicts of interest [Rule 2.04.1]. These limited circumstances are:

  • a transfer where the transferor and the transferee are the same and the change is being made to effect a change in legal tenure (Rule 2.04.1 (3) (a) and subsection 5(2) of Ontario Regulation 19/99, Land Registration Reform Act);
  • a transfer where the transferor and the transferee are one and the same and the transfer is being made to effect a severance of land (Rule 2.04.1 (3) (a) and subsection 5(2) of Ontario Regulation 19/99, Land Registration Reform Act);
  • a transfer from an estate trustee, executor or administrator to a person who is beneficially entitled to a share in the estate (Rule 2.04.1 (3) (a) and subsection 5(2) of Ontario Regulation 19/99, Land Registration Reform Act);
  • a transfer where the transferor or the transferee the Crown in Right of Canada, the Crown in Right of Ontario, a Crown corporation, an agency, board or commission of the Crown or a municipal corporation (Rule 2.04.1 (3) (a) and subsection 5(3) of Ontario Regulation 19/99, Land Registration Reform Act);
  • a transfer that is being made to effect the transfer of an easement (Rule 2.04.1 (3) (a) and subsection 5(3) of Ontario Regulation 19/99, Land Registration Reform Act);
  • a transfer where the transferor and the transferee are “related persons” as defined in section 251 of the Income Tax Act (Canada) (Rule 2.04.1 (3) (b));
  • a transfer where the lawyer practices law in a remote location where there are no other lawyers that either the transferor or the transferee could without undue inconvenience retain for the transfer (Rule 2.04.1 (3) (c)).

Where the Rules permit an individual lawyer to act for both the transferor and the transferee in the transfer of title to real property, the lawyer must ensure that he or she complies with Rule 2.04 on conflicts of interest including obligations with respect to joint retainers.

The author, Elmira Chimirova, is a real estate lawyer with Mullun Law. Do not hesitate to contact her if you have any legal questions. Elmira can be reached at Elmira@mullun.com or (800) 878-1630 ext. 102.

Enforcement of Order – Writ of Seizure and Sale

ENFORCEMENT OF ORDER: WRIT OF SEIZURE

A writ of seizure and sale is obtained by filing a requisition with the Registrar of the court after judgment has been obtained. The requisition outlines the amount owing at the time of filing, taking into consideration any payments made after judgment.

Real Property

When obtained, the writ of seizure and sale is delivered to the sheriff and a copy must be filed with the Master of Land Titles. Under the Execution Act, when a writ is delivered to the sheriff, it binds all of the real property of the judgment debtor within the jurisdiction of the sheriff. Authority is given to sheriffs under section 9 of the Execution Act – “The sheriff to whom a writ of execution against lands is delivered for execution may seize and sell there under the lands of the execution debtor, including any lands whereof any other person is seized or possessed in trust for the execution debtor and including any interest of the execution debtor in lands held in joint tenancy”

However, only the debtor’s interest in its assets is bound by the writ. Therefore, if the debtor’s assets are subject to security interests, mortgages, liens, or other encumbrances created by agreement or by statute, the writ only entitles the sheriff to seize it subject to the rights of the holder of the security interest, mortgage, lien, or encumbrance. The writ does not give judgment creditors priority over existing charges over real estate.

Personal Property

Identifying the interest in personal property available for execution is not a simple task. Since in Ontario there is no reliable public search to identify ownership in personal property, when acting on the instructions of the judgment creditor, the sheriff is at risk of seizing assets that do not belong to the judgment debtor and are therefore not subject to the writ. For this reason, before acting on a creditor’s instructions, the sheriff insists that the judgment creditor provide specific instructions identifying the assets to be seized and a bond of indemnity making the judgment creditor responsible for any damages caused if the seizure was wrongful. The sheriff may decline to enforce the writ if the sheriff is uncertain whether the writ has been properly issued or filed, and the creditor may make a motion to the court for directions (Rule 60.17, Rules of Civil Procedure).

Expiry of Writ

The Rules of Civil Procedure states that a writ expires in six years of issuance. Rule 60.07(6) states that a writ of seizure and sale remains in force for six years from the date of its issue and for a further six years from each renewal.

The author, Elmira Chimirova, is a real estate lawyer with Mullun Law. Do not hesitate to contact her if you have any legal questions. Elmira can be reached at Elmira@mullun.com or (800) 878-1630 ext. 102.

Estate Trustees and an Estate Sale

A sale of real estate property by the estate of the deceased must be accepted by all estate trustees. The estate trustees are named in the will of the deceased to act on behalf of the estate. Where a Certificiate of Appointment has been issued under R. 75 or 75 of the Rules of Civil Procedure, parties can look to the respective Certificate for the named estate trustee.

Where there is no will, the court must appoint the estate trustee by court order before the estate can accept the sale of the real estate property.

The author, Stuart Murray, is a real estate lawyer with Mullun Law. Do not hesitate to contact him if you have any legal questions. Stuart can be reached at stuartmurray@mullun.com or (705) 500-4430.

Essential Questions for Power of Attorney

Where a Power of Attorney (“POA”) is used to close a real estate transaction, some additional questions should be asked. The following is a non-exhaustive list of questions or concerns that should be asked by the lawyer representing the person with the Power of Attorney.

1. Who prepared the POA?

2. Do you know the Donor? Do you know the Attorney? If so, how long have they been clients? If not, how were they referred to your firm?

3. Why is a POA being used/ What are the circumstances?

4. Does the signature on the POA match the signature on the photo ID or any other title documents of the donor?

5. Have you met with the donor to explain the consequences of the POA and to obtain photo ID from both donor and attorney?

6. Was the POA witnessed and signed in your office? If No – please provide details as to how and where it was signed. Who are the witnesses to the POA?

7. If prepared by another firm, do you have confirmation from the solicitor/notary who prepared the POA that he/she personally met with the donor, that he or she obtained photo ID from the donor and explained and witnesses said POA?

8. What have you done to confirm that the POA is in full force and valid?

9. To whom are the funds being made payable to? (What name will the cheque be written to?)

10. Is anyone receiving a direct or indirect benefit from the transaction other than the donor? If so, please give particulars.

If the Vendor is using a Power of Attorney, the same questions should be sent to the Vendor’s lawyer to be answered.

Having the answers to these vital questions will allow you to make an informed decision. It will also allow you to know whether a title insurance company can title insure the transaction.

The author, Stuart Murray, is a lawyer with Mullun Law. If you have any questions, do not hesitate to contact him at 905-960-6402 or e-mail stuartmurray@mullun.com.