Title insurance is one of the issues that must be dealt with when purchasing a building. Unfortunately, a vast majority of buyers just throw the title commitment in the file without as much as a cursory review.
That is probably not the best course of action for the serious buyer.
The reason the title commitments are dismissed so quickly out of hand is that it looks like Greek. In reality, they are very easy to navigate. It just takes a little time to review them and make sense of what is written.
The title commitments are not yet title insurance. That comes later in the process.
The title commitments are the direct result of §7 of the Colorado Real Estate Commission Contract to Buy and Sell Real Estate (Commercial). This section specifically directs the seller of a property to provide “… a current commitment for owner’s title insurance policy (Title Commitment) in an amount equal to the Purchase Price …”
In other words, the seller must work through a title insurance company to ultimately obtain a policy on the property being sold and ensure the policy is delivered to the buyer after closing.
Upon receiving a copy of the Contract to Buy and Sell Real Estate, the chosen title company will review the property in their files and issue a title commitment. The commitment is usually sent to the seller, buyer and any brokers involved in the transaction.
Sometimes the commitments are incomplete because the title company does not have all the required information.
For example, the mortgage company might not be identified at this point in the transaction or the final name for the purchasing entity might not be established. Once the mortgage company is identified or the name finalized, a revised commitment will be sent to all recipients.
This often confuses people because they are not certain why they continue to receive what looks like essentially the same document.
All commitments are made up of a Schedule A and a Schedule B.
Schedule A sets forth many of the specifics for the commitment, such as the effective date, the type and cost of the policy to be issued, the name in which title will be taken, any certificates or addendums and their associated costs, the name in which the title is currently held and the legal description of the property.
Each and every one of these items needs to be reviewed for accuracy. Misspelled names, incorrect dollar amounts or errors in the legal description can all cause problems down the road if they are not caught and corrected.
If something needs to be corrected, a corrected commitment will be mailed to all parties, adding to the confusion noted above.
Schedule B begins to address the specifics of the property and the current transaction.
There is usually a list of requirements that must be dealt with to the satisfaction of the title company before the company will ultimately issue title insurance. For example, if the property is mortgaged by the seller, receipt of a statement from the holder of the mortgage that it has been paid in full is required. If title to the property is currently held by an entity, then there must be a statement of authority indicating the person signing documents at the closing is properly authorized to do so.
Other requirements of Schedule B usually include the payment of all general taxes and special assessments, indemnification of the title insurance company regarding mechanics’ liens, an improvement survey plat (or other survey acceptable to the company) and a statement that if the requirements are met then the company will delete some of the exceptions noted.
The exceptions referred to above are stated specifically in §7 of the Contract.
Those exceptions are parties in possession, unrecorded easements, survey matters, any unrecorded mechanics’ liens, gap period, and unpaid taxes or assessments. The contract calls for a choice as to whether these items will be deleted or insured over.
If they are to be insured over, all seven items will be removed as exceptions provided the requirements requested by the company are met.
Many commitments end after the seventh item, unpaid taxes or assessments.
However, if there are exceptions noted beyond that, the buyer should carefully review each and every exception to ensure they are comfortable with those exceptions. Legal help with such a review may be money well spent. The exceptions may include various easements, references to owner association documents that have been recorded or restrictions about exactly how the property may be used.
The impact of these exceptions can be illustrated by a recent transaction in which the buyer identified a house on a main road that they wanted to use as a retail location.
The zoning in the area allowed for commercial use. Many other properties in that area were houses that had been converted to commercial uses. It seemed reasonable that the property would work for the intended use.
However, upon receipt of the title commitment, an exception indicated that regardless of the zoning, the property could only be used as a residence. This was based on a recorded ordinance that dated to the 1960s.
In this particular case, the buyer went through the necessary rezoning hearings to ensure the property would meet his needs. If that had not been done, the buyer would have encountered a shock at some point in the future.
The simple act of reading the title commitment and asking questions is what led to a successful resolution of the case above. That is the best advice for anyone purchasing property, read the title commitment and ask all the questions necessary.
After all, it is the buyer that will suffer the consequences if the title commitment is not understood.
Terry L. Vice is the managing broker of Hoff & Leigh Management Inc. If you would like to see a topic addressed you may contact him at 630-2277 or TLVice@TLVice.com.