A big thanks to Chris for contributing today’s guest post.
We have had two occasions recently where clients have closed on a house and found out, after the fact, that the previous owners had not paid all of their outstanding taxes. In each case, our client has been faced with a bill from the municipality plus any interest outstanding, for the previous owner’s taxes!
When lawyers are hired to close a house transaction, the expectation has always been that he/she will look into the realty tax account for the house to make sure that there are no outstanding taxes due before ‘closing’ and title transferring. Not so, says several municipal tax clerks. When speaking with a few local municipalities, I have been told that, in fact, many legal firms no longer request a “tax certificate” before closing, which would tell them definitively when outstanding taxes exist.
What does this mean for our buyer clients? Well, if they purchased ‘title insurance,’ a claim can be made for the amount of taxes the buyer has had to pay on the seller’s behalf. If they did not purchase this insurance, once the title has transferred, they are responsible for the outstanding taxes so they would have to pay them and then they could pursue the previous owner by the usual means available, such as small claim’s court.
I can see, down the road, where Title Insurance companies may tire of this practice if they are paying out too many ‘tax arrears’ claims.
In addition to finding out more about title insurance, we also discovered that a major chartered bank has a policy which collapses a tax account as soon as a lawyer’s letter is received advising them of a house sale, regardless of the closing date. In our case, the seller’s bank did not pay the outstanding taxes on their due date, and instead credited the tax account funds into the seller’s bank account. The amount of funds was not equal to the amount of owed taxes and this went unnoticed by the seller.
In the meantime, when a buyer is hiring a lawyer, the prudent thing would be to clarify whether the lawyer intends to purchase a ‘tax certificate’ on the day of or day before closing. The tax certificates vary in cost by municipality, but are around $30 – $50 for production of this information in certificate form, which tells the lawyer if any taxes are outstanding for the property in question (amongst other things.) Lawyers would pass along that charge to the buyers, under the disbursement section of their invoice. It seems a very reasonable cost to pay to obtain such important information.
We’ve checked with local lawyer, Alex Besse, partner in Besse, Merrifield & Cowan on this topic, and he had some interesting points to make. He said that our story is a direct consequence of the increasing use of title insurance in the past 5 years.
Unfortunately, lawyers primarily use title insurance to get around a house not having a survey. For the attractive cost of $175 – $200, the buyer can buy title insurance as opposed to paying for a survey, a tax certificate ($30-50) and a zoning report ($30-50.) This type of insurance, however, does not solve all the problems which could arise from not having a proper survey done. Alex maintains that title insurance is not an adequate or intended substitute to these. He does point out that one of the most important reasons for which to buy title insurance is to guard against mortgage fraud, especially when there will be no mortgage on the property.
He also drew our attention to the fact that in our case, if a buyer were to submit a claim against their title insurance policy for the taxes owing by the previous owner, the insurance company would in turn go after that previous owner for the money plus costs.
What does all this mean? If you are the seller, check with your bank if you pay your taxes through your bank, that they will be paying any outstanding instalments before closing. If you are the buyer, ask your lawyer about tax certificates, zoning reports, surveys and title insurance.
The fewer the surprises you have before, at and after closing, the better!
Marg Scheben-Edey is a Broker with RE/MAX four seasons realty limited, Brokerage in beautiful Collingwood, ON. With three decades of experience, Marg is a leader in the local real estate marketplace and is ready to help guide both Buyers and Sellers in achieving their real estate goals. Email Marg