The Battle of Bona Fides: The Doctrine of Indefeasibility Revisited

When it comes to registered title, we take comfort in it being right—its record, indefeasible. The land titles registry is the root of our confidence in the state of title. Registered instruments are, by virtue of their being on the registry, fixed in place, reliable and immutable. And we expect that only a handful of statutory exceptions to title, deemed trusts or liens can colour our certainty on the priority of a registered instrument.² But we may take for granted the system that facilitates the recording of ownership and interests in real property.

FirstOntario Credit Union Limited v Nagra et al.² is about what happens when the Land Registry Office (the LRO) mistakenly deletes a charge from title to a property, and then such property is subsequently transferred. Who prevails? The bona fide mortgagee who had a first position charge registered and wrongly discharged, or a bona fide purchaser and its mortgagee?

In November 2016, the applicant, FirstOntario Credit Union Limited (the Applicant) registered a first in priority charge against a property, which at the time was owned by Kevin Carmichael (the Vendor). In December 2016, the LRO deleted a number of instruments from the PIN assigned to the subject property (the Property) and the Applicant’s charge was mistakenly deleted in the process. There was no discharge of charge instrument or reference to the registration number of the discharged charge.

In April 2020, the Vendor entered into an agreement of purchase and sale to sell the Property to Kanwaljot Nagra (the Purchaser), and the Purchaser obtained a commitment for acquisition financing from Nelson Campos (the Purchaser’s Lender). Both the Purchaser’s counsel and the Purchaser’s Lender’s counsel’s title searches of the Property showed that there were no registered financial encumbrances against the Property. In August 2020, title to the Property was transferred to the Purchaser, and the Purchaser’s Lender registered a first charge in connection with the acquisition. At no point in time were the Purchaser, the Purchaser’s Lender or their respective counsel aware that the Vendor had an outstanding mortgage obligation.

The Vendor continued to make mortgage payments under the Applicant’s charge until April 2022 (long after closing). The following month, the Applicant discovered that its charge had been deleted, the Property had been sold and that there was another charge on title to the Property in first position. At the request of the LRO, the Applicant’s charge was reinstated on title to the Property.³

Subsequently, the Purchaser and the Purchaser’s Lender (collectively, the Respondents) initiated proceedings to set aside the reinstatement order and delete the Applicant’s charge from title to the Property. The Director of Titles held a hearing⁴ and concluded that the Applicant’s reinstated charge should be deleted from title.

The Applicant appealed this decision in court.

The Applicant argued that as a consequence of the LRO’s admission of error in deleting the Applicant’s charge, the court has the discretion to order rectification of the parcel register. In the alternative, as a result of the red flags on title (being that no discharge of charge instrument or reference to the registration number of the discharged charge was referenced on title), the Purchaser and the Purchaser’s Lender’s counsel had notice of the unregistered interest in the Property, and therefore cannot rely on the doctrine of indefeasibility of title. In the further alternative, the Applicant also argued that the court should consider any entry, omission or delay error made by the LRO as an exception to the doctrine of indefeasibility of title.

The Applicant also called upon expert Robert Aaron who opined that counsel investigating title should have been alerted to red flags and investigated further, and therefore the lawyer’s failure to do so was a failure to meet the required standard of care.

The Respondents argued that the doctrine of indefeasibility of title is a complete answer, and that it is well established law that, absent fraud or actual notice amounting to fraud, both a bona fide purchaser and mortgagee for value take the land free and clear of unregistered claims. They further argued that any discretionary powers to rectify title are subject to the Land Titles Act⁵ (the LTA), which provide that their rights cannot be defeated by rectification in circumstances where they were strangers to the Applicant’s charge transaction.

The Respondents called upon expert Sidney Troister who opined that lawyers are entitled to and do rely on the accuracy of the land registry records and if the land titles record indicates that the title is free of a mortgage encumbrance, then barring fraudulent activity, the title of the property is as it is reflected on the parcel register.

Ultimately, the Court concluded that it was unable to order rectification to restore the Applicant’s charge and dismissed the appeal of the decision of the Director of Titles.

The Court found that whether lawyer conduct fell below the standard of care owed to the applicable client, as opined on by the experts, was not relevant to the matter.

The common law test for rectifying a contract as established in Sylvan Lake Golf & Tennis Club Ltd. v Performance Industries Ltd.⁶, is not binding in the context of an application under the LTA. Rectification is an equitable remedy, and the court has a wide discretion with respect to the remedy in appropriate circumstances, subject to sections 159 and 160 of the LTA, which specify that "the court’s rectification powers are subject to any estates or rights acquired by registration under the LTA".

The "estates or rights acquired by registration under the LTA", provide that an instrument is effective when registered "according to its nature and intent, and to create, transfer, charge or discharge, as the case requires, the land or estate or interest therein mentioned in the register."⁷

The limitations imposed by sections 159 and 160 of the LTA to the court’s discretionary power to rectify title is rooted in the doctrine of indefeasibility of title.

As stated by the court in Durrani v Augier⁸, "where a bona fide purchaser for value succeeds in becoming a registered owner, the fact of registration is conclusive. Indefeasibility of title is a consequence or incident of that registration. The court does not have jurisdiction to rectify the register if to do so would interfere with the registered interest of a bona fide purchaser for value in the interest as registered."

It was undisputed that the Purchaser was a bona fide purchaser for value and the Purchaser’s Lender is a bona fide mortgagee for value.

So let’s refresh on the notion of the doctrine of indefeasibility. The land titles system was established in Ontario in 1885, and its general purpose, and what we all rely on, is that it provides the public with security of title and facility of transfer. The sanctity of title is established by a register and the guarantee of the government that (subject to certain statutory exemptions) the person named on the register is the owner and has perfect title subject only to registered encumbrances.⁹

The three principles forming the doctrine of indefeasibility of title are well settled law, and are as follows:

1. The Mirror Principle—whereby the register is the perfect mirror of the state of title;
2. The Curtain Principle—whereby the purchaser need not investigate past dealings with the land, or search behind the title as depicted in the register; and
3. The Insurance Principle—whereby the state guarantees the accuracy of the register and compensates any person who suffers loss as a result of an inaccuracy.

The two exceptions to the doctrine of indefeasibility title are fraud and actual notice of an unregistered instrument.¹⁰

The Court found that fraud had no application to the facts of the case and that constructive notice is not one and the same as actual notice. The factual analysis is confined to a consideration of what the party knew, not what it could have know had it made inquiries.

The undisputed evidence was that the Purchaser and the Purchaser’s Lender did not have actual knowledge of the Applicant’s registered interest.

The court further found that an entry made in error by the LRO is not an exception to the doctrine of indefeasibility of title, and there is no juristic reason for such an exception, given the insurance principle. The deletion of the Applicant’s charge from title is an entry on the register, and the Applicant is entitled to seek compensation from the Land Titles Assurance Fund if it exhausts its efforts against the Vendor and has not been made whole.

As said best by the Court in Wonderland Power Centre Inc. v Post and Beam on Wonderland Inc.¹¹, "rectification of registered interests after purchase by a third party is of particular concern because of the importance of the reliability and integrity of the land registry to all aspects of land law and conveyancing." While it’s not ideal, to say the least, that the Applicant’s charge was deleted through no fault of its own, it is imperative that we are all able to rely on the land registry system.

So, it would seem, that all remains good with the reliability of our land registration system, at least if you are a bona fide purchaser. If you are a mortgagee with a mistakenly discharged mortgage… you may feel somewhat less comfortable with the facts of the case…and not entirely comforted by having to sue on the discharged mortgage and then seek compensation from the Land Titles Assurance Fund for any deficiency. Of course, cases like this are the calling card of title insurance companies who derisk mortgagees against human error and malfeasance of this nature….and fight the fight on the insured’s behalf when there is a battle of the bona fides.