As with other policies of insurance, a title policy is a complex contract that includes pages of specific risks covered under the policy, along with exclusions from coverage and conditions of the policy. If you lack the counsel of a seasoned professional adept at analyzing and reviewing the title commitment and title policy, the following can help you gain a basic understanding of title insurance issues and customary title coverages.
The “Standard Exceptions”
The Standard Exceptions to title coverage concern:
- The “gap” (the “gap” is the period of time between the date a particular county has made records available to the public and the date the (new) deed is placed of record);
- Rights and claims of parties in possession;
- Mechanics liens and tax liens not filed of record with the county recorder;
- Easements or claims of easements not shown by the public records; and
- Items which would be revealed by a current and accurate survey and inspection of the property (the “Survey Exception”).
Deletion of the “Standard Exceptions”
A Seller Affidavit containing representations, statements and information about the seller, the property, property occupants, recent work done on the site, and unrecorded agreements pertaining to the property, in form acceptable to the title company, is the usual required closing document necessary to delete what have been identified above as Standard Exceptions 1 through 4.
The Survey Exception can be deleted once a new survey is certified to the title company. An old survey may be acceptable if paired with an Affidavit of No Survey Change from the current owner. The latter may not be an option if there have been alterations on the real property (or on adjacent parcels) or the prior survey is outdated (a survey older than 10 years may be considered outdated). If a prior survey is not acceptable or no prior survey is available, the buyer has a choice to either obtain a policy with the Survey Exception intact (i.e., there will be no coverages for losses of a type which would have been discovered had a survey of the land been completed) or obtain a new survey of the property.
Helpful Hint: If the buyer does not intend to order a new survey but requests deletion of the Survey Exception in the owner’s policy, the buyer should first determine if a prior survey is in fact available and then discuss early on with the title company whether the prior survey will be acceptable to delete the Survey Exception. Further, a discussion must be had with the seller (as to whether the seller will or can sign an Affidavit of No Survey Change, if required). It is important to have these discussions early in the due diligence process, allowing for time to obtain a new survey in the event these avenues are not available.
Endorsements
Keep in mind that all insurance policies are policies of indemnity, meaning these policies cover an insured for loss or damage should a covered event occur. For example, a homeowner’s policy does not ensure that a fire will not occur – but instead provides coverage for loss should a fire occur. In short, insurance provides recovery for a loss, not an assurance that loss will not happen. In terms of title insurance, the policies and endorsements do not, for example, guarantee the named owner in the policy is the owner of a particular piece of real property. Instead, title insurance provides recovery/funds for covered losses should it be determined that the named owner is not the legal property owner.
In addition to a standard policy of title insurance, title endorsements are also available for various risks. Think of an endorsement as a “rider” to a title insurance policy. The small print of the title policy may not provide coverage for a particular type of loss, but an endorsement may be available to encompass additional risks associated with the real property.
For example, the standard ALTA (American Land Title Association) policy insures that a parcel is not “landlocked”. The Access Endorsement describes the specific physical access point and, in the event the identified access point is not available or there is no legal right to use it, a claim can be made under the policy for losses associated with the loss of that particular access point.
There are approximately 50 types of endorsements to title policies that have been approved by ALTA.
Helpful Hint: For each transaction it is helpful to pull up a list of the available ALTA endorsements and use the list as a checklist of endorsements that may apply to the specific characteristics and needs of the real property associated with that transaction.
Specific Encumbrances/Recorded Documents
Exceptions in the title commitment or title policy identify specific documents recorded against the real property which is the subject of the commitment or policy.
For example, documents such as an Easement with Covenants and Restrictions (ECR) or Covenants, Conditions and Restrictions (CCR) may be recorded against the real property. Review these documents completely because they run with the land, and the text of the documents can impact what an owner can (and cannot) do on a parcel, may address cost sharing across a development for common area maintenance expenses, and may contain restrictions on building design, materials, and heights. Reviewing the documents prior to acquisition and requesting additional information can prevent future surprises.
Helpful Hint: Look for estoppel language in the ECR, CCR or similar document and be sure to request an Estoppel Certificate in a timely manner so that it is delivered before the closing. An Estoppel Certificate is a certification from all of the parties to the ECR, CCR or other document, confirming there is not a current default (or identifying any default), confirming no amounts are due from the selling party (or identifying any outstanding amounts), and confirming that the recorded document is in full force and effect. The last thing a buyer wants is to be stuck with post-closing unpaid debt of the prior property owner or be responsible to remedy the default under the terms of the ECR, CCR, or other document. Better to be forewarned and require the payment of outstanding amounts at closing, paid by and charged to the responsible party on the settlement statement.
Knowing some of the basic title coverages requested in commercial transactions, including requests for deletion of the Standard Exceptions, issuance of Endorsements, and identification and review of restrictions and easements running with the property, is of great help in real estate transactions. Armed with some general knowledge of the basic structure of title insurance coverage, real estate professionals will be better able to assist clients in navigating and understanding the complex world of title commitment review, title policy coverages and endorsements, and related title issues.
Linda Cross and Vickie Johnson-Loher are attorneys at the Minneapolis law firm of Monroe Moxness Berg. You can contact them at lcross@mmblawfirm.com and vjohnson@mmblawfirm.com. For more information, please visit mmblawfirm.com.