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Giving Diligence its Due “Title Insurance – Don’t close without it!”


In the realm of real estate development, fundamental to the real estate Developer’s ability of converting   his/her vision of developing property for  profit  to the reality of realizing that “noble” goal is  his/her ability to accomplish myriad, complicated and interrelated tasks along the critical path of the project’s development  to completion. First among these has to do with   ownership of the property on which the r project will rise.  We are assuming here that the Developer (or “Owner”) is buying vacant land in order to build a “ground-up” improvement on the property he is acquiring.

The Developer must be assured that the  development plan is not only economically feasible and market acceptable, but that the project will be legally permissible (e.g., zoning and other governmental regulations).Prior to making significant commitments of  his/her resources and those of  his/her partners, investors and lenders, title to the land he acquires is, in the parlance of lawyers and title insurers,  must be “good and marketable” (hereinafter simply referred to as, “good title”). Moreover, he/she must be assured that it always remains that way. He/she must provide that same good title to  the project’s  construction lender who is, in effect, the project’s largest cash investor by far and who bears the greatest amount of  economic risk. The  financing associated with a to-be-built asset  (e.g. funding the construction of a building) as opposed to financing an already built asset where the risks, while still significant, are much less than in the construction loan setting.  So too will the Developer’s successors in interest and each of their own lenders, partners and investors demand no less quality of title for their own account.

In order to assure him/herself and his/her lenders that the property being purchased enjoys good title, the Developer, as the title insurance policy beneficiary, depends initially on the title insurance underwriter’s title commitment  to insure, followed by the title insurance policy. Subject to exceptions and exclusions to coverage, which  usually include  “standard” industry exceptions, the Developer must be assured, as  must  his/her lender, that any title matters  will not impair  the Developer’s ownership and development  of the property or the lender’s ability to lend the project vast sums of money for the purposes intended. These loans are secured by the land and the improvements to be developed on it. Interestingly, unlike casualty and liability insurance which insures against future events, a title insurance policy insures against what has happened in the past.

Typical exceptions (meaning items that the title insurer will not insure against) include such items as the current year’s real estate taxes or any taxes or assessments not shown as liens of record on the property, easements or claims of easements or rights-of-way not shown of record, riparian and littoral rights, (these include rights to water and are generally never insurable), as well as other matters of record or some which might not be of record. Although easements not of record are a standard exception, they are usually deleted as an exception and are therefore insured against. A critical part of the Developer’s initial due diligence in evaluating the property purchase is to review with competent legal counsel and other professionals such as engineers, surveyors and others, the matters which are not insurable. The Developer must be certain that none of these items will pose a problem from an ownership, development and financing perspective.  If there are title matters that are not so clear cut, negotiations by the Owner and  his/her counsel with the title insurer’s counsel  as may be supplemented with the purchase by the Owner of special policy endorsements come into play in order to provide the required coverage.

It is critical that the  title review be done even in advance of signing a contract to purchase the property, if that is possible, because the Developer is wise not to incur legal fees attendant to the contract of purchase negotiations when there may be an overriding matter of title that literally can “kill” the project” before it even gets started. For example, a recorded easement running through the middle of where the building is planned to be built would preclude a purchase of the property in the first instance, without an appropriate requirement remediating the problem.

Negotiations with the title  insurer are as important a part of the acquisition transaction as the purchase contract itself, if a title problem is imminent.  The Owner deals with the title insurance agency,  often a law firm which acts as an agent  of the title insurance underwriter.  Initially, the agent will provide a title insurance commitment to the Owner, which is a contract to provide the policy pursuant to agreed upon terms and conditions. As in any agency relationship, the agent  insures  nothing, but merely is an agent of the title insurance underwriter, that is,  the “title underwriter”, which actually assumes the title insurance risk to defend title for the Owner and the Owner’s lender by underwriting the title policies. The agency might be an agent for  several title insurance underwriters. It receives a commission calculated as a percentage of the premium cost paid by the insured as a one-time fee at the closing of the issuance of the policy, which generally coincides with the closing on the sale of the property and/or its funding by a third party lender. The Owner’s lender will also receive Mortgagee Policy to the extent of its interest as a mortgagee provided by the same agent and underwriter. The Owner also typically  pays   the Mortgagee Policy premium, the cost of which is mitigated favorably for the Owner because it is being  issued simultaneously with the Owner’s policy.

The Developer’s confidence in  his/her ownership and property development rights continues uninterrupted through the  completion of  the project. His/her moving ahead is borne out of  his/her knowledge that the title insurance  underwriter,  through its title  insurance policy, has among several of its contractual obligations, the obligation to defend the Owner’s title against claims that may be made against it, in strict compliance with the  terms  and conditions, exceptions and exclusions of the contract of insurance. Moreover, if such claims require money or  performance to correct or eliminate title problems, to satisfy or relieve claims,  it is the title insurance company’s responsibility, to comply with its obligations under the policy of title insurance up to the full extent of the policy’s value. It is under  contractual  obligation, that is, it’s “duty to defend for the Owner” on which the insured, together with all other provisions of the title insurance policy, relies. The comfort given by a policy of title insurance, is a testament to the great importance property Developers and their investors and lenders give to the title insurance process and the blanket of protection it affords.

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