FEATURE ARTICLE, NOVEMBER 2007
FUNDAMENTALS OF TITLE INSURANCE
Practical tips to ensure that your title and survey review process fits the needs of your deal.
Aaron Y. Strauss, Esq.
Title insurance means something different to each party in a real estate transaction. For lender’s counsel in a sophisticated loan transaction, title review requires a meticulous, methodical approach to scrutinizing each bit of information provided. For a retail tenant seeking to occupy space at a regional shopping center, a brief review of title to confirm landlord’s ownership of the demised premises and the non-existence of any major encumbrances may be sufficient. While a developer purchasing a parcel of land might pay particular attention to the location and scope of existing easements, a corporate investor purchasing an existing building might simply require counsel to advise that no title issues will affect its ownership interest. No matter what a party’s interest may be in reviewing title; however, no intelligent analysis of title is complete without a properly prepared survey. This article will provide an overview of the title and survey review process and offer practical tips for adding value in any analysis of title and survey in a real estate transaction.
The Title Commitment
As an x-ray provides an examining physician with an inside glimpse of the body, a title commitment serves as a legal blueprint for counsel who must scrutinize issues of record affecting a subject property. The title commitment contains lien searches, federal, state, county, upper court and lower court judgment searches, flood zone searches, vesting deed information, articles of organization or certificates of formation, good standing certificates, tax searches, flood searches and all documents appearing of record which the title company will specifically list as exceptions to its insurance policy. A title commitment is not a title insurance policy, but rather a contractual obligation by the title company to issue a title insurance policy upon satisfaction of various requirements and payment of the policy premium.
The first step upon receipt of the commitment involves taking inventory and confirming critical information. Schedule A must show the proper amount of insurance coverage, correct insured parties and the vesting deed information of the present owner of the property. All searches must be carefully reviewed to confirm that no judgments or liens exist against any of the parties in the transaction. In the event additional parties are added to the transaction, the title company must be advised of such fact as early as possible so that all such searches may be timely updated. Schedule B-1 of the title commitment, which sets forth the requirements the insured must satisfy in order for the title company to issue the title policy, must also be scrutinized as early as possible in the transaction to enable the timely delivery of any such items to the title company in advance of closing. For out-of-state transactions, Schedule B-1 often serves as a critical resource to gain familiarity with local custom and jurisdictional requirements.
The legal description set forth in Schedule A of the commitment must perfectly match the legal description on the face of the survey, as there can be no discrepancy between what actually exists on the ground and what the title company is insuring. If there are any discrepancies between the legal description on the survey and the title commitment, the surveyor and title company must work together to confirm the correct legal description.
If there are any beneficial access or reciprocal parking easements affecting the property, the same must be included as “together with” the Schedule A legal description. If there are any such “together with” items also affecting record title of an adjacent property, it is important to remember that record title searches must also be run on such adjacent properties. A title company cannot insure the benefits of a reciprocal parking easement, for example, if an adjacent property search reveals that an existing mortgage has lien priority over such beneficial easement.
The list of Schedule B-2 items must be checked to confirm that the correct deed, book and page numbers and proper name of each recorded document are listed in the commitment. To the extent any exception or underlying documents are either illegible or incomplete, you must request that the title company provide complete or legible copies, as applicable. In the rare event that a title company simply cannot deliver a legible copy of such exception document, even upon multiple requests, you should insist that the title company have its title searcher prepare an abstract of such document at the recorder’s office summarizing the scope and effect of such exception on the property.
Endorsements vs. Affirmative Coverage/Loan vs. Owner’s Policy
Title companies are far more accommodating and flexible for lenders than owners when providing affirmative coverage or endorsements over unique or problematic exceptions. The general difference between title endorsements and affirmative coverage is that endorsements are standard protections granted to owners or lenders that have been approved by state regulatory agencies governing insurance and affirmative coverage refers to specific, customized language which title companies issue to protect a policy holder’s interest with respect to a specific exception or exceptions.
The reason for the accommodating stance of title companies to lenders is that for a lender to actually recover damages based on its loan policy, the borrower must not only have defaulted under its mortgage, such lender must have actually foreclosed on the subject property and at the time of such foreclosure the property value must be less than the amount of the outstanding principal of the loan.
Reviewing Schedule B-II Exceptions
When reviewing each Schedule B-II exception item, it is helpful to ask the following questions: Does this exception truly affect the subject property? Check the survey to confirm. Sometimes a title company will note as an exception an agreement which does not actually effect the subject property or otherwise will reference an agreement which has clearly expired or terminated by its terms. In each such instance, the title company should omit such exception. Would a violation of this exception materially or significantly affect the owner’s or lender’s use and enjoyment of the property? If a violation would negatively impact the property to a material degree, it is best to seek affirmative coverage ensuring that a violation of such exception will not “affect the use and enjoyment of the improvements and building as shown on the survey.” Lenders also often request affirmative coverage to the effect that “a violation of said exception shall not cause a reversion or forfeiture of title.” Does this exception reference any other documents or maps, which must be reviewed to analyze the full scope and effect of the document? If so, the title company must deliver the same to you for your review. Such additional documents should also be forwarded to the surveyor as applicable. Are the references to such exceptions properly limited? Often, when listing Schedule B-2 exceptions, a title company will note an exception in a general manner, stating, for example: “subject to Easement Agreement contained in Deed Book X at Page X.” While such a reference may be acceptable in certain instances, one of the ways to add value to a title insurance policy is to cause the title company to limit Schedule B-II exceptions to the extent such exceptions have an actual impact on the subject property; an often unrealized nuance in title review is that the manner in which an exception is stated can actually expand or limit the coverage of the title policy. For example, if a 30-foot utility easement is situated on the borderline between the insured property and an adjacent property, and only a 7-foot portion of such easement actually encumbers the insured property, you must request that the title company list such exception as “Easement Agreement contained in Deed Book X, as shown on filed map X, such easement affecting the 7-foot northeast corner of the property.”
Survey should be reviewed simultaneously with the title commitment. You must confirm that each Schedule B-2 exception listed in the title commitment is either noted in the Notes section of the survey as “not plottable,” “blanket in nature,” or is plotted on the face of the survey. A helpful tip is to use a highlighter pen to mark the location of easements and encumbrances for easy reference. The legal description from the title commitment must be run against the courses as shown on the survey and must “close.” The survey must be certified to all relevant parties in the transaction, including the title agency, title company, seller, purchaser, seller’s law firm, lender, or any other party that may claim reliance on the survey. The survey must show all setback lines to confirm that there are no setback violations. All streets should be noted as either public or private, and all access points, boundaries of easements (including off-site easement areas benefiting the property) should be clearly noted and identified. The point of beginning should also be clearly marked. Sometimes, a survey will reveal the existence of encroachments, minor improvements, or other items that one would not expect to see. For example, in a major shopping center acquisition, a depiction of an ATM kiosk adjacent to the parking lot that purchaser never knew existed or the existence of tidelands claims affecting the subject property that the title commitment did not specifically except.
Most lenders will insist that surveys be prepared in strict accordance with certain American Land Title Association (ALTA) standards. Lenders often require that all striped parking spaces be delineated on the survey, and square footage and acreage of the entire lot and building also be noted. If you are working with a lender, be sure to deliver to the surveyor a list of all of lender’s requirements as early as possible in the transaction, and continually monitor the surveyor’s progress as best you can. It is an all to common occurrence where a surveyor completes a survey in accordance with its own standard practice, only to find shortly prior to closing that lender requires a different set of criteria that must be met in order to close.
Aaron Y. Strauss, Esq. is an attorney at Riker Danzig Scherer Hyland & Perretti LLP. in New Jersey.
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