Buyer Beware: Title Insurance May Not Be Enough

February 11, 2008
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A few weeks ago, a commercial real estate broker called and asked me to assist with a client who had a potential legal problem over title to a piece of property. “He has title insurance, so the client thinks it probably doesn’t matter,” the distraught broker confided.

One of the most common — and frequent — misconceptions that I encounter in my practice of real estate law concerns the power of title insurance. While it is a crucial part of any commercial real estate transaction, title insurance does not absolve the buyer from conducting the appropriate due diligence. It also may not provide an adequate financial remedy if problems over title surface.

Buying property is arguably one of the biggest investments a business will make, so I am amazed when people don’t take the necessary steps to ensure what they are buying is what they think they are buying. Think of it this way: Would you hire an employee based solely on a resume, or would you check references, educational background, work history and criminal record first?

At a minimum, the buyer needs to do three things before buying any piece of commercial property:

**Review the title commitment carefully. Sure, this is an obvious place to start, but don’t just file the commitment away. Take the time to carefully read it and all of the documents referenced in it (which can be a few pages or a few hundred pages) before you buy the property. A title commitment will assure that the seller does own the property and spells out any exceptions to the seller’s interest in the property, such as mineral rights, a third party’s claim to a portion of the property, utility easements or tax liens. These types of issues are easier and significantly less expensive to clean up before the seller has your money rather than after.

**Get a survey. One of my mentors told anyone who would listen there are three rules when it comes to real estate: “Get a survey. Get a survey. Get a survey.” A survey will visually translate the title to the physical property, again ensuring that what is spelled out in the title is consistent with the buyer’s expectations. Sellers are famous for saying that the property extends to the oak tree in the corner. Yet when a surveyor surveys the property, the physical dimensions can be quite different. The courts, of course, will rely on how the title and survey describe the property, not what the seller told the buyer.

**Get title insurance. Contrary to popular belief, title insurance is not property insurance. It is not a 100-percent, money-back guarantee. It only ensures the condition of the title as reported in the title commitment. If a buyer fails to read and understand the title commitment, he can’t necessarily file a claim for title insurance to secure a refund. Ignorance of the law, as they say, is no excuse. This means that if the commitment disclosed there was a tax lien on the property, the title policy does not protect the buyer from losing title to the property when the tax lien is foreclosed. If, instead, the title policy failed to identify the tax lien, a refund is possible. However, the buyer must recognize that even then he will only be reimbursed up to the policy amount, and there will be no increases in the policy amount for appreciation, inflation, or any improvements made since the property was purchased.

Title insurance plays a significant role in any commercial real estate transaction, but it’s not enough to fall back on title insurance, which is likely to disappoint. It’s important for potential buyers to review the title closely, perform a survey and purchase title insurance before completing the transaction. As in hiring a new employee, a little due diligence in advance of a deal can save a tremendous amount of headaches — and expenses — later.

Melissa N. Collar is a partner at Warner Norcross & Judd LLP. She concentrates her practice in real estate and construction law and serves as chair of the firm’s Construction and Condominium Practice Groups. She can be reached at mcollar@wnj.com. CQX

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