My law partners Molly Jeffcoat Moody and Ben Williams, the usual authors of this column, discussed in a prior column the differences in title certificates, title commitments and title policies. (See COMMERCIAL FINANCE 701 – “Title certificates, reports, commitments & policies: The difference may be your job!”, Mississippi Business Journal, March 6, 2015.) This column expands on the subject with a discussion of title policy endorsements.
WHAT IS AN ENDORSEMENT?
Endorsements are addenda to a title insurance policy that expand, limit or otherwise modify the coverage afforded by a policy. Endorsements are typically used to provide more comprehensive coverage and to address particular title issues affecting, or potentially affecting, the real estate. They are available for both owner’s and loan title policies.
Endorsements are not automatically issued. Instead, the parties must specifically request them. Most traditional lenders have a standard, short list of required endorsements. Permanent lenders often have a long laundry list of requested endorsements covering every imaginable scenario (and then some).
WHAT KINDS OF ENDORSEMENTS ARE AVAILABLE?
The American Land Title Association (ALTA) has promulgated over 75 conveniently numbered standard or uniform endorsements. See http://www.alta.org/forms/. While the ATLA forms are routinely used in Mississippi, several states use different or revised forms. A title company’s ability to issue a particular endorsement will vary from state to state and from transaction to transaction, depending on whether the endorsement is even allowed in that state and the specifics of the particular transaction.
The most common endorsements requested in commercial real estate transactions are:
Zoning. ALTA 3-06 provides insurance as to the zoning classification in which the land is located and the uses permitted in that zone. ALTA 3.1-06 applies only to improved property and adds coverage regarding physical characteristics of the improvements, such as the area, height, width, and depth of the structure, the property setbacks, and the number of parking spaces. Yet another version, ALTA 3.2-06, applies to land under development.
Restrictions, Encroachments, Minerals. ALTA 9-06 through 9.10-06 is a series of endorsements available under the “ALTA 9” umbrella. These endorsements insure, generally, against: (a) existing violations of any covenant, condition, or restriction; (b) existing encroachments across property lines or onto easements; (c) damage to improvements that may result from the exercise of easement rights or mineral interests; and (d) a final court order requiring the removal of an encroachment or denying the right to maintain an existing building because of the violation of a private building setback line or other private restriction.
Access. ALTA 17-06 provides insurance against loss or damage suffered as a result of the insured land not having actual vehicular and pedestrian access to and from a public street via existing curb cuts to the street. Relatedly, ALTA 17.1-06 addresses indirect access to a public street via a private access easement.
Single Tax Parcel. ALTA 18-06 insures against loss resulting from the property not constituting a single parcel for real estate tax purposes, separate and apart from other property, or in the event that the permanent tax number identified in the endorsement affects other land in addition to the insured land.
Contiguity – Multiple Parcels. ALTA 19-06 insures against loss resulting from two parcels of land not being contiguous with one another.
Survey. ALTA 25-06 ensures that the land described in the policy is the same as that identified on the survey.
Subdivision. ALTA 26-06 insures against loss resulting from the failure of the property to be a lawfully created parcel (aka subdivision) pursuant to applicable state and local laws and ordinances.
There is a host of other endorsements available to cover all sorts of other issues that could arise in a commercial real estate transaction. A discussion of all available endorsements is beyond the scope of this article. The appropriate selection of endorsements is best made after a review of title, survey and construction plans.
WHAT ARE THE CONDITIONS AND COSTS TO OBTAIN AN ENDORSEMENT?
Depending on the type of endorsement requested and the nature of the transaction, the level of underwriting required can vary substantially. Some endorsements require almost no underwriting. For many endorsements, a current survey will be required. Affidavits from different parties may also be necessary, as well as letters or documentation from governmental entities or offices (such as to confirm the zoning). Often, loan documents must be reviewed. Construction lien issues – and endorsements addressing such issues – may require a special application. In a few instances, the underwriting may be time-consuming and expensive.
The cost of endorsements varies widely. Some endorsements are free, while others range from a nominal amount to potentially several thousand dollars. In Mississippi, the rates for endorsements are frequently negotiable, based in part on the size of the transaction, the number of endorsements requested and many other factors. Other states, in contrast, are “filed rate” states, with the cost of each endorsement set by the state insurance department.
Most borrowers will purchase endorsements because their lender requires it on a lender’s policy. Commercial property owners are somewhat reluctant to purchase an endorsement not otherwise required by a lender. Endorsements, however, can be a bargain. The low cost of an endorsement is often an economical way to supplement the general title coverage.
Endorsements can greatly enhance coverage and limit risk. Owners and lenders should carefully consider the available endorsements to an owner’s or lender’s title insurance policy. As Joe Namath said, “If you aren’t going all the way, why go at all?”
» Roger Williams is an attorney in a commercial law and real estate practice at Watkins & Eager PLLC (www.watkinseager.com). Roger is recognized by Chambers USA and Best Lawyers in America in the area of Real Estate Law. Roger can be contacted at email@example.com.