Title Insurance Issues in Securitized Transactions

Transcription

1 Title Insurance Issues in Securitized Transactions 1. Structure of the Transaction a. What type of structure is involved, single asset/single borrower, pool, credit lease? a. What type of entity/entities are involved, i.e., REIT, SPE,? b. Is the structure finalized? Can it change in order to save on transfer or recording taxes? c. What is the timing? Under 6 weeks to close? Year-end? d. Is there recent, pending, or planned construction? e. Are there any outstanding, off-record matters that the title company needs to know about in order to address and resolve prior to closing? 2. Multi-site and/or Multi-state? a. Are any highly regulated states involved, i.e., Texas, Florida b. Aggregation issues for pricing and regulatory purposes 3. Who is the purchaser, what is purchase price and loan amounts? a. Who are all the parties? b. Who is their lead counsel? Who is their local counsel? c. Who will be the main contact for the title company for negotiating transactional issues? d. Who will be executing owner s/seller/s affidavits? 4. What amount of title insurance coverage is being requested? a. Are there existing title policies available for each property? b. Regulatory issues, mortgage tax issues, recording tax issues c. Where will the closing be held? d. What are the pricing issues, i.e., speed and efficiency of title company vs. lowest bid 5. What special coverages or endorsements are being requested? a. Required vs. requested b. Some coverages require additional information or documentation, etc. survey, indemnity c. Gap coverage 6. Does the lender require any particular reinsurance or co-insurance? 7. What additional services can the title company provide? a. 50 year chain of title search b. UCC searches c. Local recording requirements

2 T ITLE I NSURANCE E NDORSEMENT C HECKLIST FOR A SECURITIZED T RANSACTION 1. ALTA 3.1 ZONING ENDORSEMENT (The ALTA 3.1 is too long to fit in this space. It is attached as Exhibit R to these materials) The ALTA Forms Committee has reported out a revised ALTA 3, and that proposed revision is also attached to these materials, as Exhibit HH). 2. ALTA 8.1 ENVIRONMENTAL PROTECTION LIEN ENDORSEMENT The insurance afforded by this endorsement is only effective if the land is used or is to be used primarily for residential purposes. The Company insures the Insured against loss or damage sustained by reason of lack of priority of the lien of the Insured mortgage over: (a) any environmental protection lien which, at Date of Policy, is recorded in those records established under state statutes at Date of Policy for the purpose of imparting constructive notice of matters relating to real property to purchasers for value and without knowledge, or filed in the records of the clerk of the United States district court for the district in which the land is located, except as set forth in Schedule B; or (b) any environmental protection lien provided for by any state statute in effect at Date of Policy, except environmental protection liens provided for by the following state statutes:. Paragraph 1 of the ALTA 3.1 insures that the improved land described in the policy is zoned in a specific classification, and lists the uses allowed in that classification. Paragraph 2 affirmatively insures that the improvements comply with the zoning classification with respect to use, building size dimensions, floor space, setback and height. We are frequently asked to add "(v) Number of parking spaces" to the list of items insured in Paragraph 2(b) when parking is important to the property. The ALTA 8.1 insures a residential lender against loss of priority to (a) an environmental protection lien (federal or state) filed in the public records as defined in the endorsement at Date of Policy and (b) an environmental lien provided for by a$state statute (superlien) in effect at date of policy, except the statutes listed below paragraph (b). Title insurers are frequently willing to give the coverage of paragraph (a) to lenders on commercial loans, but the superlien coverage is too risky for commercial transactions. In Midlantic National Bank v. New Jersey Department of Environmental Protection, 474 U.S. 494 (1986) the Supreme Court ruled that a trustee cannot abandon property if the public health and safety require a cleanup by a responsible party. If the trustee fails to clean up a discharge of hazardous waste, the state may be entitled to administrative expense priority if it must respond instead. See, In re Wall Tube & Metal Products Company (Lancaster v. Tennessee), 831 F.2d 118 (6 th Cir. 1987).

3 3. ALTA 9 RESTRICTIONS, ENCROACHMENTS, MINERALS (The ALTA 9 is too long to fit in this space. It is attached as Exhibit BB to these materials. The ALTA Forms Committee has reported out a revised ALTA 9, and that proposed revision is also attached to these materials, as Exhibit II). 4. Reverter CLTA against loss or damage which the insured shall sustain by reason of the enforcement or attempted enforcement of any reverter, right of re-entry or right or power of termination of the estate or interest referred to in Schedule A upon a breach of the covenants, conditions and restrictions referred to in Schedule B. For purposes of this endorsement, the words "covenants," "conditions" or "restrictions" shall not be deemed to refer to or include any covenants, conditions or restrictions relating to environmental protection, except to the extent that a notice of a violation or alleged violation affecting the land has been recorded in the public records at Date of Policy and is not excepted in Schedule B. CLTA The Company hereby insures against loss which the insured shall sustain by reason of: (a) The exercise or attempt to exercise any provisions for a reverter, right of re-entry or any right or power of termination of The ALTA 9 endorsement (derived from the California Land Title Association CLTA 100) insures a lender against: (i) loss caused by covenants, conditions or restrictions (CC&Rs) that can impair the lien of the mortgage or deed of trust; (ii) any violations of CC&Rs; (iii) encroachments of improvements on adjoining land or easements; (iv) loss resulting from future violations of CC&Rs; and loss from damage to improvements which encroach upon easements or as a result of the exercise of mineral interests. Although there is some belief that the CLTA 100 is better, the two endorsements are identical through paragraph 4. Paragraph 5 of the ALTA 9, insuring the right to maintain improvements if any restrictions are violated, is not included in the CLTA 100. The ALTA 9 is the CLTA Two California Land Title Association endorsement forms address "reverter" directly. The CLTA insures against loss or damage caused by a reverter, and the CLTA gives similar coverage, plus expressly insures against a loss of marketability of title as a result of a provision providing for a right of reverter. The ALTA 9 endorsement also protects the lender from losses arising from a reverter provision in paragraph 1(a): The Company insures the owner of the indebtedness secured by the insured mortgage against loss or damage sustained by reason of: 1. Any incorrectness in the assurance that, at Date of Policy: (a) There are no covenants, conditions or restrictions under which the lien of the mortgage referred to in Schedule A can be divested, subordinated or extinguished, or its validity, priority or enforceability impaired. Of course, the ALTA 9 does not include the express marketability coverage contained in the

4 the estate or interest referred to in Schedule A upon breach of the covenants, conditions and restrictions referred to in paragraph of Schedule B; (b) Unmarketability of the title to the estate or interest referred to in Schedule A due to the provision for a reverter, right of reentry, or a right or power of termination upon breach of said covenants, conditions and restrictions should the insured acquire title to the estate or interest referred to in Schedule A in satisfaction of the indebtedness secured by the insured mortgage. 5. Mineral Rights CLTA The Company insures the insured against loss which the insured shall sustain by reason of damage to existing improvements, including lawns, shrubbery or trees resulting from the exercise of any right to use the surface of the land for the extraction or development of the minerals excepted from the description of the land or shown as a reservation in Schedule B. 6. Access ACCESS This policy insures against loss or damage that the insured sustains by reason of lack of ingress and egress to and from the insured land is by means of, a dedicated public road. VEHICULAR AND PEDESTRIAN ACCESS This policy insures against loss or damage that the insured sustains by reason of lack of vehicular and pedestrian access to and from the insured land by means of. 7. Address CLTA 116 The Company hereby insures the owner of the indebtedness secured by the insured mortgage against loss or damage which the CLTA , but it doesn't need it. The old CLTA "Standard Coverage Policy" had no marketability coverage in its insuring provisions, but the later versions do, and all ALTA Loan Policy forms have had it as insuring provision 3. Compare the CLTA coverage to paragraph 3(b) of the ALTA 9. The CLTA is exactly the same coverage as paragraph 3(b), but is designed for use where the other CLTA 100 (ALTA 9) coverages can t be given. Consequently, if you have the ALTA 9, you already have mineral rights coverage. Paragraph 4 of the insuring provisions of the title insurance policy insures against loss or damage resulting from a Lack of a right of access to and from the land. The Access endorsement insures that the land is directly accessible from a named street or road. If the right of access is over adjoining land by an easement, the Vehicular and Pedestrian Access Endorsement insures access over the named easement. In these cases, the easement parcel should be described and named in Schedule A and the endorsement should refer to the defined name. The CLTA 116 has been one of the most popular of the CLTA endorsements. Since it insures the accuracy of the plat of survey, you must have a current survey to attach to the

5 insured shall sustain by reason of the failure of (i) a (description of improvement, e.g. "a single residence") known as (street address), to be located on the land at Date of Policy, or (ii) the map attached to this policy to correctly show the location and dimensions of the land according to the public records. must have a current survey to attach to the policy. It is commonly referred to as the address endorsement, but identifying the address doesn t seem as important as insuring that the survey accurately shows the location and dimensions of the land. 8. Same as Survey CLTA against loss or damage which the insured shall sustain by reason of the failure of the land to be the same as that delineated on the plat of a survey made by on, designated Job No., a copy of which is attached hereto and made a part hereof. 9. Contiguity CLTA against loss or damage which the insured shall sustain by reason of the failure of the land described in Schedule A to be contiguous to. CONTIGUITY - SINGLE LINE This policy insures against loss or damage which the insured sustains if the land described as [Parcel A] is not contiguous with the land described as [Parcel B] along the side of parcel A without gaps or gores. CONTIGUITY - MULTIPLE LINES This policy insures against loss or damage which the insured sustains if the land described as [Parcel A] and the land described in the policy as [Parcel B] are not contiguous to each other along the boundary lines between and and between and without gaps or gores. This endorsement correlates the policy and the survey made for the transaction. If all parcels are enclosed by a perimeter description, you do not need a contiguity endorsement. The perimeter description is more precise, and insures that the policyholder owns all of the interests inside the perimeter, unless the policy identifies an adverse interest in Schedule B. Contiguity endorsements become important where the land described in the policy consists of multiple estates that can t be described as a single parcel. For example a fee parcel and an appurtenant easement, or a leasehold outlot in a shopping center involving access and parking rights in the rest of the shopping center. The CLTA is used when the policyholder wants insurance that the insured land is contiguous to an adjacent parcel, a street or road.

6 10. Encroachment CLTA The Company hereby insures the owner of the indebtedness secured by the mortgage referred to in paragraph of Schedule against loss which the insured shall sustain in the event that the owner of the easement referred to in paragraph of Schedule B shall, for the purpose of * compel the removal of any portion of the improvements on the land which encroach upon said easement. CLTA The Company hereby insures the owner of the indebtedness secured by the mortgage referred to in Schedule A against loss which the insured shall sustain in the event that any governmental agency having jurisdiction over shall, for the purpose of exercising the right of use or maintenance of said street, compel the removal of any portion of the which may encroach on said street, provided that said are located and constructed in accordance with those portions of the plans and specifications prepared by, dated, which portions are identified in said plans and specifications as, copies of which are in the possession of the Company. 11. Subdivision CLTA against loss which the insured shall sustain by reason of the failure of the land described as Parcel in Schedule to constitute a lawfully created parcel according to the Subdivision Map Act (Section 66410, et seq., of the California Government Code) and local ordinances adopted pursuant thereto. If the policy takes no exception for encroachments shown on the survey, and you have required an ALTA 9 Endorsement you have general coverage against loss or damage caused by encroachments in paragraph 1 (b). It provides: The Company insures the owner of the indebtedness secured by the insured mortgage against loss or damage sustained by reason of: 1. Any incorrectness in the assurance that, at Date of Policy:.. (b) Unless expressly excepted in Schedule B:... (3) There is no encroachment of existing improvements located on the land onto adjoining land, nor any encroachment onto the land of existing improvements located on adjoining land. (4) There is no encroachment of existing improvements located on the land onto that portion of the land subject to any easement excepted in Schedule B. The CLTA and are designed to address specific encroachments excepted to in Schedule B. If there is no specific exception, the ALTA 9 applies. Exclusion 1(a)(iii) removes a separation in ownership or a change in the dimensions or area of the land or any parcel of which the land is or was a part from the coverage of the policy. Subdivision endorsements protect the policyholder from loss or damage caused by a failure to comply with subdivision requirements. The CLTA addresses California subdivision issues. The Subdivision Endorsement is a modification of the CLTA

7 116.7 designed for use outside of California. SUBDIVISION ENDORSEMENT This endorsement nullifies Exclusion 1(a)(iii). The policy insures against the loss or damage the Insured shall sustain by reason of the land described in the policy being a division of land in violation of the [Subdivision Control Act] or as the result of any law, ordinance or government regulation, in effect at Date of Policy, which prohibits a separation in ownership or a change in the dimensions or area of the land or any parcel of which the land is or was a part. 12. Single Tax Lot SINGLE TAX LOT The Property described in Schedule A of the Policy is assessed for [state, county, local or municipal] real estate tax purposes as a separate tax lot which includes no other property. DUAL INTEREST TAX LOT The Company insures the insured against loss or damage sustained by reason of: 1. The land described in the policy as Parcel One not being assessed under the following tax identification number(s). 2. The land described in the policy as Parcel Two not being assessed under the following tax identification number(s). 3. All of the insured lands are included within the listed tax identification numbers. which do not include any additional land. Insurance that the land is assessed as a separate tax lot is especially important where the mortgagor is supposed to be a bankruptcy remote special purpose entity. Take the time to evaluate the property involved to be certain that the endorsement meets all of the lender s needs. In most cases, the conventional Separate Tax Lot Endorsement will suffice. In those cases where multiple estates are involved, the Dual Interest Tax Lot Endorsement offers better protection. It is usually appropriate in the same circumstances that a contiguity endorsement helps (see item 9 above). Paragraph 4 insures that a foreclosure of a lien will not cut off or disturb the easement rights of the policyholder over the easement parcel. Its not just a tax issue, but protects the lender 4. None of the easements afforded by any instrument described in in Schedule A may be cut off or disturbed by the non-payment of real estate taxes, or the foreclosure of any lien or mortgage affecting Parcel Two.

8 13. Assignment of Loan Document ALTA 10 ASSIGNMENT 1. The name of the insured is amended to read:. 2. The company insures the insured against loss or damage sustained by reason of: (a) The failure of the following assignments to vest title to the insured mortgage in the insured:. (b) Any modification partial or full reconveyance, release, or discharge of the lien of the insured mortgage recorded on or prior to Date of Endorsement in the public records other than those shown in the Policy or a prior endorsement, except:. This endorsement shall be effective provided that the note or notes secured by the lien of the insured mortgage have been properly endorsed and delivered to the insured at Date of Endorsement. The assignee of a mortgage becomes the insured under a title insurance loan policy without an endorsement or action by the title insurer. The definition of the term insured includes the current assignee of the mortgage. If the assignee wants the assignment to be an insured instrument, the assignment must be added to schedule A by an endorsement or by issuing an ALTA 10 or 10.1 endorsement. The CLTA can be used when the insured is a collateral assignee of the mortgage. It is similar in structure to the ALTA 10, so it doesn't add the collateral endorsement as an insured instrument under the policy. Since a collateral assignment is a security interest in personal property, title companies cannot insure the validity or enforceability of the security interest created by the collateral assignment. ALTA 10.1 ASSIGNMENT AND DATE DOWN 1. The name of the insured is amended to read:. 2. The Company insures the insured against loss or damage sustained by reason of: (a) The failure of the following assignment to vest title to the insured mortgage in the insured:. (b) Any liens for taxes or assessments that are due and payable on Date of Endorsement, except:. (c) Lack of priority of the lien of the insured mortgage over defects, liens or encumbrances other than those shown in the Policy or a prior endorsement, except:. (d) Notices of federal tax liens or notices of pending bankruptcy proceedings affecting the title to the estate or interest in the land described in Schedule A of the Policy and recorded

9 subsequent to the Date of Policy in the public records and on or prior to Date of Endorsement, except:. (e) Any modification, partial or full reconveyance, release or discharge of the lien of the insured mortgage recorded on or prior to Date of Endorsement in the public records other than those shown in the Policy or a prior endorsement, except:. This endorsement shall be effective provided that the note or notes secured by the lien of the insured mortgage have been properly endorsed and delivered to the insured at Date of Endorsement. COLLATERAL ASSIGNMENT CLTA The Company hereby insures against loss or damage which such insured shall sustain by reason of any of the following: (a) The failure of the beneficial interest under the mortgage referred to in paragraph of Schedule to have been assigned to such insured as collateral security; (b) The existence of any reconveyance, either full or partial, of the insured mortgage, or any modification or subordination thereof, appears in the public records. The liability of the Company under this endorsement shall not exceed the sum of $ and costs which the Company is obligated to pay under the Conditions and Stipulations of the policy; and the total liability of the Company under the policy and any endorsement thereto shall not exceed, in the aggregate, the face amount of the policy and costs which the Company is obligated to pay under the Conditions and Stipulations thereof. 14. Assignment of Leases and Rents CLTA against loss which the insured shall sustain Many lenders on income producing properties require a collateral assignment of leases and rents as extra security in addition to a mortgage.

10 by reason of: (a) any defect in the execution of the document referred to in paragraph of Part II of Schedule B; and (b) the existence, as shown by the public records, of any prior assignment of the lessor's interest in the lease or leases specified in such document, including any assignments of rents thereunder, other than as set forth in Schedule B. CLTA against loss which the insured shall sustain by reason of the existence, as shown by the public records, of any assignment of rents prior to the assignment of rents contained in the mortgage shown in paragraph of Schedule, other than as set forth in Schedule B. 15. Doing Business DOING BUSINESS against loss or damage which the insured shall sustain by reason of the entry of any court order or judgment which constitutes a final determination and denies the right to enforce the lien of the mortgage referred to in Schedule A on the ground that making the loan secured thereby constituted a violation of the "doing business" laws of the State of. 16. Due execution DUE EXECUTION The Company insures against loss or damage that the insured may sustain by reason of a defect in the execution of the insured mortgage. A collateral assignment of leases and rents creates a security interest in personal property, so the title insurer cannot insure the validity, enforceability or priority of the lien of the collateral assignment as it can with the mortgage. If the collateral assignment is recorded in the land records, the title insurer can state whether it has found any prior assignment of the leases and rents in the land records. Both the CLTA and the protect against the risk that an earlier collateral assignment has been recorded. In addition, the CLTA insures that there is no defect in the execution of the collateral assignment. Each state has exemptions from the requirement of a business organization to qualify to do business in that state. In most, merely lending money and receiving a mortgage to secure the repayment of that loan is insufficient alone to require the lender to qualify. Lenders require this endorsement as confirmation that the transaction will not trigger a requirement to qualify. Insuring provision 5 protects a lender against the invalidity or unenforceability of the lien of the insured mortgage. It makes the Due Execution Endorsement redundant.

11 17. Mortgage tax MORTGAGE TAX In the event additional mortgage taxes or penalties are assessed at any time after the mortgage is recorded, and provided the insured pays those additional mortgage taxes and penalties, the Company insures the owner of the indebtedness secured by the insured mortgage against loss or damage it may sustain by reason of: 1. The invalidity or unenforceability of the lien of the insured mortgage resulting from the failure to fully pay the mortgage tax when the mortgage was recorded. 2. Loss of priority of the lien of the insured mortgage as security for the unpaid principal balance of the loan, together with interest, which loss of priority is caused by the failure to fully pay the mortgage tax when the mortgage was recorded. The Company will also pay the costs, attorney s fees and expenses incurred in defense of the title or the lien of the insured mortgage, as insured, but only to the extent provided in the Conditions and Stipulations. This endorsement insures that an insufficiency in the amount of mortgage tax paid when a mortgage is recorded will not impair the validity, enforceability or priority of the lien of the mortgage, if the policyholder pays the deficiency before foreclosing. Title insurers do not insure that the mortgage tax paid at closing is sufficient because recorders do go back and reevaluate the mortgage tax assessed on occasion. The risk is greater when the loan is a multistate loan allocated among several sites. The risk of loss is unmanageable, unless the state has a procedure for giving a binding determination of the amount of tax based on an affidavit by the lender. If the lender follows the transaction described in the affidavit, the title company should be able to hold the state to its assessment. If the lender strays from the transaction described in the affidavit, and is assessed additional tax as a result, the title company can avoid liability under Exclusion 3(a). 18. Usury USURY ENDORSEMENT This policy insures against loss or damage which the insured sustains by reason of the entry of the final decree by a court of competent jurisdiction adjudging that the lien of the insured mortgage is invalid or unenforceable by reason of the usury laws of the state of. The usury endorsement doesn t insure against a decision that the loan is usurious. It insures against loss or damage caused by a decision that the mortgage is invalid or unenforceable because the loan violated the usury laws. To that extent, it overrides Exclusion 3(a) of the policy protecting the title company against liability for acts of the insured. Title insurers grant the coverage based upon an exemption in the state's usury laws. Usually business and commercial loans are exempt, but some states use other standards. California exempts from usury based upon the nature of the lender.

12 19. Assessments CLTA The Company hereby insures the owner of the indebtedness secured by the insured mortgage against loss or damage which the insured shall sustain by reason of the lack of priority of the lien of the insured mortgage over the lien of any assessment which may be fixed or levied prior to acquisition of title by the insured, pursuant to the document referred to in paragraph of Schedule B. 20. Aggregation ALTA 12 (The ALTA 12 is too long to fit in this space. It is attached as Exhibit FF to these materials). 21. First Loss FIRST LOSS ENDORSEMENT In the event a defect, lien, encumbrance or other matter insured against by this Policy creates a loss or a series of losses which exceed in the aggregate ten percent (10%) of the amount of insurance shown in Schedule A of this Policy, the amount which the Company shall be liable to pay shall be determined without requiring maturity of the entire indebtedness by acceleration or otherwise, and without requiring the insured to pursue its remedies against any properties which secure the indebtedness other than the premises described in Schedule A. Provided, however, that nothing in this endorsement shall affect or impair the Company's right of subrogation with respect to the insured premises. This endorsement insures over assessments levied under the provisions of a document, usually a declaration, excepted to in Schedule B. It doesn t insure against assessments levied pursuant to a law or ordinance. Where multiple properties are secured by a blanket lien, the title insurer may issue a tie-in or aggregation endorsement, which aggregates the coverage of the individual loan policies, and allows the lender to shift coverage among the properties as if they were all insured under one policy. Used in multi-property transactions, this endorsement allows the insured lender to accelerate the payment of a loss under the title policy if the value of one of the properties is diminished by a matter covered by the title insurance. Subject to a 10% loss trigger, it provides for payment to the lender on a loss without requiring foreclosure of all of its security. 22. Last Dollar LAST DOLLAR ENDORSEMENT Section 9(b) of the Conditions and Stipulations

13 The liability of the Company under this policy will not be reduced under Paragraph 9(b) of the Conditions and Stipulations as the result of payments on the indebtedness secured by the insured mortgage, except to the extent such payments reduce the total indebtedness secured by the insured mortgage below the Amount of Insurance stated in Schedule A. of the policy could impair the insurance coverage for a mortgage in many common situations, particularly revolving lines of credit, of where the insured land if only part of the loan collateral. It provides: Payment in part by any person of the principal of the indebtedness, shall reduce the amount of insurance pro tanto. Where the note and mortgage stipulate that the lien secured the indebtedness until the last dollar is repaid, this endorsement is appropriate.