Title Insurance: It’s Negotiable
As a requirement to closing most commercial real estate mortgage loans in the United States, the borrower is almost universally required to deliver to the lender a loan policy of title insurance. These types of insurance policies provide assurances as to the current state of title with respect to the real estate securing the mortgage loan, including the ownership of the real estate, the priority of the lender’s mortgage, and a recitation of any matters of record that might affect the real estate. The most common type of such an insurance policy is the American Land Title Association (ALTA) Form 6-17-06 Loan Policy. Although the ALTA loan policy of title insurance is a standard form document, many provisions and aspects of these insurance policies are very much negotiable. Lenders who accept an “off the rack” ALTA loan policy of title insurance are doing themselves a disservice. This article will provide a high-level review of a few basic requests that lenders should consider in connection with the origination of mortgage loans.
Each ALTA loan policy is comprised of three distinct sections: (i) Schedule A, (ii) Schedule B – Part I, and (iii) Schedule B – Part II.
Schedule A contains general information regarding the insurance that is being provided, including the date of the policy, the name of the insured, the type of real estate being insured (e.g., fee or leasehold), and the legal description of the real estate. One often overlooked provision of Schedule A is the date of the policy. The date of the policy is important because the title policy only provides insurance with respect to the mortgage and matters of record as of the date of the policy. As such, the date of the policy should always match the date that the mortgage is recorded; otherwise, a gap will exist. Lenders need to pay particular attention to this gap. If a gap exists, any intervening liens that are recorded after the date of the insurance policy but prior to the lender’s mortgage being recorded would not show up on the title policy and would not be insured against. The simple solution here is to require “gap coverage” from the title company and require that the title policy be dated as of the date the mortgage is recorded.
Schedule B – Part I
Schedule B – Part I of the loan policy of title insurance includes exceptions from coverage, i.e., those matters that the title company is not insuring. This section includes a listing of all matters of record that affect the underlying real estate, as well as several “standard exceptions.” These standard exceptions are typically found in the first four to six items listed in Schedule B – Part I. Included in the standard exceptions are typically exclusions for (i) certain taxes that are not shown as existing liens in the applicable public records, (ii) mechanics’ liens, (iii) facts that are not shown in the public records but that could be ascertained by an inspection of the property, (iv) easements and other liens not shown in the public records, and (v) matters that would be disclosed by an accurate land survey. While these standard exceptions might seem benign, they are quite broad and provide the title company with many exclusions upon which to avoid liability and limit the scope of coverage being provided. As such, lenders should negotiate these standard exceptions and, in most cases, request that they be deleted from the final title policy to be issued. Please note that title companies routinely delete these standard exceptions; however, depending on the circumstances, certain requirements may need to be satisfied prior to doing so (for example, delivering title affidavits, surveys, or mechanics’ lien waivers).
Schedule B – Part II
Schedule B – Part II of the loan policy is reserved for matters that the title company insures are subordinate to the lien of the insured mortgage. Often this section is left blank. However, it is not uncommon for lenders to require that the title company insure that all leases at the property are subordinate to the lien of the insured mortgage or, at a minimum, that such leases do not contain any options to purchase or acquire any portion of the property. Unless such a request is made, the title company will not unilaterally offer this type of insurance.
In addition to the body of the standard ALTA loan policy, several additional coverages can be added by way of endorsements. These endorsements include zoning, survey, private rights, usury, mortgage tax, access and entry, and a host of other coverages depending on the jurisdiction. Unless these coverages are added with an endorsement, the form loan policy will not provide insurance for these matters. The specifics of these endorsements are beyond the scope of this article, but lenders should familiarize themselves with the endorsements available in their particular jurisdiction.
Title insurance is negotiable. The final negotiated loan policy of title insurance for any particular transaction should provide the lender the broadest and most protective form of coverage available.