Edge News

February 2010  

Teachers buy into mortgage insurance business
Strong market gains expected to continue through first half of 2010
“Time is of the essence” when notices given and received
First-time buyers may want rental income but beware restrictions
ON THE MARKETS: Economists predict higher interest rates in fall
Identifying fraud: use caution, common sense
LEGAL BEAT: Open use of driveway for 20 years supports easement
Make a difference; join a committee
REALTOR^® concerns not reflected in brownfield regulation amendments
AERO improves offer to REALTORS^®

Teachers buy into mortgage insurance business
A private investor group, in which Ontario Teachers’ Pension Plan is the lead sponsor, is set to buy the Canadian mortgage insurance business of American International Group Inc (AIG). AIG United Guaranty Canada, headquartered in Toronto, is the second largest private mortgage insurance provider in Canada with assets of C$274 million and total equity of C$127 million. AIG's sale of the Canadian mortgage division is the latest business unit to be sold by the insurance giant in an effort to help repay a US government bailout package received last year worth more than US$180 billion.

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Market Watch
Strong market gains expected to continue through first half of 2010
Canada's residential real estate market is forecast to remain unusually strong through the first half of 2010, according to the Royal LePage Market Survey Forecast and House Price Survey. The survey reports state, “As confidence in the recovery builds in early 2010, increases in average house price levels and overall market activity are expected to continue. The gradual erosion of affordability driven by higher house prices and the expected late-year modest upward movement of interest rates, together with an improvement in listings supply as confidence improves, are expected to bring the market back into balance in the second half of the year when home price increases are expected to moderate.”

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“Time is of the essence” when notices given and received
One of the most significant changes made to the OREA 2010 Standard Forms was the revision of the Notices clause in Form 100, the Agreement of Purchase and Sale. The revised clause makes it clear that the brokerage should not be legally designated as the agent for giving and receiving notices in a multiple representation situation.

It is important to understand that this clause clarifies when the notice is legally deemed to be given and received. It does not prevent the brokerage from being involved in the process of delivery. As in the past, salespeople are expected to be directly involved in personally delivering notices, waivers, etc., to their client, or faxing such notices to the fax number designated by their client, if a fax number (not the brokerage’s fax number) has been so designated. Of course, the salesperson’s responsibility may be to convey the notice to another salesperson who is working with the buyer or seller.

For all transactions, it is the duty of the salesperson to ensure that notices have been properly given and received. This is essential for the Agreement to be legally binding. Multiple representation can cause great uncertainty as to when a notice has been given and received, and since “time is of the essence” uncertainty can be fatal to a transaction.

Consider the following example: A buyer signs a waiver that must be delivered within a stipulated time period. If the brokerage has been designated for notices, when has the seller been legally notified of the waiver? When the buyer signs the waiver and gives it to the selling salesperson? When the selling salesperson brings the waiver to the brokerage office or faxes it to the office? When the selling salesperson gives or faxes the waiver to the listing salesperson? When the listing salesperson delivers the waiver in person or by fax to the seller and obtains adequate documentation that it has been delivered?

In a recent Ontario court case involving multiple representation, McKee vs. Montemarano [2008] O.J.No. 7855, Ont. S.C.J., the court ruled that a waiver had not been delivered, even though the selling salesperson was in possession of the waiver.

Brokerages representing more than one party to a transaction must ensure that the interests of each client are protected. Designating the brokerage as legal agent for notices can create confusion and unnecessary risk. Delivering notices to the parties within the required time frames eliminates this confusion and risk.

It is also important to note that the above mentioned court case resulted in a change to the OREA Standard Clauses for 2010. Each of the clauses that make reference to the giving of notice has been revised to complement the wording of the new 2010 Notices clause in the standard wording of the Agreement of Purchase and Sale. All brokers and salespeople should ensure that the revised 2010 version of the Standard Clauses is used when adding clauses to the Agreement of Purchase and Sale.

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First-time buyers may want rental income but beware restrictions
Many homebuyers consider purchasing a property with an existing or potential for a second suite. First-time homebuyers in particular often hope to take advantage of the extra income a second suite, often a basement apartment, can generate. Financial advantages can be great, but the buyer needs to know the legal implications.

Your client or customer may have many questions regarding the legalities and financial implications of creating or operating a rental unit. REALTORS^® should refer them to their lawyers or accountants for legal or financial advice, but REALTORS^® still have an obligation to disclose material facts.

Whether a suite is a legal second suite will depend on building code and fire code issues and municipal zoning bylaws. Although bylaws across Ontario are generally similar, each municipality has its own variations.

For example, while the town of Bolton encourages basement apartments, in neighbouring Brampton, only basement apartments built before November 16, 1995 are legal, and these units must be registered with the city. Basement apartments in Brampton built after that date are illegal. Any landlord that violates this bylaw faces fines of up to $50,000 and one year in prison. REALTORS^® should encourage their clients to visit a municipality’s website, or to speak to a lawyer located in the area.

If a buyer intends to create a second suite, he needs to determine whether the home qualifies under the bylaws of the specific municipality. If the home does not meet these requirements, the potential buyer must determine whether he is willing to make the necessary changes to create a legal apartment. A building permit is always needed, even in cases where construction will not be taking place.

Any construction plans are approved based on zoning requirements, safety systems and building issues. Once a second suite is introduced into a home, a General Inspection for Fire Code Compliance must be completed by the Electrical Safety Authority. The inspection reviews both the owner’s unit and the rental unit for fire code compliance.

If a home currently has a second suite, it is important to determine whether the existing unit meets the municipality’s requirements. The municipality will inspect the unit to determine whether it is fit for habitation and whether it meets established standards. Both new and existing units require a General Inspection for Fire Code Compliance.

Return on investment
The cost of retrofitting a home depends on the home’s condition. Assuming a renovation expense of $25,000 and net rental income of $500 a month, the return on investment will be 24 per cent. The investment will pay itself back in just over four years.

Rent collected from a second suite must be declared as income. However, landlords can deduct direct expenses (directly related to operating the rental unit, e.g. replacing appliances) and indirect expenses (costs shared with the entire house, e.g. utilities and mortgage interest) needed to operate the suite. Direct expenses are 100 per cent deductible; indirect expenses are deducted on the portion of the home assigned to the rental unit.

Landlords can also deduct capital cost allowance (CCA), commonly known as depreciation, from their income. CCA is permitted on any long-term purchase, such as renovations or appliances. The consequences of claiming CCA must be considered carefully. The equity earned when selling a principal residence is not taxed. However, once CCA is claimed, the area dedicated to the second suite is no longer considered personal residence. Therefore, a homeowner would forego any tax benefits from the sale of the property on the second suite portion of the home.

A second suite can increase a property’s value between two to five per cent. Property taxes are based on a Current Value Assessment (CVA), which usually does not increase unless the home’s value increases by at least $10,000 or five per cent. So, most second suites do not add enough value to increase taxes. The exception is a second suite created by an addition, which can add significant value to a property, and can increase property taxes.

As in any transaction, REALTORS^® need to be sure to provide their clients with information that is accurate and not misleading. In the Ontario Superior Court case Malpass v Morrison (2004 ONSC 12542), the judge found that the agent had failed in his duty of care to his buyer clients. The buyers were looking for a home with four bedrooms or space that could be converted to a bedroom. They made an offer on a bungalow that was accepted. They later discovered the fourth bedroom was illegal and decided not to proceed with the purchase, which cost them over $60,000. They sued their agent for the losses, alleging their agent failed to advise them with respect to a municipal by-law prohibiting a basement bedroom.

The judge found that it was a material fact known to the agent that the basement “fourth bedroom” was not compliant, and that the buyers considered this room to be a bedroom and he did not correct their impression. He found that in this case, the breach of fiduciary responsibility amounted to a breach of duty of care. When listing a property or showing a home to buyer clients, the best policy is to always disclose any material facts, including whether a suite is legal or not.

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ON THE MARKETS
Economists predict higher interest rates in fall
According to many of Canada’s top economists, higher interest rates – and debt servicing costs – may be just around the corner. Exactly when rates will rise is unclear and depends on who you talk to.

In its latest Financial System Review, The Bank of Canada judges that vulnerability of Canadian households to adverse wealth and income shocks has grown in recent years. “At present, Canadian household finances appear quite healthy,” Governor Mark Carney says, but it is the responsibility of households now to ensure that in the future, when the recovery takes hold and extraordinary measures are unwound, they can still service their debts.”

The Bank of Canada still maintains it will hold the line on rates until July of this year, and many analysts believe rates may start to rise in the fall of 2010, with some expecting a full three percentage point hike by the end of 2011. Here’s a summary of a few of the forecasts for where interest rates are headed over the next year and a half:

TD Quarterly Economic forecast
With home prices on track to grow a further 9.4% in 2010, the housing market will continue to support economic activity through much of the year, while rock bottom interest rates, improvements in financial asset and housing wealth, and a recuperating labour market will help underpin consumer spending. Home price growth will slow significantly thereafter, and residential investment is expected to detract from economic growth through 2011 and 2012. The slower rate of home price appreciation will also limit the rate at which household wealth increases, posing a hurdle for Canadian consumer spending. Second, households may be very sensitive to rising interest rates, particularly given the high rate of debt accumulation that occurred in response to record low interest rates. As such, an expected rise in short term interest rates of a full 3 percentage points by the end of 2011 is likely.

RBC Economics
In the near-term, with interest rates likely to remain low and the supply of homes available for sale relatively limited, we do not expect to see a sharp drop-off in sales activity. In the second half of 2010, however, the combination of higher mortgage rates and higher prices are likely to take some steam out of the market. In 2011, conditions in the housing market are likely to be relatively stable as the strengthening economy leads to job and income growth, which will offset some of the effect of the steady rise in interest rates throughout the year. The Bank of Canada will honour its conditional commitment to hold the policy rate at its current level until the end of the second-quarter 2010. Our baseline forecast looks for the Bank to raise the policy rate by 100 basis points in the second-half 2010. Another 225 basis points in rate hikes are expected over 2011 with the policy rate expected to settle at 3.5%.

Scotia Economics
For most other central banks, the process of normalizing the emergency level of short-term interest rates should begin around mid-year — led by the European Central Bank, but quickly followed by the Federal Reserve and the Bank of Canada, and belatedly by the Bank of England and the Bank of Japan. Overall, we expect that the Fed and the Bank of Canada will raise their overnight rates 2 percentage points by mid-2011, after which they are likely to remain on hold as the U.S. economy adjusts to a slower growth trajectory. U.S. bond yields should continue to trend higher against a backdrop of a revival in private sector credit demands, a less accommodative central bank stance, and the massive financial requirements associated with large and sustained government deficits.

CIBC World Markets
The US consumer upturn has been more vigorous than we would have expected, a challenge to our view that a rising savings rate would sap growth momentum. But we’re still a long way from the big job gains needed to bring unemployment down on a sustained basis, and we’re sticking to our view that the Fed will stand pat until early 2011. Still, Canadians must be prepared for when interest rates inevitably rise. “They are emergency rates, they won't be here forever,” says Benjamin Tal, CIBC World Markets.

BMO Nesbitt Burns
As long as these conditions continue, the Fed should remain on hold. We look for the unemployment rate to peak during Q1 and remain in double digits until the autumn, with core inflation drifting down consistently during the year. We’ve pencilled in a September rate hike start, by which time the outlook for resource utilization, inflation, and inflation expectations should be signalling a precautionary requirement to begin removing monetary stimulus, and also reflecting the Fed’s concern that keeping policy rates too low for too long “could lead to excessive risk-taking in financial markets”. Rate hikes are likely to be gradual and could easily be postponed into 2011 because of continued high unemployment and inadequate credit creation.

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Identifying fraud: use caution, common sense
Mortgage fraud continues to be a major concern for the real estate industry. While recent changes to the Land Titles Act make it easier for defrauded homeowners to recover title or be compensated, fraudsters continue to find new ways to defraud lenders and use REALTORS^® and other individuals as innocent dupes.

FINTRAC now requires salespeople and brokers to collect and verify personal information from clients, as well as track the source of funds received during a transaction. REALTORS^® must ask for proof of identification of all buyers and sellers in a transaction, including corporate clients. REALTORS^® are now required to keep documentation on all funds received for five years. Lawyers are also now required to verify client identification in almost all transactions.

According to RECO, more than 50 per cent of RECO investigations in the past year dealt with real estate brokers or salesperson and fraud. The Registrar's position is that any registrant who knowingly participates in mortgage fraud faces losing their registration.

Although mortgage fraud is a criminal act, the Real Estate and Business Brokers Act, 2002 gives RECO the power to investigate crimes that are relevant to a persons' fitness for registration. The Act also contains sections which make it an offence for anyone to falsify, assist in falsifying, induce or counsel anyone to falsify documentation. RECO will also report criminal activity to the local police.

RECO encourages registrants to report suspicious transactions. Registrants are often in the best position to identify and report fraudulent transactions. It is extremely important to report these transactions to RECO.

While homeowners no longer have to worry about losing title to their property, the best way to avoid the hassles and stress of dealing with real estate fraud is to purchase title insurance. REALTORS^® should refer their homebuyer clients to a lawyer, who can provide them with a title insurance policy at closing, or an existing homeowner policy at any time.

Get to know the client
The best thing that REALTORS^® can do to guard against fraud is to know their client and be alert for signs of fraud. Be cautious, and use common sense. If a deal seems too good to be true, it probably is.

According to RECO, REALTORS^® should be wary of the following indicators:

• A seller wants to meet somewhere other than the property she plans to sell.
• A seller insists that the property be listed in excess of any reasonable market value.
• The seller has just purchased the property and wants it listed again at a significantly increased value.
• A seller from another area wants a property listed.
• The seller finds his own buyer.

In a Winter 2009 Ontario Gazette article, “Update on Mortgage Fraud” (http://www.lsuc.on.ca/media/olg_winter09_mortgagefraud.pdf), the Law Society cautions lawyers to be diligent in deals where red flags appear, including:

• Credits which are not referenced in the agreement of purchase and sale are granted to the purchaser.
• Closing funds are in the form of a cheque or bank draft from a third party.
• The same purchasers, vendors, real estate agency or mortgage broker are present in multiple transactions.
• Higher than usual fees are offered on the transaction.

In addition, Lawyers' Professional Indemnity Company, or LAWPRO, has produced a comprehensive fraud fact sheet (http://practicepro.ca/practice/pdf/FraudInfoSheet.pdf), which lists the following red flags of fraud:

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LEGAL BEAT: Open use of driveway for 20 years supports easement
Welton owned two lots and sold one. He then built a driveway that both lots could use. The driveway is located on the lot that he sold. He has continued to service and maintain the driveway since 1963. A dispute arose between Welton and the new owners of that lot who had bought it in 1985.

The judge agreed that Welton had obtained an easement over the lot for the driveway and that this was by adverse possession and not by permission of the owners of that lot. The Court of Appeal summarized the legal principles as follows: "It is well established law that to acquire an easement by prescription, a claimant must show that he or she has enjoyed an easement without violence, secrecy or permission for a period of at least 20 years prior to the commencement of the action for a declaration. In other words, the claimant must demonstrate a use and enjoyment of the easement, for the 20 year period, under a claim of right which is continuous, uninterrupted, open, peaceful, and with the knowledge and absence of objection from the owner of the servient lands." "After setting out the applicable legal principles, the trial judge explained why he was satisfied that Mr. Welton had met that burden. In respect of the requirement that use be "as of right", the trial judge states: The defendants have no basis to say use was by "license" or permission. The use was obvious to all the owners of Lot 29, as to who provided the maintenance and who supplied materials for such maintenance. Mr. Welton's evidence is not only convincing but it is frank and truthful. He alone knew of the arrangement with Mr. Tickins and subsequent owners up to the arrival of the defendants. His efforts in maintaining such are evident from the photographs."

Welton v Glickman 2008 ONCA 591

MERV'S COMMENTS
Many lawyers advise clients not to become involved in fence or easement disputes such as this. The legal costs can be prohibitive. The law may be clear enough to state, but it is the facts that may become determinative. In this case Welton was convincing that his use of the property was not by license or permission. When clients tell me that a neighbour is asking permission to use their property my advice is to be generous and allow them to do so. However we then write a registered letter that they are doing so with the client's permission which can be withdrawn at any time. OR chain the entrance every few years to stop the time accumulation.

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OREA NEWS
Make a difference; join a committee
If you’ve ever thought of serving your profession, why not sign up for an OREA committee? Members are invited to apply on line on the OREA web site at www.orea.com. Log in to the Members Only section, and scroll down the menu to the Volunteer Form link located below Committees and Task Forces. New committees will be struck after the March 3rd Assembly. The deadline for submitting the online application is March 18, 2010.

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REALTOR^® concerns not reflected in brownfield regulation amendments
None of the province’s amendments to Ontario’s record of site condition regulation 153/04, released in December, address concerns raised by OREA during the consultation process. The regulation is an important regulatory standard for brownfield development.

The changes proposed by the government to the site condition standards under Regulation 153/04 will result in an increased number of properties being identified as “contaminated”. This will include not only industrial and commercial properties but also residential properties, potentially having a significant detrimental effect on property values.

In its submission, OREA urged the government to conduct an assessment on the impact of the changes to the regulation on the economy and real estate. Unfortunately, the government did not act on OREA’s recommendations.

To review OREA’s submission on the proposed changes to Ontario regulation 153/04 go to http://www.orea.com/index.cfm/ci_id/12777.htm.

OREA will continue to monitor and report on changes to the regulation.

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AERO improves offer to REALTORS^®
AERO Insurance Brokers has just negotiated a 33 per cent increase on the discount offered to OREA members. As a benefit of OREA membership, you have access to great group rates with two of Canada’s leading insurance companies. Significant discounts have been arranged for home and auto insurance, real estate office-business, personal umbrella policies, and personal comprehensive general liability policies.

AERO can also help you insure hard to insure homes that have components such as knob and tube wiring, 60 amp service, oil tanks, and galvanized plumbing.

Contact Conrad Dion at 1-888-685-AERO (2376) or go to www.aeroinsurancebrokers.com/orea for more information.

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