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Construction Loans — dig in to better protection with title insurance

Eric Haslett | The Title Page | 2015-08-10

Eric Haslett, FCTTitle insurance companies tend to be a good barometer of what’s going on in the national real estate market. Orders for title insurance are often placed months in advance of closing, so we have a pretty good read of the activity level throughout the country.

We also get valuable insight into the market itself based on what sort of activity is occurring, such as multi-site mergers and acquisitions; properties going under power of sale or foreclosure; refinances; and construction loans.

Lately our unique vantage point shows a steady increase in title insurance orders for construction loan transactions.

Title insurance great value

There may be some of you reading this article who are not aware title insurance is available on construction loans. Not only is it a growing area of the industry, it is quite possibly the best value available, offering outstanding protection for lenders.

Because there are provincial/territorial variations in the legislation dealing with construction liens, coverage may vary accordingly. As a result, I will keep my comments general in nature.

We initially drafted our construction loan endorsement to recognize the needs of the lender and how construction loans are advanced. As you may know, title companies typically require only three or four searches (depending on the province) in order to issue a title policy. In addition to many other coverages, the loan policy will provide coverage for loss resulting from the following:

* any outstanding work orders that have been issued;
* any non-compliance with agreements registered on title, such as development and site plan agreements;
* any non-compliance with zoning by-laws; and
* any defects that would be revealed by an accurate and complete survey.

All of these coverages are for matters existing at the date of policy. The date of policy is a very significant concept in understanding the value of title insuring construction loans.

Typically advanced in stages

A construction loan is typically advanced in stages. When the first advance is made, that is the date of policy. All coverage is up until that point in time. Recognizing how construction loans are advanced, our Construction Loan endorsement was designed specifically to take into consideration future advances.

As a result, the date of policy automatically moves forward to be the date of the new advance provided:

* A subsearch is conducted;
* Taxes are up to date;
* The lender has no knowledge of any liens; and
* Any holdback provisions in the legislation are complied with (e.g. 10 per cent in Ontario).

That is significant coverage because it means that if during the period since the previous advance any work orders have been issued; or work has been conducted which is not in compliance with agreements on title; or a defect occurred which would be revealed by a survey as being in non-compliance (e.g. the structure being built in violation of the setback requirements), then there would be coverage for loss suffered by the lender.

If there has been significant work to be done on the property, moving the date of policy forward is crucial.

Typically, there is an additional charge of 10 per cent for this type of endorsement and not all title companies will move the date of policy forward — it is definitely worthwhile to do your research beforehand.

So, before you dig, phone your title company!

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About the Author ()

As Vice-President, National Accounts, Commercial Solutions, Eric is responsible for building FCT’s commercial business by fostering key relationships with national lenders and major law firms. Relying on his extensive experience and niche expertise, Eric’s goal is to promote education and best practices throughout the commercial real estate marketplace. Eric earned his bachelor of commerce from McMaster University in 1990 and later graduated from the Faculty of Law at The University of Western Ontario. He was called to the Ontario Bar in 1997.

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