A Practical Guide To Title Review (With Form) Shannon J. Skinner - PDF document

A Practical Guide To Title Review (With Form) Shannon J. Skinner The standard title insurance policy might have some things you need and some things you don’t. The safe course is always to review the specifics of the transaction and structure the coverage accordingly. FEW REAL ESTATE TRANSACTIONS are would cause the transaction to collapse. But the closed without a title insurance policy. In most title insurance policy does not magically appear real estate transactions, at least one party’s satis- at closing. Much of a real estate lawyer’s effort faction with the state of title is a key condition to in closing the transaction is directed to review- the closing. Indeed, some transactions close ing the state of title, resolving issues with the only because of the insurer’s agreement to pro- title, determining which title risks are accept- vide coverage for a title problem that otherwise able to the client, and deciding what types of af- Shannon J. Skinner is a partner with Preston Gates & Ellis LLP , in Seattle, Washington. 35

36 The Practical Real Estate Lawyer July 2005 firmative coverage are appropriate for the client sumes that the reviewer is reviewing a prelimi- and the transaction. Thus, competent review of nary commitment. the preliminary title evidence and resulting pol- SCHEDULE A MATTERS • The first matters icy is an essential skill for the real estate lawyer. to review in a preliminary commitment are Few guides, however, exist to explain how to those that will appear in Schedule A of the title review the title evidence or the policy. This arti- policy. These are generally the first matters cle discusses some practical tips for title reviews shown in the commitment and should be noted and includes as Appendix 1 a Memorandum on the title review memorandum. These in- form to be completed as part of the review clude: process as well as a sample review/memoran- • Date; dum. A note about surveys: Conducting a com- prehensive title review is impossible without a • Type of policy; current survey of the property. The following • Policy amount; discussion assumes that a current survey is • Names; available for the title review. • Quality of estate; and • Legal description. TITLE EVIDENCE • The first step in review- ing title is to determine the type of title evidence under scrutiny. Preferred for most sophisticated Date real estate transactions is a preliminary commit- The date of the commitment is important— ment for title insurance prepared using the how old is the information? Could a real estate American Land Title Association (“ALTA”) tax payment have become delinquent since the form. The preliminary commitment is not a re- commitment date? Has the commitment ex- port on the status of title but rather is a contract pired? Should it be updated? in which the insurer agrees to issue a policy sub- ject to the conditions, exceptions, and exclusions Type Of Policy shown in the commitment. Commitments are The commitment will also show the type of valid for a certain period of time (generally six policy the insurer is committed to issue. Most months) and must be extended if necessary. sophisticated parties in real estate transactions They are organized in much the same fashion as require a policy issued on an ALTA form if title policies. available in the jurisdiction. The question usual- ly focuses on which ALTA form to use. The Reports vs. Commitments ALTA most recently revised the lender’s and By contrast, title reports and abstractor’s re- owner’s policy forms in 1992. Nevertheless, ports are true reports on the status of title as of many insureds (in particular institutional real a certain date and do not include the assurance estate lenders) insist on the 1970 or 1970 with of policy issuance provided by a commitment. 1984 revisions form of policy. Because one of the Nevertheless, the terms “report” and “commit- main differences in the 1992 form is the inclu- ment” are often used interchangeably and their sion of the “creditor’s rights exception,” which availability varies by jurisdiction. So, as a pre- is objectionable to many proposed insureds, any liminary matter, the title reviewer should deter- issues with the form of policy should be raised mine the type of title evidence both required early. This will provide the insurer with ade- and available. The following discussion as- quate time to review the draft documents and

Title Review 37 transaction structure to determine if it is com- Policy Amount fortable removing the creditor’s rights excep- The amount of the proposed policy and pre- tion. This issue may be easily resolved in a typ- mium are also shown in the commitment. The ical mortgage loan transaction but may be quite insurer should know this amount as early as difficult in a post-foreclosure policy or lever- possible to enable it to determine if the policy aged buy out transaction, so addressing this will be “high liability”—one needing special in- issue sooner rather than later is beneficial. ternal underwriting approvals. The face amount of the policy is a limit on the amount As between the 1970 and 1970 with 1984 re- that the insurer is obligated to pay (together visions forms, many insurers prefer the later with defense costs). In addition, damages are version because it narrows the definition of also capped by the value of the property (with- “public records” to be the traditional real estate out the alleged defect) and the loan amount records (and not other public records such as plus interest (for lender’s policies), so the in- the Federal Register) and expressly excludes en- sured does not benefit from either over- or un- vironmental matters unless a lien therefor is derinsuring its interest. The ALTA 1992 policy recorded in the records in which these liens forms contain co-insurance provisions, so un- should be recorded (often the federal court- derinsuring is especially ill advised with these house for CERCLA liens). Because insurers policies. Lender’s policies for loans that have have argued that the 1970 form of policy did not negative amortization or future advance fea- include any coverage for environmental mat- tures may require special endorsements or a ters (being “police power” matters excluded larger face amount, as may owner’s policies for under Exclusion 1), some insureds prefer the property on which the owner expects to con- 1984 revisions so as to at least have coverage of struct significant improvements. recorded environmental liens. Is Co-Insurance Or Reinsurance Needed? Update Underway The policy amount should also trigger some ALTA is currently in the process of a com- thought about whether co-insurance or reinsur- prehensive update of its loan policy form. ance is required. If the policy amount is larger Unlike earlier form changes, which primarily than the insurer’s self-imposed limits or those addressed legal developments, the current un- imposed by the client, work should begin early dertaking promises to substantially update the on identifying co- or reinsurers and providing policy to deal with changes in the mortgage fi- appropriate preliminary information to them. nance marketplace as well as the title industry. Co- and reinsurance can also add to the cost of Look for promulgation of this form by early 2006. The new form could well become the pol- the title insurance and these costs should be icy of choice for lenders. identified early in the transaction. Often, the cost can be reduced by keeping the co- and rein- surance in the same family of title companies. The Practicalities An additional issue may be that not all title company offices in all counties have the earlier Premium Amount policy jackets. Although the ALTAhas not with- The premium for the policy should also be drawn any of the forms, some offices simply do noted with the amount. This is the appropriate not stock the earlier jackets and must obtain place to inquire about the basis for the premi- them from a regional underwriting office. um. Were any applicable discounts (such as