EDITOR’S NOTE: Commercial Finance 701 is a continuing series on commercial loans written exclusively for the Mississippi Business Journal. This series is geared to lenders, developers, investors and transactional attorneys.
A distinguished Mississippi attorney once observed, “Words mean so much more when you know what they mean.” In some cases, words just don’t mean what we think — like decimate, factoid, peruse, and snafu. In other situations, you could be dealing with industry vernacular – as in the real estate title business. For attorneys, lenders, and developers, the subtleties of certain terms – such as title certificate, report, commitment and policy – could be your job.
As to title, the first question about real estate is “Who owns it?” You probably also want to know if there are any mortgages, tax liens, judgments, easements, or unpaid taxes. The answer to these questions can be found in the local Chancery Clerk’s office. Searching the land records may, however, require some knowhow.
Instead of spending days examining dusty books, mastering a foreign computer system, and learning the nuances of thirty-two years’ worth of different clerks’ methodology, you may choose to engage an attorney to deliver a TITLE CERTIFICATE (sometimes called a TITLE OPINION), which sets forth the attorney’s opinion as to title.
In order to issue the certificate, an attorney might (1) personally review the land records, (2) ask a trained staff member to research the records, or (3) engage a company (such as a third-party abstract company or a title insurance company with an abstract department) to prepare a TITLE REPORT.
In many transactions, the parties might simply rely on a warranty deed, updated title certificate, and settlement statement as evidence of a proper conveyance. If, however, the transaction involves a loan, the bank will likely require a TITLE INSURANCE COMMITMENT (sometimes called a TITLE BINDER). This document evidences a title insurance company’s obligation to issue a TITLE POLICY after the closing.
If you have a warranty deed (as opposed to some lesser deed like a “special” warranty or a quitclaim deed) and a clean title certificate from a reputable attorney, shouldn’t that be enough? The seller has “warranted” title and the attorney has issued a title opinion. Why would the bank require the borrower to purchase title insurance? There are at least two good answers.
1. Remedy (aka Blood from a Turnip). A warranty deed and title certificate are only as good as the signer. In many business transactions, the seller is a single purpose, single asset entity that will, a few months after the sale of the single asset, dissolve and distribute all money to its members or shareholders. A warranty from a dissolved entity is essentially worthless.
As to the title certificate, it pains us to admit that attorneys move, retire, become insolvent, and even die. Law firms dissolve. Did the practicing attorney or law firm have an E&O policy? Even if the seller or attorney is solvent and can be found, how will she handle your “claim”?
By contrast, title insurance companies are regulated by state insurance departments and required to maintain adequate reserves for claims.
2. Standard for Liability. The standards for determining liability are different as to the parties issuing (a) title certificates, opinions and reports, versus (b) a title policy. If an attorney’s title certificate proves to be defective, the standard of liability is negligence. The fact the title certificate proves to be wrong doesn’t mean the attorney was negligent. It could be a problem with the land records or a computer glitch in the county’s records. Or it might be a survey issue rather than a true land record issue. But, as to a title insurance policy, the insurance company is held to a policy-holder friendly “strict liability” standard. It doesn’t matter if the Chancery Clerk’s land records were a mess or that a computer glitch deleted all the federal tax liens.
It is mainly because of the remedy and standard of liability that lenders require title policies on large commercial real estate loans. Other reasons include (i) the myriad exceptions, assumptions, qualifications and carve-outs that undermine any “opinion” of a title opinion, (ii) federal loan guidelines, and (iii) the smorgasbord of endorsements for added coverage that can be purchased with the policy. From the over 75 endorsements available, the routinely purchased endorsements address mineral activity, tax parcels, compliance with subdivision regulations, specific access, zoning compliance, environmental liens, and survey issues. Endorsements added to a title policy are like, well, extra toppings on an already excellent cheese pizza.
Commercial title insurance policies come in two basic forms – a “lender’s policy” and an “owner’s policy.” The typical commercial developer will find himself reluctantly purchasing a lender’s title insurance policy because the bank requires it. The commercial developer occasionally passes on the owner’s policy because (a) it was not in the budget [true], (b) it will cut costs [we’ll find out in a few years], and (c) the lender’s policy will protect the owner as it is the same real property [false].
A lender’s policy merely insures the bank’s mortgage. Over time, the mortgage will get paid down, with the insurance company’s exposure reducing commensurately. When the loan is paid off, the lender’s title insurance coverage ends. By contrast, an owner’s policy insures the owner as to his title and, without regard to the merits of the claim, provides the owner with legal representation to defend against claims and cure title issues – even years after he sells the property.
To reduce costs and expedite service, the parties to a transaction should locate all prior surveys, title reports, certificates and policies and deliver those to a commercial title attorney to obtain a quote and time estimate. If you are unsure whether a title policy was purchased in the past, review the closing statements from the original purchase and any refinances. The time spent locating these old documents will be worth it.
» Ben Williams and Molly Jeffcoat Moody are attorneys in a commercial law practice at Watkins & Eager PLLC (watkinseager.com). Ben is recognized by Chambers USA and Best Lawyers in America and was selected as Best Lawyer’s 2014 Commercial Finance Lawyer of the Year in Jackson. Molly is recognized by Chambers USA in the area of Real Estate Law.