Author: Alejandro Ramirez.
Alejandro Ramirez, Esq. is the founder of AR | Legal Team. You can read more of his posts at www.arlegalteam.com. He also works with Bona Law on real estate issues.
All too often, investors and business owners fail to give the title review process its due weight when making a major commercial real estate acquisition, and, as a result, they do not fully understand the title risks involved.
Upon receiving the preliminary title report (Preliminary Report) from the title company, parties sometimes fall into the temptation of skimming through the list of exception items without performing a careful review of the underlying exception documents themselves. The failure to fully understand the title risks in a deal leads to mismanaged legal and financial risk.
Here are seven reasons to rethink the importance of title review:
- Vesting of title. Ownership needs to be fully ascertained to ensure that all seller parties are properly identified in the Purchase and Sale Agreement (PSA), conveyance deed, and any other ancillary documents. Seems obvious, right? You’d be surprised.
- CC&Rs/Restrictive covenants. Covenants, Conditions & Restrictions, commonly called CC&Rs, and other restrictive covenants, should be carefully reviewed to ensure that compliance will not raise any issues for you. Depending on your intended use, a use restriction can make or break a deal.
- Options/Right of First Refusals. Occasionally, options and other similar instruments are used to grant parties certain purchase or sale rights. Inadvertently bypassing these rights can cause headaches for all.
- Easements. The analysis of easements that will survive closing is crucial. There are many kinds of easements (e.g., access, utility, parking, reciprocal, slope and drainage). An easement may benefit or burden a property. Buyers should determine if they are willing to live with the terms of the easements involved and whether any such easements will interfere with the buyer’s intended use of the property (and potential future uses by subsequent purchasers). Oftentimes, certain types of easements (e.g., utility easements) are mistakenly viewed as standard or innocuous, however, buyers should note that the terms of an easement are negotiable. As a result, the written terms can vary significantly, even as to easements recorded against the same property by the same parties.
- There are many forms of encroachments. An encroachment can expose a buyer to possible liability in many ways. For example, an encroachment may violate the terms of an easement agreement, or certain encroaching improvements may be subject to removal by the easement holder. In extreme cases, an encroachment may render title unmarketable.
- Maintenance Agreements. The maintenance and repair obligations for an easement shared by several owners may be memorialized in a maintenance agreement and recorded against the subject property. Buyers should determine if they are willing to live with the terms of any applicable maintenance agreements.
- Other Unknown or Undisclosed Agreements. Occasionally, pertinent documents may not be provided by the seller. The seller may be unaware of their existence or may have negotiated these documents years ago, but may not remember or think to provide them along with the other due diligence deliverables. However, their existence can sometimes be discovered if the document appears in the Preliminary Report or if it is mentioned in another document appearing in the Preliminary Report.
The above list is not exhaustive. In some instances, depending on the context, a comprehensive title review may reveal issues that may justify a price reduction, especially if the seller understands that the issue would similarly affect a sales transaction with any other prospective buyer. An experienced real estate attorney will also be instrumental in reviewing the title commitment and proforma title policy, and suggesting applicable endorsements.
Tips for Carrying Out an Effective Title Review:
- Start the title review as early as possible, and maintain a proactive, sustained approach. If available, begin reviewing the Preliminary Report prior to executing the PSA. Allow yourself plenty of time to track missing documents, and to address and resolve potential title issues with the seller (and any pertinent third parties). .
- Ensure that the title review provisions in the PSA are clear and that they provide realistic time periods for both you and the seller. Very rarely will complete and legible copies of all the pertinent title documents be produced at the outset. Even in situations where due diligence packages have been gathered ahead of time in anticipation of the execution of the PSA, it is not uncommon to discover missing items (agreements, amendments, addenda, etc.). If an ALTA survey will be ordered, which is advisable with most major commercial real estate investments, the surveyor will likely need two or more weeks lead time to prepare the survey. If possible, the PSA should provide ample time for this.
- Engage an experienced commercial real estate attorney. Also, if you engage an attorney that will delegate the title review to a junior attorney, paralegal or other person, be sure that you are comfortable with that person’s skill set as well. Finally, be involved and ask questions. In certain instances, the person handling the title review may not be familiar with your specific buyer objectives or the intended use or development of the site. What may not be problematic to one buyer client, may be a potential “deal-breaker” for another. Effective communication with your title review team is key.
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