A Primer on Title Insurance in Real Estate Transactions

If an individual or entity will be purchasing or selling real estate, it is important to review the condition of the title. In real estate transactions, it is common for the seller to provide an owner’s policy of title insurance covering the proposed buyer. In addition, if the transaction involves financing, the buyer must typically purchase title insurance for its lender to protect the lender’s security interest. The purpose of title insurance is to provide protection for defects in the title to a property. More specifically, title insurance provides protection for one’s interest in the property, subject to the policy terms and certain exclusions and exceptions from coverage.

Before issuing a title insurance policy, the title insurer will provide a title commitment, which sets forth the conditions under which it will issue title insurance. Title insurance companies usually provide title commitments according to a standard form. A title commitment consists of commitment conditions and several schedules, each of which serves a different purpose. Therefore, parties to a real estate transaction should closely review the schedules and request changes, if necessary.

Schedule A is the first schedule in a title commitment. Schedule A starts with the “Commitment Date.” The Commitment Date refers to the date through which the insurer has searched the title. It is important to make sure that this date is updated through the date and time of recording of the deed of transfer. One can accomplish this by purchasing a “gap” endorsement. Next, Schedule A identifies the type of policy the insurer will issue, the proposed insured, and the proposed policy amount. The parties should verify that Schedule A identifies the buyer correctly and that the amount of coverage matches the purchase price. After that, Schedule A lists the type of interest the current owner will convey, such as complete ownership, also known as “fee simple.” Schedule A will also identify the property’s current owner(s) and their type of ownership. Finally, Schedule A will provide the property’s legal description. The representatives of the buyer and seller should review the legal description to confirm that it is accurate and matches the parties’ understanding of the property included in the offer to purchase. It may be necessary to obtain a survey of the property if there is any doubt about the legal description’s accuracy.

The next schedule in a title commitment is Schedule B, Part I. This schedule identifies the requirements that must be satisfied in order for the title company to issue a title insurance policy. For instance, the buyer must notify the title insurance company of anyone not listed in the commitment who will have an ownership interest in the property or make a loan on the property. In addition, the buyer must pay the purchase price agreed to between the parties for the property, and the parties must pay for the premiums, fees, and charges associated with issuing the policy. Moreover, the documents necessary to convey title or create a mortgage on the property must be signed and properly authorized. For school districts, it may be necessary to provide meeting minutes or a resolution showing that the transaction has been properly authorized.  Further, Schedule B, Part I may also identify items that must be satisfied, such as mortgages, liens, and property taxes.

The last schedule in a title commitment is Schedule B, Part II. This schedule lists the exceptions to coverage, some of which are standard exceptions and others that are specific to the property (special exceptions). Notably, parties to a real estate transaction can often negotiate with the title company to remove some or all of the standard exceptions. For instance, the title company may remove certain standard exceptions if the parties order a survey of the property. However, the title company may add special exceptions if the survey reveals certain property conditions that were not previously apparent, such as an existing fence. In addition, the title company may remove other standard exceptions based upon an owner’s affidavit, special assessment letter from the local municipality, and purchase of a “gap” endorsement.

Schedule B, Part II generally lists the special exceptions after the standard exceptions. Special exceptions vary and may include recorded easements, restrictive covenants, and outstanding mortgages and liens. It is very important to review the special exceptions and the specific documents related thereto. For instance, the buyer may discover significant limitations on its proposed use of the property. In addition, the buyer will likely want to ensure that all mortgages and liens are satisfied.

If there are issues with the title to a property, the buyer may need to take additional steps to protect its interests. For instance, the buyer may need to serve a notice of its objections to title on the seller, after which the seller may take steps to address or remove the buyer’s objections. Alternatively, the buyer or seller may need to address certain title issues by purchasing additional insurance, in the form of endorsements to the title insurance policy.

Reviewing the title commitment is an important step in every real estate transaction. For example, the title commitment may reveal material issues with the title or significant impediments to a buyer’s proposed development plans. Alternatively, the title commitment can provide the parties to a real estate transaction (and lenders) with assurance that the property’s title is clear or presents no significant issues. The buyer (and lender, if any) can then obtain title insurance consistent with the commitment to insure against defects in the title.