Court File and Parties

COURT FILE NO.: CV-11-423639 DATE: 20160714 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

HERCULES MOULDED PRODUCTS INC. Plaintiff – and – ROBERT J. FOSTER, STEWART TITLE GUARANTY COMPANY, BARAT FARLAM MILLSON, and estate of ARTHUR BARAT Defendants

Counsel: Michael Carlson, for the Plaintiff Cynthia Kuehl, for the Defendant, Stewart Title Guaranty Company

HEARD: January 29 and May 27, 2016

BEFORE: Lederman J.

Nature of Motions

[1] The parties bring cross motions for summary judgment: the plaintiff seeks summary judgment to recover on a title insurance policy for losses it allegedly incurred after it obtained a mortgage on two development properties in Windsor, Ontario; and the defendant, Stewart Title Guaranty Company (“Stewart Title”) seeks summary dismissal of these claims.

Background Facts

[2] The plaintiff advanced a loan which was secured by a charge/mortgage against two adjacent properties in Windsor, Ontario that faced the Detroit River and are considered prime development lands. On one property (333 Riverside) there is a building that had, at the time of the mortgage, a number of government tenants. The adjacent property (369 Riverside) was a vacant lot which had a large excavation hole, dug in anticipation of the development of a condominium tower.

[3] The mortgage transaction closed in February 2006, and Stewart Title insured both properties together as a single parcel under a Commercial Title Insurance Policy (the “Policy”) dated February 3, 2006.

[4] Eventually, the mortgagors were unable to continue to finance the mortgages and the plaintiff became mortgagee in possession of both properties and initiated power of sale proceedings.

[5] The plaintiff, as mortgagee under power of sale, entered into an Agreement of Purchase and Sale on July 15, 2010 to sell both properties for $1.9 million to Farhi Holdings Corporation (“Farhi Holdings”). The transaction was to close on July 30, 2010.

[6] The solicitor for Farhi Holdings provided a requisition letter on July 23, 2010, raising certain title problems including:

a) Evidence of a building encroachment by one property below the surface onto the other;

b) Various development agreements with the City of Windsor that were registered on title to both properties and had not been complied with.

[7] Farhi Holdings was not satisfied with the response to the requisitions and refused to tender on the basis that financing was conditional on clear title to both properties and that the plaintiff was unable to convey unencumbered title to the lands, and as such, the Agreement of Purchase and Sale was at an end.

[8] Farhi Holdings has demanded the return of its deposit of $300,000 but the plaintiff has refused and Farhi Holdings has brought an action against the plaintiff for that sum.

[9] In December, 2005, months before the mortgage transaction closed, the plaintiff received notice of a forthcoming application to the court regarding the property at 369 Riverside. In the application, the City of Windsor was seeking a work order that the excavation hole, dug in anticipation of development, be filled by the owner or that the City be allowed to enter the property, fill the hole and seek compensation.

[10] The application came on for a hearing in March, 2006. Justice Patterson found that there was a nuisance constituting a violation of the City’s Dirty Yard By-Law and the City obtained a work order that the hole be filled. In 2008, the City incurred costs of approximately $500,000 to fill the hole. By mid-2009, $510,000 was added to the tax rolls which took priority over the plaintiff’s mortgage. The arrears and interest thereon accumulated to approximately $1.5 million by 2012 when the plaintiff sold the properties to the same purchaser, Farhi Holdings, this time for $2.3 million ($1.5 million of which is for back taxes). The plaintiff says this was an inferior Agreement of Purchase and Sale from the earlier one that it had with Farhi Holdings that had been aborted in that, for example, the 2012 Agreement of Purchase and Sale provided that $400,000 of the purchase price was to be an interest free loan for five years.

[11] In this action, the plaintiff claims that all of the damages it suffered as a result of the Dirty Yard By-Law violation and the ensuing interim tax bill, and as a result of the title defects leading to the aborted sale (namely, the development agreements and the alleged encroachment) are covered by the Stewart Title Policy.

[12] Stewart Title takes the position that there are no covered title risks that caused any damage to the plaintiff and in any event, exclusions or exceptions would apply to any coverage.

[13] These motions deal only with whether or not there is Policy coverage; and the issue of quantum of damages is to be left to another proceeding, if necessary.

The Title Insurance Policy

[14] The Policy provided coverage against loss or damage, not exceeding $2 million sustained by reason of various bases, which were set out in the Standard Terms (the “Jacket”) of the Policy and the Commercial Lender Endorsement which modified the Jacket by adding/deleting certain coverage. In particular, the Policy contained coverage for any “defect in or lien or encumbrance on the title” and for “unmarketability of the title.” While title is not defined in the Policy, “unmarketability of the title” is defined as:

an alleged or apparent matter affecting the title to the land, not excluded or excepted from coverage, which would entitle a purchaser of an estate or interest described in Schedule A or the insured mortgage to be released from the obligation to purchase by virtue of a contractual condition requiring the delivery of good, registrable, proper or marketable title.

[15] In addition, the Policy included a Survey Endorsement and Canada Zoning Endorsement, which provided specialized terms for coverage.

[16] The Policy contained standard exclusions from coverage including sections 3(a) – (d) in “Exclusions From Coverage” which stated:

The following matters are expressly excluded from the coverage of this policy and the Company will not pay for loss or damage, costs, legal fees or expenses which arise by reason of:

3. Defects, liens, encumbrances, adverse claims or other matters: (a) created, suffered, assumed or agreed to by the insured claimant; (b) not known to the Company, not registered in the public records at Date of Policy, but known to the Insured claimant and not disclosed in writing to the Company by the Insured claimant prior to the date the Insured claimant became an Insured under this policy; (c) resulting in no loss or damage to the insured claimant; and (d) attaching or created subsequent to the Date of Policy (except to the extent that this policy insures the priority of the Insured mortgage over any statutory lien for services, labor or material).

[17] Schedule B of the Policy provided for other exceptions from coverage, including an exception for unknown tax liabilities or taxes that arose after the date of the Policy:

This policy does not insure against loss or damage (and the Company will not pay costs, legal fees, or expenses) which arise by reason of:

1. Taxes, assessments, levies or betterment charges, which are not shown as existing liens by the public records.

[18] The Policy (Sections 3 and 5 of the Conditions and Stipulations) also put an onus on the claimant to make timely disclosure of possible claims to Stewart Title:

… a proof or loss or damage signed and sworn to by the insured claimant shall be furnished to the Company within 90 days after the insured claimant shall ascertain the facts giving rise to the loss or damage. The proof of loss or damage shall describe the defect in, or lien or encumbrance on the title …. If the Company is prejudiced by the failure of the insured claimant to provide the required proof of loss or damage, the Company’s obligations to the insured under the policy shall terminate, including any liability or obligation to defend, prosecute, or continue any litigation …

Principles Applicable to Insurance Contracts

[19] The burden of proof is on the insured to establish coverage: if that is met, the burden is on the insurer to prove exclusions or exceptions: Lombard Canada Limited v. Zurich Insurance Company 2010 ONCA 292 at para. 34.

[20] Interpretation of insurance policies should strive to reflect the intent and reasonable expectations of the parties, at the time of entering the contract by reference to the plain and unambiguous meaning of the contractual language, taken as a whole: MacDonald v. Chicago Title Insurance Company of Canada 2015 ONCA 842 at para 66. If there is ambiguity in the policy, additional interpretive principles may be applied which include the contra proferentum rule and the principle that coverage provisions will be interpreted broadly and exclusions narrowly: Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada 2010 SCC 33 at para. 24.

Issue One: The Claim Based on the Dirty Yard By-Law Violation

(i) Coverage

[21] The plaintiff submits that there is coverage for the interim tax bill that it received because of a work order issued on the property after the Policy date. It submits that coverage is available for loss or damage by reason of “any defect in or lien or encumbrance on the title;” and further, that there is Policy coverage from the consequences of the Order to Comply: Dirty Yard By-Law as set out in s. 1 and s. 2 of the Commercial Lender Endorsement (“CLE”) in the Policy.

[22] Section 1 of the CLE covers:

Any outstanding governmental or quasi-governmental work orders against the land, including any incorrectness in any written statement from a governmental or quasi-governmental authority indicating that there are no outstanding work orders, and the lack of a building permit or occupancy permit for any buildings on the land as at the Policy Date.

[23] The hole on the property at 369 Riverside had existed in 1998. Though a municipal “Order to Comply” had been made in 1998 for a Dirty Yard By-Law violation, the public records (the Property Information Report) indicated that it had been “completed” by February 15, 2005 i.e. it was not outstanding. This may have been an erroneous statement according to the plaintiff. Notwithstanding this entry on the public record, a new by-law (186-2003) allowed the pre-existing infractions to continue to apply until any enforcement proceeding in the courts was completed. Stewart Title, however, was entitled to accept the public record that there was no ongoing violation as of the date of the Policy.

[24] In any event, the by-law violation is not a work order in of itself. It led to the work order issued by Justice Patterson dated March 22, 2006, after the Policy Date.

[25] Accordingly, it cannot be said that there were any work orders against the land “as at the Policy Date” and thus there is no coverage under s. 1 of the CLE.

[26] The plaintiff also submits that there is coverage under s. 2 of the CLE in the Policy which reads as follows:

The Company insures the Insured against loss or damage sustained or incurred by the Insured by reason of any work orders subsequently issued with respect to compliance with fire safety regulations of the buildings and improvements on the land as at the Policy Date where such work order arises as a result of the existence on the Policy Date of any non-complying state or condition of the improvements on the land.

[27] This Endorsement deals with work orders issued subsequent to the policy date arising from a pre-existing, non-complying condition.

[28] Stewart Title takes the position that this provision deals exclusively with compliance regarding fire safety regulations. The plaintiff submits that it also deals expressly and independently with “improvements on the land …where such work order arises as a result of a … non complying state or condition of the improvements on the land.” The end result of Patterson J’s order, the plaintiff submits, was an improvement on the land in that the excavation hole was filled in and brought up to grade by the City and an interim tax bill was subsequently issued. This arose under Patterson J’s work order because of non-compliance with a state or condition required by the City of Windsor.

[29] In my view, the work orders referred to in s. 2 of the CLE must relate only to non-compliance with fire safety regulations for both buildings and improvements. In terms of interpretation, it makes little sense to single out “fire safety regulations” as applying to only buildings but that “improvements” are to be treated separately. Further, the interpretation advanced by the plaintiff would be inconsistent with s. 1 of the CLE which is not forward looking. It requires the work orders to be outstanding as at the Policy Date.

[30] The decision of Justice Patterson makes clear that the work order he issued arises from a finding of a “nuisance” on the land and not in respect of any non-compliance with fire safety regulation. Therefore, the plaintiff has not established coverage under s. 2 of the CLE.

[31] Even if the plaintiff’s interpretation was correct, the provision requires that the work order arises because of “a non-complying state or condition of the improvements”. The plaintiff acknowledges that there was no improvement existing on the land until the excavation hole was filled in and brought up to grade. In para. 24 of his factum, counsel for the plaintiff states “The end result was an improvement on the land that arose under the work order.” The work order resulting from non-compliance was with respect to the hole before it was filled in. There was no “improvement” at that time. Therefore, for this reason, as well, s. 2 of the CLE would not provide coverage.

[32] The plaintiff also submits that there is coverage under s. 2(b) (i) of the Canada Zoning Endorsement in the Policy. This Endorsement provides as follows:

CANADA ZONING ENDORSEMENT

1. The Company insures the insured against loss or damage sustained by reason of any incorrectness in the assurance that, at Date of Policy: (a) The following use or uses are allowed under that classification subject to compliance with any conditions, restrictions, or requirements contained in the zoning ordinances and amendments thereto, including but not limited to the securing of necessary consents or authorizations as a prerequisite to the use or uses: Continuation of Present Use

2. The Company further insures against loss or damage arising from a final decree of a court of competent jurisdiction: (a) Prohibiting the use of land, with any structure presently located thereon, as specified in paragraph 1(a); or (b) Requiring the removal or alteration of the structure on the basis that, at Date of Policy, the ordinances and amendments thereto have been violated with respect to any of the following matters: (i) Area, width or depth of the land as a building site for the structure; (ii) Floor space area of the structure; (iii) Set back of the structure from the property lines of the land; or (iv) Height of the structure.

[33] The plaintiff submits that s.1 (a) deals solely with zoning but that s.2 is a provision which does not refer to zoning.

[34] The plaintiff submits that Justice Patterson ruled that the excavation was a nuisance and ordered the alteration of the structure’s depth to grade, fulfilling the requirement in the Endorsement of a final decree of a court of competent jurisdiction demanding an alteration of the depth of the property. Also, the violation of the Municipal bylaw, here the nuisance of the excavation itself, had been a long standing violation at the time of the Policy date.

[35] Although the heading of the Endorsement refers to “Zoning” and s. 1(a) refers to “zoning ordinances”, the plaintiff submits that s. 2 is a stand-alone provision, unrelated to zoning, which is covered by Patterson J’s judgment in that it deals specifically with the alteration of the structure of the vacant lot excavation regarding the depth of the land as a building site for the structure.

[36] One must look at the entire Endorsement. It is clear that this Endorsement was meant to deal with zoning issues. It is so stated in the heading. Section 1(a) refers to “zoning ordinances” and the reference in s. 2(b) to “ordinances” relates to zoning matters in subparagraphs (i) to (iv).

[37] There is no ambiguity. The ordinances referred to in s. 2(b) are zoning ordinances which require the prohibition of use because of a structure located on the property (as in s. 2(a)) or the removal or alteration of the structure (as in s. 2(b)).

[38] There is no indication that the Dirty Yard By-Law was a violation secondary to a zoning ordinance or that any structure had to be removed because of a zoning ordinance. Justice Patterson’s order does not arise out of a violation of a zoning ordinance. Rather, it arises out of a violation of a by-law pertaining to nuisance, dirt and debris. On its face, the Canada Zoning Endorsement does not apply.

[39] In the end, the plaintiff has failed to meet its burden to establish Policy coverage for the interim tax bill, being the impact of the Dirty Yard By-Law violation.

(ii) Exclusions or Exceptions from Coverage

[40] In any event, the exclusions and exceptions in the Policy would apply to any claimed coverage.

[41] For one thing, the Policy provides:

“The following matters are expressly excluded from coverage of this Policy and the company will not pay loss or damage, costs, legal files or expenses which arise by reason of:

3. Defects, liens, encroachments, adverse claims or other matters: (b) not known to the company, not registered in the public records at Date of Policy, but known to the insured claimant and not disclosed in writing to the company by the insured claimant, prior to the date of the insured claimant became an insured under this policy.”

[42] The plaintiff knew of the Dirty Yard By-Law violation and forthcoming court application before the Policy was issued but failed to advise Stewart Title who did not know of these matters. Because of such knowledge on the part of the plaintiff and failure to make disclosure, the Policy excludes this loss from coverage.

[43] Although s. 3(d) of the Exclusions From Coverage states that the Policy does not exclude “any statutory lien for services, labor or material”, a claim for payment of taxes incurred after the Policy date is specifically and expressly excepted in Schedule B. It indicates that the Policy does not insure against loss or damage which arise by reason of “1. Taxes, assessments, levies or betterment charges, which are not shown as existing liens by the public records”. There is no coverage for future taxes.

[44] In the end, the taxes were incurred because of a work order issued by Patterson J. post Policy. The plaintiff had known pre-Policy that an application would be made to the court for such a work order but did not advise Stewart Title. The plaintiff then waited some five years after the application to Patterson J. was heard and the work order issued to finally advise Stewart Title of any claim.

[45] The plaintiff submits that although it was aware pre-Policy that there was a pending court application regarding the Dirty Yard By-Law violation brought by the City against the owner to bring the excavation up to grade, it was under no obligation to provide this information because (a) it was available in the public record and (b) this information was specifically not required by Stewart Title pursuant to its Commercial Search Requirements for loans under $5 million. The plaintiff submits that because Stewart Title has deliberately avoided knowledge of this information, it should not be permitted to deny coverage.

[46] The plaintiff’s argument fails because the public record did not show any existing violation but the plaintiff knew of an ongoing violation. Further, the Commercial Search Requirements relieved an insured from the necessity of conducting a search and providing a report to the insurance company. While the plaintiff did not have to get this information, it did not relieve the plaintiff from the obligation to be honest and forthright with the insurer to disclose information already in its possession (see Walter M. Traub, Falconbridge on Mortgages (5 th ed. 2013, Canada Law Book) at s. 43:40). In this regard, in a letter dated January 23, 2006 to the owner’s solicitor, Stewart Title expressly forewarned in bold type: “In the event that any additional title, survey, or other defects are discovered before closing, please advise us in writing and we will determine if they will be insured or excluded from coverage.”

[47] Also, s. 3 of the Conditions and Stipulations of the Policy requires an insured to provide prompt written notice to Stewart Title of any claim affecting title. Failure to do so will result in termination of liability if actual prejudice is caused to Stewart Title by reason thereof. In this case, the plaintiff did not advise Stewart Title of the By-Law violation, the application to the court and its judgment until years after. Stewart Title was prejudiced in that, had it known pre-Policy, it could have modified the Policy to exclude any effects of the violation of the application for a work order; and post-Policy could have negotiated with the City to resolve the court application or to mitigate the cost of filling the hole and the accumulation of tax arrears.

[48] Therefore, even if there was coverage under the Policy, as the plaintiff contends, Stewart Title has discharged its onus and has shown that the exclusions and exceptions apply.

Issue Two: The Claim Based on the Development Agreements

(i) Coverage

[49] The development agreements were entered into between the City of Windsor and the owners/mortgagors of the properties. In essence, the development agreements required that the development included certain specific structures that would benefit the City. The requirements included the right of the City to insist on the style and functionality of the buildings to be constructed. Many of these substantive terms of the agreements were not satisfied by the property owners. The plaintiff submits that these development agreements ran with the title and not the mere owners by way of privity of contract and that the City of Windsor was in a position to legally compel the would be owner to build in the manner originally agreed upon. The plaintiff claims that title was unmarketable because of these development agreements.

[50] The Policy states that coverage is “against loss or damage” sustained or incurred by the insured by reason of a title defect. Under condition 7 (iii) of the Policy, the liability of Stewart Title is not to exceed the least of certain amounts including the “difference between the value of the uninsured estate or interest as insured and the value of the insured estate or interest subject to the defect, lien or encumbrance insured against the policy”. Thus, loss is measured by the difference in value of the real estate without the defect and the value with the defect, such that any diminution in value constitutes damages. In a case of a commercial lender policy, the measure of damages is the difference between the market value of the mortgage without any defect on title and the market value of the mortgage with the title imperfection. (See National Title Ins. Co. v. Safeco Title Ins. Co., 661 So. (2d) 1234 (Fla. Dist. Ct. App., 1995) at p.1236).

[51] In this case, the plaintiff has failed to demonstrate any actual loss occasioned because of the development agreements. It received an offer to purchase the property in its capacity as mortgagee in possession for $1.9 million in July 2010, prior to any knowledge of any alleged title defect. Thus, $1.9 million represents the value of the land without the defect. It is that transaction which failed allegedly because of a title defect. The plaintiff later sold the properties for $400,000 more for a purchase price of $2.3 million representing the value of the land with the alleged defects. Also, it is of note that the plaintiff did not close on an earlier transaction for $2.6 million in July 2011 ($700,000 more than the offer on the July 2010 failed transaction) offered with full knowledge of the alleged title defect. This would indicate that the presence of the development agreements had no impact on the value that the mortgagee could receive as a mortgagee in possession.

[52] Therefore, the plaintiff has not shown that the development agreements caused it any loss.

[53] Further, there is a real question whether title was unmarketable because of these development agreements. As pointed out by the Court of Appeal in Fischer v. Stewart Title Guaranty Co., 2014 ONCA 798 at para. 4, even if the land was unmarketable, the title itself could still be marketable and unencumbered by defects that would permit a purchaser to refuse to perform a contract of sale. Restrictions on use do not go to title. Here, the development agreements affect the use to which the land can be put by requiring certain development upon it; but the development agreements do not restrict the ownership of the properties. Although Farhi Holdings took the position that it would not close the contract of sale because of the development agreements, that may not in fact have been the real reason. Farhi Holdings did allude to the development agreements as affecting financing; however, it would appear that the inability to obtain financing to close the transaction was because of the loss of the leases of government tenants in the building and the impact on cash flow. Thus, regardless of the development agreements, Farhi Holdings could not have closed and did not intend to close this transaction. The plaintiff has not discharged its burden to demonstrate that there is coverage based on an allegation of unmarketable title.

(ii) Exclusions or Exceptions from Coverage

[54] Section 3 of the Conditions and Stipulations of the Policy excluded coverage for “defects, liens, encumbrances, adverse claims or other matters (a) created, suffered, assumed or agreed to by the insured claimant.”

[55] As part of its loan to the mortgagors/owners of the properties, the plaintiff took an assignment of intellectual property, including architectural drawings and permits, incidental to the development agreements.

[56] The plaintiff knew all along of the development agreements and that they had not been complied with, in that the building had not been constructed.

[57] The plaintiff saw benefit in having all of the intellectual property associated from the development agreements. This intellectual property would enable the plaintiff to develop the property if the mortgage went into default. Therefore, the plaintiff not only knew of the development agreements but also agreed to them as important to the future development on the property as part of the consideration of its mortgage commitment. The plaintiff thereby expressly or impliedly accepted the “defect”, thereby coming within the exclusion in s. 3 of the Conditions and Stipulations (Brown v. St.Paul Title Insurance Corp., 634 F.2d 1103 (8 th Cir. 1980)).

[58] Further, the plaintiff failed to give prompt or timely notice of a claim to Stewart Title which is a basis of the termination of any liability. The plaintiff was advised that Stewart Title would consider insuring all the development agreements but needed to review them. However, the plaintiff did not pursue this but instead allowed the sales transaction to fail.

Issue Three: Claim Based on Alleged Encroachment

(i) Coverage

[59] The Survey Endorsement of the Policy insures against encroachments affecting title which includes encroachments onto adjoining land. The plaintiff claims damages arising from an alleged encroachment of one insured property onto the other on the basis that the alleged encroachment rendered title to both properties unmarketable. The issue arose when the prospective purchaser, Farhi Holdings, of the property made a requisition based on an allegation that there was an encroachment and sought confirmation that the building does not encroach on the lands. When the requisition was not satisfied by the owners of the properties, the purchaser took the position that the Agreement of Purchase and Sale was at an end.

[60] Apart from the prospective purchaser’s say-so there is no evidence of an encroachment sufficient to allow a purchaser to refuse to close the transaction. In any event, even if there was such an encroachment, as stated earlier in these Reasons, there is no evidence of a diminution in value of the properties once this alleged defect was advanced by the purchaser, in comparison to the value of the properties before any allegation or discovery of an encroachment defect. As such, there is no loss or damage and therefore no coverage.

[61] Also, as with the development agreements, the plaintiff has not established that the alleged encroachment made the title unmarketable and was of a nature that relieved the purchaser from closing the transaction.

(ii) Exclusions or Exceptions from Coverage

[62] The plaintiff failed to give prompt written notice of a claim to Stewart Title prior to the failure of the July 2010 transaction with Farhi Holdings. Had it done so, there was the option that the owners of the affected properties could have entered into a permanent easement agreement or Stewart Title could have elected to insure over the encroachment, which would have provided an appropriate remedy for the alleged defect (see Royt v. Goldenberg). Stewart Title was denied that opportunity and suffered prejudice because of the failure to give such notice and thus there would be no liability.

Conclusion

[63] The plaintiff’s motion is dismissed; Stewart Title’s motion is granted and the action against it is dismissed.

[64] If the parties cannot otherwise agree as to the costs of the motions and the action, they may make written submissions; Stewart Title within 30 days; the plaintiff within 15 days thereafter; and reply, if any, within 7 days thereafter.

Lederman J. Released: July 14, 2016