Local Improvement Charge – When does title insurance apply?
Oct 26th, 2013 | By John Tracy
We have recently heard of a situation in Ottawa where there was a delay of almost ten years between the time work was completed and the time the municipality levied a local improvement charge against the affected homeowners. (As reported in the Ottawa Sun http://ow.ly/pJAgW.)
Local Improvement Charges are charges that a municipality levies against properties to recoup the costs of an improvement that was constructed for the specific benefit of those properties. For example, if a municipality extends municipal water and sewers to a group of properties that were formerly on well-water and private sewage systems, it could then choose to charge the owners of those properties their proportionate share of the costs of the project. Normally the owner of the property has the option to pay the local improvement charge in one lump sum payment or in installments over a period of time. If these charges are not paid they can form a lien on the property.
The Ottawa homeowners who were affected by this retroactive local improvement charge are understandably upset at now having to pay for work that was completed a decade ago. Would title insurance provide any relief in these cases? In a word – No. The trigger is the date when the charge was levied and the bill was received by the homeowner. Only those amounts owing on the local improvement charge that had accrued prior to the policy date (normally the date of purchase) would be covered by a title insurance claim. There was no bill received by the previous owner even though the work was completed during their ownership of the affected property. With no bill prior to the Policy Date or lien against the property for a local improvement charge, there is no coverage available in this unfortunate situation.
When does coverage apply? FCT’s Platinum Residential Owner’s policy does provide coverage for local improvement charges when losses arise from the lien caused by a local improvement charge as to “that portion of the total amount of the charge which had accrued prior to the Policy Date.” So if an insured purchases a property and if there is any portion of a Local Improvement Charge that is unpaid and that is attributable to a period prior to the Policy Date, the insured will have coverage under their title insurance policy for that amount.
Most standard forms of agreement of purchase and sale deal with local improvement charges in the same way as property taxes. That is to say they are usually apportioned between buyer and seller with the seller responsible for paying the local improvement charge bill up to the date of closing and the buyer responsible for all amounts falling due after the date of closing. Many home buyers may be unaware of the existence of a local improvement charge prior to closing. But if it is paid up to date, there is no title insurance coverage and the home buyer is usually contractually obligated to pay all amounts owing on the local improvement charge that fall due after closing.
So title insurance applies when there is an outstanding payment by a previous owner or a related lien on the home buyer’s property. So from a title insurance perspective, it is the date of the Charge, Bill or Lien that is relevant not the date of the work.