Case Studies

Our case studies offer examples where an Insurance policy has helped a client to achieve their objectives despite facing compromising situations.

• Australia: An attractive proposition?

  Jon Downes, General Manager, Australia

  Investing in Australia is an attractive proposition with steadily rising property prices despite the global financial crisis (GFC) - however, this has been accompanied by the number of identity fraud schemes operating across Australia soaring. Most recently, in December 2009, a $150 million mortgage fraud scam was uncovered.

  In the economic outlook for Australia released in November 2009 by the Organisation for Economic Co-Operation and Development (OECD), it was reported that Australia has been less affected by the GFC than most other OECD countries and is likely to experience a relatively robust recovery in 2010.

  With business and consumer confidence at healthy levels, there has been an unprecedented surge in housing finance. This has been driven in part by strong population growth, pent-up demand for housing stock and lower interest rates than previous years. Property prices have held firm, with Australia largely failing to experience a drop in property prices over the last 18 months that has been the case in other parts of the world.

  One of Australia's largest banks, ANZ, published its Property Outlook Report in December 2009. According to the report, property prices across Australia rose by an average of 10% in 2009, with the prediction being made that as construction levels have been low and there has been a surge in population growth, property prices will continue to be driven up, particularly in the residential market.

  A recent report, Housing Outlook for 2010-2012, released by QBE Lender's Mortgage Insurance and prepared in conjunction with BIS Shrapnel, speculated that property prices across Australia will grow by as much as 23% over the next 3 years.

  So why is mortgage fraud on the rise? Australia's longest serving fraud investigator, Detective Superintendent Colin Dyson of the New South Wales Fraud Squad, spoke at the National Identity Crime Symposium in October 2009. Given the dramatic rise in property prices over the last ten years, in a report of what was said at the Symposium, Det Supt Dyson opined that organised crime groups have realised that mortgage fraud is becoming increasingly lucrative as they can acquire significant sums of money by fraudulently taking out loans against high value properties. As property prices continue to rise, the rewards are increasingly outweighing the risks. The property system in Australia is not infallible and, given the potential sums involved, it appears that there are many different players in the conveyancing chain, from real estate agents and mortgage brokers to bank staff and lawyers, who seem prepared to step outside the law to obtain money by deception. In addition, the sanctions for mortgage fraud are generally less severe than for other crimes.

  The $150 million scam is reported to involve more than 200 residential and commercial properties with over 250 people wanted for questioning by police and several arrests already having been made. The scam apparently involved identity theft with properties being mortgaged without the owners' knowledge, as well as property prices being fraudulently inflated. It is understood that Australia's four largest banks, as well as a number of smaller lenders, have all been hit by the scam. It has been reported that at least two murders are linked to the scam, including the murder of a prominent Sydney businessman who was gunned down outside his home in September 2009.

  The police have urged lenders and property owners to protect themselves against mortgage fraud. With First Title on the front line in the battle against such fraud, having been involved in a number of leading cases on mortgage fraud in recent times, we have been working with the police, Mortgage and Conveyancing Industries to help prevent fraud through increased awareness and through offering tailored solutions providing insurance coverage to lenders and purchasers.

• Mexico: Claims Case Studies

  Tony Anton, Director General, Mexico

  Real Estate Ownership and Mortgage Security Insurance (title insurance) is still a relatively new product available in the growing Mexican real estate market. When, fueled by international investors, it made its first appearance some years ago, local attorneys, Notarios and real estate professionals used to agree with one dry statement: "title insurance, whatever it is, is not necessary in México." Such a statement overlooked a tangible fact: while buying real property in México can be a safe avenue for foreign investors, land litigation is a frequent occurrence in Mexican courts. Title claims and disputes are constantly filed in México, and even Notarios and Public Registrars, the gatekeepers of the system, are usually named co-defendants in legal actions that challenge their participation in the transactions at issue.

  Tony Anton, Director General of FAF International's Mexican office reviews some of the more recent examples of disputes affecting real property owned by foreign investors in México.

  An active public sewer goes unnoticed

  A well known leader of the United States retail industry was aggressively expanding to Mexico, buying, constructing and beginning to operate all over the country, anchoring many new shopping centers. One location faced an unforeseen problem- an active public sewer went unnoticed by the contractor in charge of the engineering due diligence prior to the closing. After months of planning, the schedule for opening was in jeopardy. Attorneys retained by FAF International entered into an agreement with the city to relocate the sewer line.

  The Disgruntled Stepmother

  Another big name in the U.S. retail industry was challenged when judicial action was made by the stepmother of the sellers of the property under the claim that her stepchildren had gained ownership over the land by forgery of their terminally ill father's signature. The plaintiff is currently seeking avoidance of that transfer and all transfers made after a point in time approximately 40 years ago. Should she prevail in her claim there will be a total failure of the title. The challenge is a complex multiparty litigation involving the current owners of this shopping plaza, the sellers and Notarios Públicos that participated in the transactions.

  FAF International have retained top Mexican trial attorneys and the litigation is expected to last several years whilst working its way up through the complicated Mexican judicial process, involving both state and federal courts. Our client may rely on FAF International to provide for these costs while the other co-defendants who also bought land affected by the claim must pay for this unforeseen risk themselves.

  Should the plaintiff succeed in proving her case resulting in a total failure of the title, a second level of protection will be triggered under the policy: FAF International will provide for the actual loss incurred by the insured, up to the amount of the policy.

• Europe: French title transfer process

  Elise Klein Wassink, Specialist Broker, Title Protection Europe

  Most transactions in France include properties that have, at some point in time, benefitted from a building permit. Usually the building permit per se forms part of the file presented to the acquirer. However, paperwork documenting the next steps in the building process up to proof of conformity of the construction works as executed with the building permit, may be missing or incomplete. And in some cases, the buyer when visiting the building plan in hand finds that the construction work as executed does not correspond to the building permit as granted. In both cases, when documents are missing or when the actual construction and the permit do not coincide, the negotiations between buyer and seller may turn sour: should the price of the property be reduced, should the seller give extensive guarantees and put a part (which portion?) of the sales price in escrow, and when does the risk actually lapse, if ever?

  We have assisted on a number of such occasions recently, proposing to take the risk off the shoulders of seller and buyer, thus taking the sting out of the negotiations, allowing the transaction to be concluded within the planned time frame and without the buyer or the seller incurring extensive cost.

  It is noted that such a known risk policy involves the obligation for the insurer to defend the title against claims of third parties, including but not limited to the municipal authorities.

  Having met with a number of market players in France, we find that in the Paris area properties may sometimes present a tax liability relating to the so-called "redevance pour création de bureau". Legal experts have different views on if and when this risk lapses over time. All agree that the financial impact will be substantial due to fines/penalties and interest charges.

  Buyers and sellers in the Paris market are accustomed to this issue, and may take a commercial view. We have reason to believe that banks and other financial institutions may not. In the current economical climate, the cost of debt will increase or lending conditions will become more stringent, if a property presents this type of latent liability.

  Together with FAF, I am willing to study any case presenting this type of risk, in order to develop a product that caters to this need, specific to the properties in the Paris area.

• Europe: Syndicated Bank Facility

  FAF International, through its UK operation, First Title Insurance plc was recently approached by a leading European Commercial lender that was looking to enter an existing syndicated bank facility in the UK.

  Originally in 2001, a number of UK banks entered into a facility against a portfolio of several hundred commercial properties located in England, Scotland and Wales for a leading property company. The security comprised fixed and floating charges, which the security trustee would register at the Land Registry and Companies House following completion.

  A European lender was looking to acquire a portion of this syndicated facility, as a new member of the syndicate.

  Clearly as existing lenders, the original syndicate banks, were happy with the security and simply required finance documents to be refreshed to encompass the revised loan amounts and renewed covenants. The new bank therefore had the option of accepting the existing security documentation or undertaking renewed title due diligence. Due to time constraints and more importantly cost implications this was obviously not a viable option. As a result of the high-profile purchase of Dawney Day's UK portfolio of 221 commercial assets, the bank's lawyers were aware that FAF International could provide an insurance policy tailored for this transaction, to satisfy the bank's requirements, with minimal impact on the existing syndicate.

  Details of the properties over which the loan was to be secured were provided and FAF International undertook its own due diligence exercise on a sample, incorporating a spread of the highest value properties and all the holding companies.

  As our indemnity is based on loss rather than (as with normal professional indemnity cover) fault, we were able to take a commercial view of the quality of the portfolio. Our intention was to produce a solution that saved time and money without compromising security. Working closely with the lawyers we negotiated and agreed bespoke policy wording, which met all of the lender's requirements within a matter of days.

  The policy provided cover for any legal ownership defect (whether identified during due diligence or not) that cause the bank a financial loss, including technical legal ownership defects which allow another person to refuse to perform a lease, complete a contract to purchase or take a mortgage. The policy also insured the quality of the existing security documentation, insuring that the new bank had a valid and enforceable mortgage security which had the expected priority against other secured borrowing.  Additionally we were able to save the bank the costs of undertaking local authority searches on each of the properties by insuring loss or damage caused as a result of any adverse circumstance which would have been disclosed had a full search been undertaken.

  In addition to the significant advantage gained in terms of speed and cost, the policy also gives a clear transfer of risk with a simpler route to compensation - all our policies oblige the insurer to provide a defence against challenge to the insured interest without extra cost.

  When the portfolio approach is combined with specific cover for known risks, FAF International's insurance can provide a solution that allows financially attractive deals to complete on time, or simply to complete where title problems might otherwise prevent this.

  We believe that this type of policy can be extremely beneficial to those undertaking loan sales, refinancing, or syndications, in allowing purchasers to be comfortable with security, without having to refresh full due diligence. This enables deals to complete quickly and efficiently in a cost effective manner.

• Asia Pacific: Recent Case Studies

  US$51m office property in Singapore - International Fund purchaser

  • Building encroached on adjoining site, which was under development
  • Lawyers letters had already been exchanged
  • A known defect policy was issued, covering the insured for losses and costs up to the cost of remediation of the encroachment in the event of a claim against the title

  Resort development land in Phuket, Thailand - International Fund purchaser

  • Building encroached on adjoining site, which was under development
  • Lawyers letters had already been exchanged
  • A known defect policy was issued, covering the insured for losses and costs up to the cost of remediation of the encroachment in the event of a claim against the title

  Asia Case Studies