Title Insurance Coverage: What Real Estate Counsel Need to Know

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Title Insurance Coverage: What Real Estate Counsel Need to Know Leveraging the Latest Developments in ALTA Coverage and Endorsements THURSDAY, MAY 22, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Joseph E. Lubinski, Senior Associate, Ballard Spahr, Denver Ralph J. Schumann, Principal, Law Offices of Ralph J. Schumann, Schaumburg, Ill. Scott J. Stein, Principal, Stein Law, Scottsdale, Ariz. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Title Insurance Coverage: What Real Estate Counsel Need to Know Leveraging the Latest Developments in Affirmative Coverage and Endorsements May 22, 2014 Scott J. Stein Stein Law N. Frank Lloyd Wright Blvd. Suite 1000 Scottsdale, AZ

6 Scott J. Stein is a transactional attorney at Stein Law, PLC and represents and advises businesses and individuals in their commercial real estate sales, leases and developments and other types of corporate and business transactions. Scott can be reached at scott@steinlawplc.com. Please visit for more information.

7 ALTA s 2006 Policy The 2006 forms were created to more accurately describe matters covered by the policy (matching the style of the ALTA residential policy forms) Streamline language throughout the policies, but especially in the Conditions section 7

8 ALTA s 2006 Policy An expansion of coverage, specifically the new definition of insured and indebtedness Fraud and forgery specifically listed as covered matters Removed double negatives in policy specifically to address judicial rulings in regard to the policy. Previous policies included exceptions to excluded matters. The new 2006 policy has either covered matters or exclusions. Certain standard coverages are now automatic unless specifically excepted on Schedule B Electronic mortgages are addresses and are now accepted. 8

9 Covered Risks Title to the described estate or interest being vested in someone other than the owner stated in Schedule A of the policy Any defect in, lien, or encumbrance on the title Unmarketability of the title Lack of a right of access to and from the land 9

10 Covered Risks Enforcement of police powers laws, ordinances, permits, and regulations relating to building and zoning codes, subdivision regulations, and environmental protection laws if notice of violation or intention to enforce is recorded in the public records Pending exercise of eminent domain power if notice of exercise is recorded in the public records. 10

11 Covered Risks Prior taking by a governmental body that is binding on a bona fide purchaser for value and without notice. Creditors rights coverage. Post-policy coverage. (Gap Coverage) 11

12 Covered Risks The following are also included in the loan policy: I. Invalidity or unenforceability of the insured s lien on the title II. III. IV. Priority of other lien or encumbrance over the insured s lien Priority of certain statutory mechanic s liens Invalidity or unenforceability of assignments shown in the policy or the failure of an assignment shown to vest title in the insured free and clear of all liens 12

13 Covered Risks Unlike prior policies, the 2006 policy lists the following risks: (a) defects covered by; forgery, fraud, undue influence, duress, incompetency, incapacity, or impersonation; lack of authority to convey; defect in the execution, acknowledgement, or delivery of a document; execution of a document pursuant to an invalid power of attorney; failure of a document to be properly recorded and indexed; a defective judicial proceeding; or failure to properly create an electronic document; 13

14 Covered Risks (b) (c) the lien of real estate taxes and special assessments; matters that would be disclosed by an accurate and complete survey of the land, including encroachments- adverse and otherwise- and building line violations. (note that survey coverage is now provided. To eliminate this coverage, Schedule B must include the survey exception) 14

15 Exclusions (Standard & Extended) 1. Police power laws, ordinances, permits, or regulations relating to building and zoning codes, subdivision regulations, and environmental protection laws or the effect of violation thereof. Exclusion 1(a). This provision also excludes other police powers not mentioned above. Exclusion 1(b). 2. Eminent domain (pending or prior). 15

16 Exclusions 3. Defects, liens, encumbrances, adverse claims, or other matters (a) Created, suffered, assumed or agreed to by the Insured Claimant (b) not Known to the Company, not recorded in the Public Records at Date of Policy, but Known to the Insured Claimant and not disclosed in writing to the Company by the Insured Claimant prior to the date the Insured Claimant became an Insured under this policy; 16

17 Exclusions (c) resulting in no loss or damage to the Insured Claimant; (d) attaching or created subsequent to Date of Policy (however, this does not modify or limit the coverage provided under Covered Risk 9 and 10); or (e) resulting in loss or damage that would not have been sustained if the Insured Claimant had paid value for the Title. 17

18 Exclusions 4. Creditors rights exclusion. 5. Taxes and special assessment in the gap. 18

19 Conditions 1. Definition of terms 2. Continuation of insurance 3. Notice of claim to be given by insured claimant 4. Proof of loss or damage 5. Defense and Prosecution of Actions 6. Duty of Insured to Cooperate 19

20 Conditions 7. Options to Pay or Otherwise Settle Claims, Termination of Liability 8. Determination and extent of liability 9. Limitation of liability 10. Reduction of insurance; reduction or termination of liability 20

21 Conditions 11. Payment of Loss 12. Right of Recovery Upon Payment or Settlement 13. Arbitration 14. Liability Limited to This Policy; Policy Entire Contract 15. Severability 16. Choice of Law; Forum 17. Notices, Where Sent 21

22 ALTA Schedule A 1. Policy number 2. Date of policy 3. Amount of insurance 4. Name of insured 5. Designation of estate or interest covered by the policy (fee simple, leasehold, or easement, depending on the interest in the land being insured) 22

23 ALTA Schedule A 6. Designation of the vested holder of the title or interest 7. The insured mortgage and assignments, if any (in Loan Policy only) 8. Legal description of the land covered by the policy (& included easements) 23

24 ALTA Schedule B Standard Exceptions The following are examples of standard exceptions : A. Rights or claims of parties in possession not shown by the public records B. Easements, or claims of easements, not shown by the public records C. Encroachments, overlaps, boundary line disputes, or other matters that would be disclosed by an accurate survey or inspection of the premises D. Any lien, or right to a lien, for services, labor, or material furnished, imposed by law, and not shown by the public records Standard Exceptions generally coverable with Extended Coverage 24

25 ALTA Schedule B II 1. Primary focus for Buyer s counsel: 2. Red Flags giving rise to potential defects related, such as: Unreported matters, such as claims for adverse possession or prescriptive easement; Deed to land with buildings encroaching on land of another; Incorrect survey; Liens not in the public record, such as mechanics or estate tax liens; and Pre-existing violations of subdivision laws, zoning ordinances or CC&R s. 25

26 ALTA Schedule B The following are examples of special exceptions: A. State, county, city, special assessment, real estate taxes (showing paid or unpaid, amounts, years open or insured) B. Easements, if any C. Deeds of trust, if any D. CCRs, Restrictions, if any E. Evidence of Leases (SNDAs, Memos) F. Other special exceptions, if any, relating to bankruptcy proceedings; probate court matters; business organizations; judgments; circuit court proceedings; special federal, state, county, or city tax liens; mechanic s liens, etc. 26

27 General Title insurance is not one-sized fits all. Different types of commercial property call for different levels of types of coverage and we can evaluate which type of policy, and which endorsements to that policy, is appropriate for a particular deal to protect their interests. 27

28 Endorsements Endorsements to title policies serve to modify or amend the wording or language of the title policies, thereby expanding or sometimes limiting the coverage afforded under such title policies. Examples of common endorsements include coverage for any loss due to third party mineral or water rights, removal of the requirement for arbitration, and an owner s comprehensive endorsement 28

29 Title Insurance Issues and Endorsements: Residential Perspective What Residential Real Estate Practitioners Need to Know About Endorsements, Coverage Issues, Claims and Post- Closing Matters Ralph J. Schumann, Attorney at Law President, Illinois Real Estate Lawyers Association (IRELA) 29

30 Ralph J. Schumann serves as President of the Illinois Real Estate Lawyers Association ( and is a transactional attorney at the Law Offices of Ralph J. Schumann with concentrations in real estate (residential and commercial), estate planning, probate administration and business and corporate litigation. Ralph can be reached at rjs@schumannlaw.com. Please visit for more information.

31 Selected Endorsements Specific endorsements may be utilized to provide for coverage of specific risks that are beyond the jacket, i.e., beyond the scope of coverage of the standard policy jacket. Examples of common endorsements include coverage for any loss arising out of or due to environmental protection liens, mineral rights issues, failure to conform to survey, zoning issues, lack of access, and the like. 31

32 Selected Endorsements Assessments. ALTA The Company insures against loss or damage sustained by the Insured by reason of the lack of priority of the lien of the Insured Mortgage over the lien of any assessments for street improvements under construction or completed at Date of Policy. 32

33 Selected Endorsements Environmental Protection Liens. ALTA (Land used primarily for residential purposes.) The Company insures against loss or damage sustained by the Insured by reason of lack of priority of the lien of the Insured Mortgage over (a) any environmental protection lien that, 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 is 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 by any state statute in effect at Date of Policy, except environmental protection liens provided by the following state statutes: 33

34 Selected Endorsements Minerals and Other Subsurface Substances. ALTA (Minerals and Other Subsurface Substances-Buildings) The Company insures against loss or damage sustained by the Insured by reason of the enforced removal or alteration of any Improvement resulting from the future exercise of any right existing at Date of Policy to use the surface of the Land for the extraction or development of minerals or any other subsurface substances excepted from the description of the Land or excepted in Schedule B (Minerals and Other Subsurface Substances-Improvements) (Includes paved road, walkway, parking area, driveway, or curb excludes crops) (Minerals and Other Subsurface Substances-Land Under Development) (Covers both Improvements on the land at the Date of Policy and Future Improvements) 34

35 Selected Endorsements Survey. ALTA (Same as Survey) and ALTA (Portion of Survey) The Company insures against loss or damage sustained by the Insured by reason of the failure of the Land as described in Schedule A to be the same as that identified on the Survey made by dated, and designated job no.. [Portion: Parcel 1, 2, or 3] Provides coverage in event land identified in survey does not match that in Schedule A of the policy Current, reliable survey must be provided ALTA Standards 35

36 Selected Endorsements Truth in Lending. ALTA The Company insures against loss or damage sustained by the Insured by reason of: any final judgment of a court of competent jurisdiction that either the lien of the Insured Mortgage has been terminated or the Title of an Insured, who has acquired all or any part of the Land by foreclosure, trustee's sale, conveyance in lieu of foreclosure, or other legal manner, that discharges the lien of the Insured Mortgage, has been defeated by a valid exercise of the right of rescission conferred by the Federal Truth-in-Lending Act and that the right or rights of rescission existed because neither the credit transaction evidenced by the Insured Mortgage nor the right of rescission was exempted or excepted by the provisions of Regulation Z (12 CFR 226). Loan policy only Transaction not covered by Regulation Z 36

37 Selected Endorsements Zoning. ALTA (Zoning Completed Structure) Rev The Company insures against loss or damage sustained by the Insured in the event that, at Date of Policy, according to applicable zoning ordinances and amendments, the Land is not classified Zone ; the following use or uses are not allowed under that classification: There shall be no liability under paragraph 1.b. if the use or uses are not allowed as the result of any lack of compliance with any conditions, restrictions, or requirements contained in the zoning ordinances and amendments, including but not limited to the failure to secure necessary consents or authorizations as a prerequisite to the use or uses. This paragraph 1.c. does not modify or limit the coverage provided in Covered Risk 5. * * * 37

38 Selected Endorsements Zoning. ALTA (Zoning Completed Structure) (Con t.) IMPROVED PROPERTY (Loss arising from Court Order prohibiting use or requiring removal or alteration of structure): Area, width or depth of land as building site for structure Floor space area of the structure Setback of the structure from property lines Height of the structure, or Number of parking spaces 38

39 Selected Endorsements Zoning. ALTA (Zoning Land Under Development) Adopted The Company insures against loss or damage sustained by the Insured in the event that, at Date of Policy A. according to applicable zoning ordinances and amendments, the Land is not classified Zone ; B. the following use or uses are not allowed under that classification: C. There shall be no liability under paragraph 2.b. if the use or uses are not allowed as the result of any lack of compliance with any condition, restriction, or requirement contained in the zoning ordinances and amendments, including but not limited to the failure to secure necessary consents or authorizations as a prerequisite to the use or uses. This paragraph 2.c. does not modify or limit the coverage provided in Covered Risk * * *

40 Selected Endorsements Zoning. ALTA (Zoning Land Under Development) (Con t.) UNIMPROVED PROPERTY For owner s and loan policies contemplation of improvements being constructed according to specific plans and specifications. Area, width or depth of land as building site for structure Floor space area of the structure Setback of the structure from property lines Height of the structure, or Number of parking spaces 40

41 ALTA s 2006 Policy Who is covered? Named insured (individual named in Schedule A), as well as certain successors by operation of law Named insured s heirs, devisees, survivors, personal representatives, next of kin (who succeed to title by operation of law, not by means of purchase) An entity (e.g., a corporation or LLC) to which named insured transfers title (under certain conditions) Trustee or beneficiary of a trust established by written instrument by named insured for estate planning purposes 41

42 ALTA s 2006 Policy Continuation of insurance policy remains in force so long as the insured: Retains an estate or interest in the land Holds an obligation secured by a purchase money mortgage given by a purchaser from the insured, or Has liability by reason of warranties in any transfer or conveyance of title Practice Tip: Warranty Deed vs. Quit Claim Deed 42

43 Coverage Issues FOLLOWING A TRANSFER CONSIDER: Add-on endorsements Available for an additional insured New Policy in name of new grantee Consider if property has appreciated significantly in value or If significant time has passed 43

44 Recognizing Covered Title Issues HOW TO RECOGNIZE: Categories include: Title to the estate is vested other than as stated in the policy Schedule Any defects, liens, or encumbrances on the title such as: forgery, fraud, undue influence, duress, incompetency, or impersonation, failure of any person or entity to have authorized a transfer or conveyance 44

45 Recognizing Covered Title Issues HOW TO RECOGNIZE: Additional Defects, liens, or encumbrances: A document affecting title not properly created, executed, witnessed, sealed acknowledged, notarized, or delivered Failure to perform acts necessary to create a document by electronic means authorized by law 45

46 Unmarketable Title How Defined and Handled by Title Insurance Companies: Unmarketable Title is defined in the definitions section of the policies: Alleged or apparent matter which would permit a prospective buyer, tenant or lender to be released from obligation to purchase, lease or loan due to seller s failure to meet a contractual condition of delivering marketable title. 46

47 Unmarketable Title How Defined and Handled by Title Insurance Companies: Unmarketable Title examined by title insurance company as a legal concept, not in terms of economic marketability of the property: A defect which lowers the value of the property on the market will not render the title unmarketable within the title insurance coverage Hazardous waste, e.g., may decrease value, but does not render the title unmarketable in the absence of a recorded lien. 47

48 Lack of Access Lack of Access to and from the property Ingress and Egress Adequate demonstration of lack of access 48

49 Lack of Access Lack of Access to and from the property 49 ALTA Endorsement (Access and Entry) provides additional coverage with policies where: (i) the Land does not abut and have both actual vehicular and pedestrian access to and from [ insert name of street, road, or highway] (the Street ), (ii) the Street is not physically open and publicly maintained, or (iii) the Insured has no right to use existing curb cuts or entries along that portion of the Street abutting the Land. Examination of survey and public record regarding limitations in rights of access (e.g., limitation of access along highway)

50 Ralph J. Schumann President, Illinois Real Estate Lawyers Association (IRELA) ( Principal, Law Offices of Ralph J. Schumann ( ) , Law Offices of Ralph J. Schumann 1701 East Woodfield Road Suite 910 Schaumburg, IL

51 Title Issues in Dealing with Distressed Real Estate Joseph Lubinski th Street, Suite 2300 Denver, Colorado

52 Disposition Types Four scenarios to consider: Foreclosure Deed in Lieu Loan Modification/Workout Loan Sale 52

53 Foreclosure Available Title Products TBD Commitment New Owner s Policy Foreclosure Guaranty 53

54 Foreclosure What does a foreclosure guaranty insure? What happens to the loan policy after foreclosure? What does the guaranty insure? 54

55 Deed in Lieu Typical to see an exception along the lines of the following: Any invalidity of or avoidance of the transfer of the title to the insured property pursuant to the provisions of the Bankruptcy Code (11 U.S.C.) or similar creditor s rights or state insolvency laws. 55

56 Deed in Lieu Note that a title company may also include this in subsequent policies (for 1 year) What happens to a loan policy after a deed in lieu if no new policy is issued? 56

57 Loan Modification ALTA This endorsement insures the lender that (1) the modification of mortgage does not result in invalidity or unenforceability of the insured mortgage; and, (2) the mortgage, as modified, has priority over defects, liens, and encumbrances, except those in the policy and prior endorsements and except those set forth in this endorsement. The endorsement does not insure against creditors' rights issues arising out of the modification. 57

58 ALTA The Company insures against loss or damage sustained by the Insured by reason of: 1. The invalidity or unenforceability of the lien of the Insured Mortgage upon the Title at Date of Endorsement as a result of the agreement dated, recorded ("Modification"); and 2. The lack of priority of the lien of the Insured Mortgage, at Date of Endorsement, over defects in or liens or encumbrances on the Title, except for those shown in the policy or any prior endorsement and except: [Specify exceptions, if any] This endorsement does not insure against loss or damage, and the Company will not pay costs, attorneys' fees, or expenses, by reason of any claim that arises out of the transaction creating the Modification by reason of the operation of federal bankruptcy, state insolvency, or similar creditors' rights laws that is based on: 1. the Modification being deemed a fraudulent conveyance or fraudulent transfer; or 2. the Modification being deemed a preferential transfer except where the preferential transfer results from the failure. to timely record the instrument of transfer; orb. of such recordation to impart notice to a purchaser for value or to a judgment or lien creditor. This endorsement is issued as part of the policy. Except as it expressly states, it does not (i) modify any of the terms and provisions of the policy, (ii) modify any prior endorsements, (iii) extend the Date of Policy, or (iv) increase the Amount of Insurance. To the extent a provision of the policy or a previous endorsement is inconsistent with an express provision of this endorsement, this endorsement controls. Otherwise, this endorsement is subject to all of the terms and provisions of the policy and of any prior endorsements. 58

59 Loan Sale Is the loan policy assignable? What endorsements are available to reflect assignment and current state of title? 59