To use title insurance effectively, counsel should determine early in the transaction what services are needed and what coverage is to be furnished. Counsel should keep the following factors in mind in assembling the requirements for title insurance: the location and number of properties, the local real estate law, the use of the properties, the structure of the transaction, the lender’s (or rating agency’s) requirements and the regulatory environment.
• Location and number of properties. A transaction that includes 70 shopping centers located across 26 states poses a much greater organizational challenge than a transaction for two convenience stores located in a single city. For the convenience stores, one title insurance office may serve for both properties. For the shopping centers, at least one office will serve for each locality, complicating communications. If a single title company is used for multi-property transactions, much of the coordinating burden can be shifted to its national title services division. With multiple title insurers, several national title services offices or various local issuing offices, or a combination of both, will be involved.
It is crucial to realize that title insurance is the most parochial line of insurance. In all other lines of insurance, the underwriting is done in a headquarters office. Title insurance is largely underwritten county by county across the United States. Local issuing offices do most of their work for local customers and resist giving unfamiliar coverages demanded by “outsiders.” They do not understand why a remote customer should receive coverages not offered locally and may demand written authorization or instructions from their regional or headquarters offices before complying with instructions.
In addition, some transactions involve a collection of sites that no single title insurer covers. In that case, multiple insurers will be required, unless one insurer agrees to issue its policy based on the title work from another company. If the lender wants its coverage aggregated, all of the loan policies must be issued by a single insurer.
• Local real estate law. Issues involving local real estate law can be quite significant. Since each state defines its own real estate law, real estate practice varies significantly from state to state. There are some regional tendencies, but they are relatively minor. For example, most Western states follow California by favoring deeds of trust, allowing nonjudicial foreclosure. Moving east, one encounters many states that require mortgages and judicial foreclosure. Lenders, especially lenders using the capital markets for funding, are searching for a uniform security instrument form that could work in any jurisdiction efficiently without any local variations. Joseph Phillip Forte, A Capital Markets Mortgage: A Ratable Model for Main Street and Wall Street, 31 Real Prop., Prob. & Tr. J. 489 (Fall 1996). Until then, lawyers must cope with these local variations.
Traps for the unwary can arise in some localities. For example, California has an antideficiency statute that forces a lender to choose either to foreclose the mortgage and risk a deficiency or to sue on the note and lose the security of the lien of the mortgage. Counsel must address whether a foreclosure on one of the properties outside of California would, with respect to a California property, (1) prevent an action to recover on either the note or the mortgage, (2) leave the lender with only a right to foreclose, risking the deficiency, or (3) have any effect on the lender’s choice on the California property at all. Counsel from states having no similar legislation may not anticipate the problems posed by California’s antideficiency legislation.
• Use of the properties. A trans-action involving convenience store sites will normally be simpler than one involving shopping centers. In unusual circumstances, there might be a cross easement for parking or some similar arrangement with an adjacent property for a convenience store to complicate its title. Shopping center transactions, on the other hand, routinely involve parking rights for the various stores, rights of ingress and egress, easements for encroachments of improvements between the different interests and other rights created by a reciprocal easement agreement.
• Transaction structure. Many transaction structures are possible. Conventional loans, refinance loans, revolving credit loans, variable rate loans, unsecured mezzanine loans, securitized loans, sale/leasebacks and synthetic leases are all currently used. Identifying the type of transaction uncovers only the tip of the iceberg.
Some transactions have further issues that complicate counsel’s management of the transaction even more. Many are securitized, so each site is partitioned off into ownership by a bankruptcy remote single purpose entity. This one step can convert the mortgagor from a borrower to a guarantor. A loan secured by a mortgage securing the guaranty of a subsidiary (upstream guarantee) or third party increases the risk that the transaction structure might be avoided in bankruptcy as a fraudulent conveyance. Other structural features that can affect the title insurance risk include credit enhancements such as standby letters of credit, surety bonds, over-collateralization, tiered debt and interest rate swaps.
Based on the structure of the transaction, counsel may decide that the title insurance policies should cover certain features of risk. Since this risk is embedded in the structure of the transaction, it must be addressed by each policy. Resolving this issue at the local level may involve a great deal of time and energy, with no assurance that each locality will adopt the optimal solution.
Coordinating the transaction through a national title services office can alleviate this problem. The national title services representative can arrange contact with the appropriate underwriting authorities that can resolve the issues created by the structure of the transaction.
By starting early enough, the transactional issues may be out of the way before the local offices begin returning their commitments and title reports. If so, the commitments will conform to the agreed structure, allowing counsel to focus on the site-specific title issues disclosed in each commitment.
• The lender’s requirements. The lender or rating agency will provide the parties with its requirements, including its title insurance requirements. Usually the requirements will specify the form of policy expected and the endorsements needed for the transaction.
It is easy to see why coverages should be discussed with the title insurer on the first transaction of a series. The title insurer may suggest an endorsement or technique used in another unrelated transaction that can contribute to this series. Once the coverage for the series has been set, efficiency dictates that the conventions developed for the first transaction should become the requirements for the following transactions in the series.
Of course, transactional coverages will continue to develop in other transactions, and both the lender and the title insurer will discover new issues as they become more experienced in closing these transactions. A review of the conventions for the series should be scheduled periodically to take advantage of new title insurance products or techniques and to take advantage of the lessons learned from experience in closing transactions in the series.
• The regulatory environment. Title insurance is regulated by an insurance department, insurance bureau or other agency of state government that regulates insurance. Joyce D. Palomar, Title Insurance Law § 18.02 (1998). The scope of regulation by these agencies ranges from strict control to laissez faire.
Texas, for example, promulgates title insurance premium rates and forms. Title insurers in Texas are limited to the promulgated forms, and they can issue those only when the transaction meets conditions specified in the promulgated rate rulings. There is very little flexibility to cope with developing financing techniques in this system. In Texas, parties expect basic title insurance coverages with little in the way of transactional coverage.
Texas is not alone. New Mexico and Florida also promulgate rates and forms, and the system in New York is similar. Requirements in these states, however, are not homogenous. The Texas regulations are the most detailed and rigid, and New York is really a filed form state that promulgates certain features for its policies.
Many states require title insurers to file forms and rates. The filing requirements can range from (1) requiring agency approval of the form (the “prior approval” systems) to (2) assumption that the forms are “deemed” approved after a specified time has elapsed from the filing without the agency’s notification of rejection (the “deemer” systems) to (3) a simple requirement that the forms be filed before the company can use them (the “file and use” systems). TITLE INSURANCE LAW, supra, § 18.07.
Finally, some states do not require title insurers to file examples of their insuring forms. Indeed, many of these states refuse to accept filings when a company offers them.
The lesser the degree of regulation, the greater the capacity to respond quickly to demands for new coverages. Illinois, Massachusetts and other “unregulated” states impose no barrier to immediate use of a newly developed form. Texas, however, reviews its title insurance regulations annually in the autumn, and approval of new forms in Texas is a lengthy process.
In the typical commercial real estate transaction, borrower’s counsel gives the title insurer an order for title insurance on the properties that will secure the financing and a laundry list of the lender’s requirements. The title insurer turns its attention to the processes of search, examination and preparation of the commitments or pro forma policies specified by the lender.
In the preparation for the dry closing, the parties turn their attention to the title insurance policies. Frequently, the lender asks for some additional endorsements to cover issues missed in the general laundry list. After its first review of the commitments or pro forma policies, the lender addresses the inconsistencies in naming parties, describing properties and similar matters that appear in policies produced by issuing offices scattered all over the country.
The title insurer will examine those requests and will usually add additional requirements, such as for surveys, indemnities or audited financial statements.
Borrower’s counsel may find it has little time to address new requirements from the title company, since counsel must also deal with lender’s concerns on a host of matters. Title insurance is only a small segment of the transaction.
Despite the problems, this process works. So long as there are relatively few properties in the transaction, it works fairly well.
For larger transactions especially, taking the time to work out some conventions at the time title work is ordered can make things easier on everybody in the transaction. The time taken at the beginning should give everyone an opportunity to be fully prepared by the closing.
A Convention Checklist
The following list is not intended to be a comprehensive checklist for multi-property transactions. There are too many variables to attempt that here. But it does give the basic issues to consider.
• Definition of policy forms. There are several ALTA loan and owner’s policy forms currently used in commercial transactions. Decide which form will be required and specify it precisely.
• Survey requirements. If the lender demands surveys on each site, the conventions should specify the survey requirements. If the site is complex, such as leasehold or fee simple outlots in a shopping center, with easements of access across the center, the survey requirements may specify a current survey for the site but no survey for the shopping center.
• Specifying the name of the insured. Generally speaking, precisely identifying the insured in a loan policy should not be critically important. The definition of the term “insured” in the loan policy includes the following: (1) the insured named in Schedule A; (2) each successor in ownership of the indebtedness (unless it is also an obligor); (3) any governmental agency or instrumentality that insures or guarantees the indebtedness; (4) any insured that takes title to the land by a transfer that discharges the lien of the insured mortgage; (5) any affiliate corporation of such an insured described in number 4 to which the property is conveyed; and (6) any government agency or instrumentality that acquires the land under a contract of insurance or guaranty insurance. The insurance follows the holder of the indebtedness.
In many transactions the lender negotiating with the borrower is a collateral agent for other participating lenders. There is some valid, if cautious, concern that it may not have standing to assert claims on behalf of the participants unless it is named in the policy as their agent. Establishing a convention for naming a lender as agent at the outset may head off returning commitments or policies for revision later.
Lenders frequently ask title insurers to add the words “its successors or assigns” following the name of the insured typed in Schedule A when issuing a loan policy. Similarly, after a note has been assigned to another lender, the lender will often request the title company to issue an endorsement naming it as the insured assignee of the indebtedness. The definition of the term “insured” in the ALTA Loan policy makes these requests unnecessary. The policy was intentionally designed to cover these situations, thus relieving both the policyholders and insurance companies of the burden of this extra work.
• Estate or interests in the land. If the properties securing the loan are all stand-alone fee parcels, defining the estate or interest in the land will be easy. If the interests are more complex, it helps to set up the definition of the estates in a convention.
If the sites are leaseholds, but the lessee owns the improvements, the title company should be asked to insure the ground lease as a leasehold interest together with title to the building.
If the sites may be either leasehold or fee simple outlots in a shopping center, the store site can be defined as Parcel One and the rest of the shopping center as Parcel Two. The policy can identify Parcel One as either a fee or leasehold interest (depending on which of the two it actually is) and identify Parcel Two as an easement.
If every policy follows the convention, the final review of the policies should go much faster and more smoothly, saving time for both the lawyer and the client.
• Identification of the security instrument. When using a standard document for all sites (with added features to meet local requirements), set a convention for describing it. If the instrument has been modified or assigned, all modifications and assignments should be described in the policy so they will part of the insured instrument.
• Property descriptions. The property descriptions should dovetail with the conventions set up for describing the estate or interest in the land. If more than one interest is involved, the convention should specify exactly how each should be described.
• Endorsements. This is a suggested laundry list of endorsements required for a securitized multi-property transaction. If there is an ALTA form or California Land Title Association (CLTA) form for a particular coverage, it is specified in this list:
- ALTA 3.1 (Zoning)
- ALTA 12 (Aggregation)
- ALTA 8.1 (Environmental)
- ALTA 10 (Assignment of Mortgage)
- ALTA 9 (REM)
- Assignment of Leases and Rents
- CLTA 100.12 (Reverter)
- Doing Business
- CLTA 100.29 (Mineral Rights)
- Due Execution
- CLTA 103.7 (Access)
- Mortgage Tax
- CLTA 116 (Address)
- CLTA 116.1 (Same as Survey)
- CLTA 116.4 (Contiguity)
- First Loss
- CLTA 103.6 (Encroachment)
- Last Dollar
- CLTA 116.7 (Subdivision)
- Single Tax Lot
- Future advance or revolving credit
- Letter of Credit
Counsel should review the list before each transaction to assure that it is appropriate for the current trans-action. The endorsements named in this list are generally known, so a title insurer will know what they are. There is not space here to publish examples of each, but a title insurer can furnish copies if requested. Sometimes a title insurer receives requests for endorsements with names that it does not recognize. If an unusual endorsement is requested, counsel should provide the title insurer with a copy to ensure that there is no confusion.
• Coinsurance and reinsurance. The conventions should address any requirements for coinsurance or reinsurance set by the lender. If the transaction risk passes the company’s retention limits for a site, the parties must work out the consequences posed by reinsurance.
• Structural issues. This brief checklist simply addresses the issues that arise in a conventional financing transaction. If the financing takes on an more exotic form, the checklist should be amended to address the issues posed in that form. Everyone should approach a meeting on conventions as a learning experience and be prepared to change the checklists in the process.
Title insurance issues in a multisite transaction can be greatly simplified by separating issues involving location and number of properties, local real estate law, use of the properties, the transaction structure, the lender’s requirements and the regulatory environment. Taking the time to work out some conventions when the title work is ordered and carefully preparing checklists are worth the effort. For one who is well organized from the start, title insurance should not be a barrier to a smooth closing.
Robert S. Bozarth is Vice President and Senior Underwriting Counsel to LandAmerica in Richmond, Virginia. A version of this article appeared in the Practising Law Institute’s Real Estate Law and Practice Course Handbook Series, May 2000.