There are many risks involved in buying and selling property — especially when it comes to commercial real estate. High dollar amounts and complex titles can make these risks even greater. This is precisely why title insurance is a key component in every commercial real estate transaction.
Knowing what title insurance is and the process of obtaining it can help you to understand its significance and role in your purchase.
Below is a general guide to the process of obtaining title insurance for commercial transactions.
What is Title Insurance?
Title insurance works to identify and eliminate potential risks and, therefore, prevent losses caused by title defects created in the past. However, there is always the possibility of unknown, undisclosed, or hidden title defects.
With a policy in place, title insurance can offer protection against a claim to the title of your property.
Title Insurance Protection
The title to a property is not a tangible document, but rather a bundle of ownership rights. As the property is transferred from one party to the next via a deed, the rights to title are also transferred. However, if there are any issues with the title, such as a lien or easement, full rights may not be conveyed.
Title insurance gives the buyer an increased level of confidence that they own all rights to their property. And, should that not be the case, the policy could save them from potentially devastating circumstances. For instance, if the buyer believes they are buying a piece of commercial property that has a clear title, but later finds a third party has a claim on it, title insurance may be able to reduce the buyer’s financial burden when fighting the claim.
Common title defects include:
- Forgery
- Inadequate surveys
- Fraud in connection with the execution of documents
- Incorrect legal descriptions
- Undue influence on a grantor or executor
- Non-delivery of deeds
- False personation by those purporting to be owners of property
- Unsatisfied claims not shown on record
- Incorrect representation of the marital status of grantors
- Deeds executed under expired or false powers of attorney
- Undisclosed or missing heirs
- Confusion due to similar or identical names
- Wills not properly probated
- Dower or curtsey rights of ex-spouses of former owners
- Mistaken interpretation of wills and trusts
- Incorrect indexing
- Mental incompetence of grantors
- Clerical errors in recording legal documents
- Conveyance by a minor
- Delivery of deeds after the death of the grantor
- Birth of heirs after the date of will
Types of Title Insurance
It is important to note that there are different types of title insurance policies and endorsements. Understanding your title insurance helps you to make sure that you adequately protect yourself and your commercial property.
Lender’s title insurance only protects the lender’s interest in the property — and only until the mortgage is satisfied. At that time, the policy expires. Most commercial lenders will make purchasing this policy a condition of their loan.
Owner’s title insurance protects the purchaser’s interest in the property. It remains in effect as long as they have an interest in the property. Although an owner’s policy is optional, it is highly recommended since liability for title defects can survive beyond the ownership interest of the purchaser.
Each of these is paid for with a one-time payment at closing.
Obtaining Title Insurance
The Title Search and Preliminary Title Report
The title search is a deep dive into the public records concerning the subject property. This means reviewing each property transfer and any claims that have been made against the property. Survey engineers do everything they can to expose anything that can impact the title and provide as much information as possible to your title company.
A preliminary title report is created and given to the buyer and seller before issuing the title insurance policy. This explains everything that is found during the search, including any judgments, liens, outstanding taxes, bankruptcies, and other encumbrances. What’s more, if the seller has limitations on their rights to title due to easements or the sale of mineral rights, for example, these will also be placed in the report.
Based on the findings, each party can determine if they want to proceed with the transaction. The seller may need to address certain issues or even refer back to their previous policy. Any grievances must be made promptly.
Acceptance of the Title Report
If any objections are made, they will be addressed appropriately. But, for the commercial real estate process to move forward, both parties must come to a place where they agree to accept the title report.
The report will then become final and a copy of the final report will be presented to all parties. This will be used when issuing the title insurance policy.
Title Insurance and Commercial Real Estate Transactions
Title insurance is necessary for smooth commercial real estate transactions. Once the title report is accepted, the rest of the process – through the closing – is often quick. Any foreseen issues have been handled and everything can proceed.
Without title insurance, many lenders and investors would not be willing to risk their resources on a property for fear that anything at all may go wrong. It is an essential part of the overall title process.
Survey Review: A Closer Look
A survey of the property is a snapshot of the title as public record shows it. It is ordered from survey engineers when the title company is contacted by either the seller, the buyer, or another interested party. This typically occurs after a sale agreement has been signed.
A survey is a crucial component of any commercial real estate purchase. The title commitment provides a written description of the property and anything that may affect the title. More specifically, the survey itself is part of the analysis of the property that confirms whether the boundary lines match the metes and bounds listed in the deed’s legal description. Everything has to line up.
Surveys are also important for visually showing any easements, encroachments, or other matters that may affect the full use of the property. They are another tool obtained by survey engineers that a title company uses to refine a title commitment.
Title Insurance at Loudoun Commercial Title, LLC
At Loudoun Commercial Title, LLC, we are highly skilled in addressing every aspect of commercial real estate transactions. We take every step possible to make you feel good about your new ownership rights and the protection you have from your title policy.
Contact us today to learn more.