For most real property transactions, at least one party will care about the status of the title to be conveyed or affected and will want a detailed review of the title's current status and advice about what title insurance policy will be appropriate to protect their interests. Attorneys assist with this work by examining recorded liens and easements, resolving issues with insuring title, determining which title risks are acceptable to the client, and advising on what types of affirmative coverage are appropriate for the client and the transaction. The client should receive a title review memorandum that summarizes the real property survey, if any, the title as it is currently vested, the title insurance sought and its exceptions, and any recommended changes to policy coverage.
Owner vs. Lender Policies
Title insurance can be purchased to secure the owner interest in title, resulting in an Owner's Policy, and to secure a lender's interest in title, which is known as a Loan Policy. Most lenders require a Loan Policy when they issue a loan and the price is usually calculated on the dollar amount of the loan. It is important to note that, if you represent a potential buyer, that a Loan Policy only protects the lender's interests in the property should a title dispute emerge.
On the other hand, an Owner's Policy protects the buyer's interest in title and is usually issued for the total purchase price of the property. The buyer pays a one-time fee at closing and holds the policy for as long as he or she holds an interest in the property.
Evidence of Title: Commitment vs. Report
For larger commercial transactions, you will likely examine a title insurer's preliminary commitment for title insurance. Title insurers use a standard form that the American Land Title Association (ALTA) prepares. Under a preliminary commitment, the title company offers to issue insurance subject to the conditions and exceptions contained in the document. This offer will generally remain open for a period of six months, so be sure to calendar extension requests as needed.
You can also order a title report from a title insurance company. This document is not an offer for title insurance, but still contains information on the property's title status. Clients and others involved in the transaction may use the words report and commitment interchangeably, however. This article will consider review of a title commitment.
Reviewing a Commitment
A commitment is commonly divided into Schedule A and Schedule B. Schedule A contains the date of the commitment and policy amount, whether the policy offered is an Owner's or Loan Policy, the names of the individual or entity to be insured and the current owners, the quality of the real estate (such as fee simple), and the parcel's legal description. All of this information should be pulled out in a client memo.
Be careful to check what year the ALTA form the insurer chooses—in the past, sophisticated clients have ordered the older 1970 ALTA forms because they predate an environmental protection lien exclusion that was later added. The more recent 2006 forms have generally increased coverage of the insuring provisions, which are now-renamed "Covered Risks."
Schedule B is where you will find the general and special exceptions to coverage and the policy's endorsements. General exceptions are those included on any standard policy and are not parcel-specific. These include exceptions to any easements that are not shown on public records, mechanic's liens, or boundary disputes that a survey would reveal.If the client is concerned about these general exceptions, it is possible to secure an extended policy that removes some or all of them—for example, Loan Policies are generally extended with all of the insurance exceptions removed.
Special exceptions exclude those matters that are property-specific. Examples include easements, covenants, conditions and restrictions ("CCR's"), and encumbrances. Each exception is numbered and the insurer should have a copy of the corresponding recorded document. You must examine these documents for issues that may cause trouble with your client's intended use of the property and you should be sure to call out a description of each special exception in your client memo. For potentially problematic exceptions to coverage, you will want to negotiate their deletion with the title officer, obtain releases from lien holders, or obtain some other evidence from the current property owner. This is commonly the most drawn-out segment of the title review process.
Do not try to knock every exception out of the report as you might be tempted to in defending a suit—your title insurer is a partner in this process, and you do not score "points" for your clients by removing exceptions that would not harm your client. Your role should be to assist your client in obtaining title coverage that accurately reflects the client's goals.
Endorsements are another way that the title insurer can expand or reduce the policy's coverage and are geared to specific issues with the property. Working with your title company to carefully craft the proper endorsement coverage can be an effective way to handle otherwise thorny issues in the deal. Common endorsements include assurances about the status of conditions, covenants and restrictions (CC&Rs); easements; access; zoning; contiguity of parcels; and assessments.
Reviewing title policy documents is no substitute for due diligence on the related matters of zoning and land use, inspecting the physical parcel, or even talking with neighboring landowners. In lengthy or complex transactions, you may consider ordering a pro forma policy before closing to attach to the contract or escrow instructions referencing what type of coverage is required at closing.