CRE Title and Survey Review Basics
Proper due diligence is a critical aspect of every real estate transaction, and one of the most fundamental aspects of the review process is the title and survey review as it verifies the ownership of the asset being purchased. This is typically accomplished through the issuance of a title commitment, which is a promise from the title company to provide coverage for any claims against title to the property. But more than that, it is an accounting of all the matters of record affecting a given piece of property. In addition to obtaining a title commitment, it's also important to review surveys of the property to identify any potential issues that cannot be ascertained from a review of the title commitment alone.
The Title Commitment
A title commitment contains four main parts:
Schedule A Identification Page. The Schedule A Identification Page provides basic information about the policy, such as the type of policy, the insured party, and insurance amount, and also details about the property, such as its legal description and address.
Schedule B-1 Requirements. The Schedule B-1 Requirements section outlines any requirements that must be met before closing on the property. This includes items such as payment of taxes or liens against the property, delivery of authority documents for LLCs, and releases for existing liens and mortgages.
Schedule B-2 Exceptions to Title. The Schedule B-2 Exceptions to Title section lists any exceptions that are excluded from coverage by the title insurance policy, and should typically provide links to review the documents referenced. Review of this schedule is arguably the most critical aspect of title review as any claims against title based on these exceptions will be excluded from coverage. As such, it is essential to understand what types of obligations or restrictions might be imposed by the various matters of record.
Commitment Conditions. This last section set forth the title company’s standard disclaimers in issuing the commitment, including its right to revise the coverage should new information come to light. At its core, a title insurance policy is designed to insure against unknown risks, not to shift liability for known risks and defects to another party, and as such, the title company will generally update the commitment to exclude any newly discovered issues or defects from coverage prior to closing.
Survey Review: What’s Important and Why
In addition to obtaining a title commitment, it's also important to review surveys of the property to identify any potential issues not reflected in the commitment. Surveys provide detailed information about a parcel of land including its boundaries, dimensions, location of structures on site, access points, locations of easements and utilities, and other features related to ownership rights or restrictions on the use of land. By reviewing surveys before closing on a property, buyers can gain insight into matters such as boundary disputes or encroachments that may not be disclosed in public records but could affect their ownership rights down the road. While each property will present unique issues, in general, important to check the following items: (i) confirm the legal description matches the description in the title commitment and that the property is fully bound; (ii) confirm all plottable exceptions from the title commitment are reflected on the survey; (iii) check for any easements that could be problematic, either due to encroachments onto the easement or because the easement rights would preclude the buyer’s intended use of the property; (iv) are there any encroachments: (v) confirm the property has proper street access; (vi) check for zoning issues, like parking space count; (vii) check floodplain disclosure; and (viii) review any other items disclosed on survey certification forms.
The purchase and sale contract usually specifies who pays for the survey, and should also specify the standard of survey to be obtained (most lenders require it to meet the ALTA/NSPS standards). The seller is usually required to give the buyer and their surveyor access to the property, with limitations on the times when surveying can take place. The buyer is usually responsible for indemnifying the seller against any injury or damage claims that may result from the surveying process.
Understanding Encumbrances
Encumbrances are claims on a property that limit or restrict its use. During a title search, these encumbrances are generally listed on Schedule B-2 of the title commitment and should be reviewed carefully before the sale of a property can be completed. Some of the most common types of encumbrances are listed below:
Easements. Easements are the grant of use or access to the property of another person for a specific purpose. They can be either public or private and can be granted to specific to a person or persons or can be attached to a specific piece of land. Public easements allow access to public utilities such as water and sewer lines, while private easements grant access to an individual or entity for purposes such as ingress/egress or the installation of utility lines. In addition, the easements of record may burden the property being purchased, such as by allowing neighbors access over a driveway, or may benefit the property in question, such as by providing the owner with rights or access over an adjacent property. Reviewing the easements is important to confirm your intended use of the property does not conflict with any of the easement rights.
CC&Rs. Covenants, restrictions and conditions (CC&Rs) are agreements that specify how a property may be used by imposing rights and obligations on the owners. These agreements are typically enforced by homeowner associations or on commercial properties such as shopping centers, portions of which may be owned by different parties. In a commercial context, CC&Rs may include rules regarding landscaping, may provide notice of exclusive uses or prohibited uses imposed on the center by an anchor tenant, may restrict uses in certain areas, such as the parking lot, and may provide agreements regarding maintenance and related contributions between owners. Understanding these restrictions, obligations and potential costs is important prior to electing to purchase the property.
Leases. While leases are not necessarily documents that are typically recorded, larger tenants on retail properties often insist on having a memorandum of the lease (“MoL”) recorded that provides notices to other owners of all or a portion of the shopping center of certain rights. For example, a grocery store may record an MoL to ensure there is record notice of its exclusive right to sell groceries at the center. Reviewing title for such restrictions is important to understand the rights of existing occupants and to ensure such rights do not conflict with your intended use of the property.
Liens. A lien is a legal claim against a piece of real estate that must be paid off before ownership can be transferred from one party to another. Common types of liens include mechanic’s liens (for unpaid labor costs related to repairs made on a home), tax liens (for unpaid taxes owed on the property), and judgment liens (for unpaid court judgments).
Mortgages/Deeds of Trust. Unless there is an express agreement to assure existing debt, any existing mortgages or deeds of trust and any related rights (such as an assignment of leases and rents) should be repaid and released as a condition to closing.
Taxes and Assessments. Title commitments will typically show the taxes and assessments against the property and will reflect if any amounts are delinquent. Any taxes owed, including delinquent amounts, are typically handled as part of the proration process before closing.
Process for Dealing With Title Defects And Objections
The purchase and sale agreement typically includes a period of time for the buyer to review title and survey. In case the buyer objects to any title and/or survey matters, it usually provides an objection letter to the seller within the prescribed time window. The contract usually then provides the seller with the opportunity to cure the objections. If the seller can’t or won’t cure the objections, the buyer can either terminate the contract or waive the objections.
The process of curing the objections depends on the nature of the objection, but as a practical matter most are handled by negotiating with the title company to remove the exceptions. For example, an old lease from a tenant that has long left the property may still be of record, in which case the title company may agree to remove the exception based on the seller’s certification that the lease is no longer in effect. Other objections, such as problematic agreements with neighboring properties, can be more sensitive, and the seller’s ability to cooperate depends on the circumstances.
Assuming the buyer gets comfortable with title and elects to move forward, the form of the title commitment will be agreed upon and the title insurance policy itself will be provided to the buyer and lender, if applicable, at closing.
Conclusion
Title and survey review plays an essential role in proper due diligence by providing buyers valuable information about the property and protection against potential unknown risks associated with it. While the documents of record and the issues they present vary by context, reviewing the title commitment for easements, CC&Rs, liens, and other encumbrances, coupled with review of a survey is essential to making an informed purchase.
