Volume 18, Number 2
REAL ESTATE LAW
A Beginner’s Guide to the Commitment for Owner’s Title Insurance
By Jack S. Levey
This article outlines one approach for examining the title insurance commitment. A title insurance commitment is a contract to enter into a contract. The title insurance company, or underwriter, promises the proposed insured that if all the conditions set forth in Schedule B, Section 1 of the commitment are satisfied, the underwriter will issue an owner’s policy of title insurance on the terms described in Schedule A of the commitment. Schedule B, Section 2 of the commitment lists the risks that the underwriter proposes to exclude from coverage.
Most states use some variation of the American Land Title Association (ALTA) form of policy. This article focuses on commitments to issue an ALTA owner’s title insurance policy, and references to sections of the policy are to those of an ALTA policy. Examining the commitment. Buyer’s counsel should make sure that the commitment specifies which form of owner’s title insurance policy the underwriter will issue. The final policy will be subject to the standard terms of that particular form. These terms exclude coverage for certain risks, impose procedural requirements for a claim, define policy terms, and set the other fundamental terms of the policy.
The choice of forms is significant. For instance, the 1990 edition added a number of provisions, including mandatory arbitration, that lenders and owners often dislike. Many lenders and developers prefer the 1970 form. Exclusions from coverage. Two key exclusions concern creditors’ rights and zoning. The creditors’ rights exclusion in the 1990 ALTA form was overly broad. The 1992 revision excludes claims based on state and federal fraudulent conveyance or fraudulent transfer laws. The 1992 form also excludes claims of preferential transfer, unless the preferential transfer results from a failure to record the instrument of transfer in a timely manner, or a failure of the recording to impart notice to a buyer for value or a judgment or lien creditor.
The standard policies exclude coverage for damage caused by nonconformity with zoning or other land-use laws. Corporate buyers. A corporation is deemed a separate entity from its affiliates. If the original insured conveys the property to its subsidiary, the subsidiary will not be covered by the parent’s title policy unless the underwriter consents to an assignment of the policy. The same is true of a deed from a corporation to its parent or sister corporation. Policy amount. The policy amount will ordinarily match the purchase price. If the coverage is less than 80 percent of the value of the property at the time the policy is issued, or if subsequent improvements increase the value of the property by at least 20 percent, the underwriter will discount payment of any partial loss.
If the property consists of two or more parcels that are not used as a single site, a loss affecting fewer than all of the parcels will be allocated among them pro rata, regardless of actual value and exclusive of any improvements made after the date of the policy. Buyer’s counsel should ask for an "aggregation" endorsement, which makes the entire policy amount available for any loss affecting any portion of the property, or should obtain an endorsement allocating specific values to specific parcels of the property.Tips for reviewing Schedule B, Section 1. Buyer’s counsel should make certain that everyone agrees who is responsible for satisfying each of the requirements in Schedule B, Section 1. The title agency can help obtain satisfactions of mortgages, liens, judgments, and other outstanding debts against the property. Often, the creditor is willing to forward a release to the title agency in trust, to be recorded on payment to the creditor of a specified amount. On request, the title agency should be willing to contact those creditors to obtain written payoff statements and arrange for recording these documents.
The buyer controls satisfaction of some of the conditions. The commitment typically asks for copies of the buyer’s organizational documents, certificates of good standing, or licenses to do business as a foreign corporation/limited partnership/LLC.Tips for reviewing Schedule B, Section 2. Most title objections will arise out of Schedule B, Section 2. Of course, the purchase agreement will determine how much latitude the buyer has in objecting to matters of record. The title company should include with the commitment a legible, complete copy of each instrument listed in Schedule B, Section 2 and a copy of any recorded plat to which the property is subject.
Counsel should check the survey against the list of exceptions, and insist that the title company revise the commitment so that any easements are limited to the area shown by the survey. Similarly, the surveyor should certify that the survey shows the location of each easement. Counsel should review the survey against the commitment to make certain that all easements are shown.The six "standard" exceptions. The buyer and its counsel should insist on deletion of the six so-called "standard" or "printed" exceptions.
The "gap" exception excludes coverage for matters that show up in the public records after the effective date of the commitment but before closing and recording of the deed. The agent can control this risk by rechecking the title shortly before closing and by controlling recordation of the documents.
The second printed exception excludes coverage for interests or claims that are not shown by the public records but that could be discovered by inspecting the land or by asking persons in possession.
The policy will not insure against facts that a correct survey would disclose, unless those facts are shown by the public records. The agent should agree to remove the survey exception if a current ALTA survey from a licensed surveyor is certified to the underwriter.
The fourth exception rules out coverage for mechanics’ liens that have not yet been filed of record. Removing this exception requires different steps in different states, reflecting the differences among their mechanics’ lien statutes. Special problems may occur in those states in which liens against a project date back to the recording of a notice of commencement, particularly if the lien law makes no provision for filing notices of completion or abandonment.
The standard exceptions disclaim coverage against rights of parties in actual possession of the land. The agent should remove this exception on receipt of an appropriate affidavit from the seller. If the property is leased, an exception will still be made for rights of tenants. The buyer should insist that any exception for rights of tenants be limited to rights of tenants under the terms of written leases disclosed to the insured in writing to occupy the property as tenant under the lease.
The final exception carves out special assessments and taxes not yet due. The agent should agree to remove this exception if the seller furnishes an appropriate affidavit.Easements and restrictions. Restrictions or covenants of record may establish standards for improvements or require the owner to have its construction plans approved in advance by the developer, an owners association, or other third party. Restrictions or covenants may also limit the purposes for which the property can be used. If title is subject to any restrictions of record, counsel should ask for an endorsement ensuring that the existing improvements and use do not violate the restrictions and that past or future violations will not cause forfeiture.
Restrictive covenants may grant a lien for assessments or other charges payable to an owners association, the developer, or other third party. If so, counsel should insist on affirmative coverage that all charges have been paid to date and that no liens currently exist.
The commitment may show beneficial easements or restrictions as though they were exceptions to title. Counsel should insist that all beneficial easements be included in Schedule A’s description of the insured property. If easement or restrictions do in fact burden the property, amendments to the easement or restrictions may have limited or removed the burden.
Jack S. Levey is a lawyer in Columbus, Ohio, and is a vice chair of the ABA Real Property, Probate and Trust Law Section’s Title Insurance and Survey (C-2) Committee.
- This article is an abridged and edited version of one that originally appeared on page 35 of Probate and Property, May/June 2000 (14:3).