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The Importance of Reviewing the Title Commitment By K. Michelle Lind Posted: December 2004 |
QUICKLINKS
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The AAR contracts require the escrow company to obtain and distribute to the
buyer a Commitment for Title Insurance together with complete and
legible copies of all documents that will remain as exceptions to the
Buyer’s policy of Title Insurance (“Title Commitment”). The Buyer has
five days after receipt of the Title Commitment and documents that will
remain as exceptions to provide notice to the seller of any of the
exceptions disapproved. Buyer’s brokers can reduce their liability and
experience fewer problems during escrow by promptly reviewing the Title
Commitment with the buyer. Tip: Make sure that the buyer understands the Title Commitment must be reviewed within five days after receipt so that notice of any items disapproved can be delivered to the seller – afterwards is too late! Be aware that often the escrow company may be only the agent for the actual title insurer, who is liable for the financial backing for the title insurance. This is often the case when the escrow company name includes the term “agency.” The AAR contract requires that if the escrow company is not the title insurer, that the title insurer provide a closing protection letter indemnifying the parties for any losses due to fraudulent acts or breach of escrow instructions by the escrow company. Important information in the Title Commitment Before issuing the Title Commitment, the title company issuing the title insurance policy will perform a title search on the property. The results of the title search that may be a issue in the transaction will be included in the Title Commitment. Thus, the Title Commitment may contain important disclosure issues, such as:
The Title Commitment is divided into several sections: Schedule A, Schedule B exceptions, Requirements, and Exclusions, and should be accompanied by the “underlying documents.” The underlying documents are copies of the actual documents referred to in Schedule B. Schedule A: Schedule A sets forth the search date, the amount of insurance coverage, the name of the insured, and the legal description of the property being insured. Tip: Check the policy to be issued in Schedule A of the Title Commitment to insure that the best policy type available will be issued. The American Land Title Association (“ALTA”) Homeowner’s Title Insurance Policy is generally considered the best available for residential transactions. Schedule B: Schedule B lists the specific exceptions from coverage that the title company discovered during its title search. It also generally includes certain standard exceptions such as mineral and water rights. The title insurance policy will not insure against loss, nor will the title insurer pay costs, attorney fees, or expenses, resulting from title problems listed in Schedule B. Additional boilerplate exceptions coverage may be contained in an addendum to the commitment. Tip: Check Schedule B of the Title Commitment for disclosure items and for restrictions on the use of the property. Refer the buyer to the escrow officer or an attorney if there are questions or concerns. Schedule B may be the most important part of the Title Commitment, but buyers are often unaware that they need to read the exceptions to coverage. If an exception is unacceptable to the buyer, the buyer and agent may be able to convince the title company to remove it, insure over it (with an endorsement), or eliminate the exception by obtaining a release, affidavit, waiver, quitclaim deed or other document. However, if the unacceptable exception is not discovered and objected to within five days of receipt, there may not be time to address the unacceptable exception and the buyer may be forced to close escrow subject to the exception. Tip: Talk to the escrow officer about the exceptions. The title insurance company may be willing to delete some Schedule B exceptions if the problem is further explained or cured before closing. Or, the buyer may obtain an endorsement so that the title policy will cover any damages arising from the defect. Requirements: The Requirements section lists what things must be done before escrow can close and title insurance will be issued. If a requirement can not be met, close of escrow may be prevented or delayed. The common requirements include the payment of taxes, recording a release and reconveyance of the deed of trust currently encumbering the property, recording the deed, and recording the deed of trust securing the new loan. Other requirements may include approval by the trustee in bankruptcy, recording a disclaimer deed from a spouse, redemption of a certificate of purchase for past due taxes, recording a court order evidencing the authority for one person to act on another’s behalf, and releases of various other types of liens. Tip: Talk to the escrow officer about fulfilling any unusual requirements as soon as possible to avoid a delay in close of escrow. Exclusions: There are also standard exclusions from the title insurance policy, including generally:
Easements: An easement gives persons other than the owner access to or a right of way over the homeowner’s property. Common easements include utility easements and roadway or access easements. Easements may be an issue if the buyer is planning on building a pool or adding improvements to the home. CC&R’s and other Deed Restrictions: A declaration of covenants, conditions and restrictions (“CC&Rs”) for a homeowner’s association is recorded against the property. The CC&R’s empower the homeowner’s association, if there is one, to control certain aspects of the home. If there is no homeowner’s association, the CC&R’s can be enforced by the other homeowners. A homebuyer should always carefully read the CC&R’s (and any other association documents) because the buyer will be obligated to comply with all the rules and restrictions. Tip: Use the CC&Rs table of contents to point out the section on Use Restrictions to the buyer. Explain to the buyer in a new home transaction that the CC&Rs must be reviewed before signing the contract. In a resale transaction, the AAR contract allows the buyer five days to review and disapprove of the CC&Rs. Access: Failure of the public record to disclose a right of access to the land will be noted in the Title Commitment. Although landlocked property can be sold (except in the case of subdivided land, A.R.S. §32-2185.02), the lack of access must be disclosed to the buyer. Military Airports: To ensure disclosure to buyers in areas in the vicinity of a military airport, the ADRE is required to record a disclosure notice on all affected property. This disclosure notice should be reflected in the Title Commitment. Judgments: A recorded judgment is a lien on all real property of the judgment debtor. A judgment lien against the seller usually must be paid prior to close of escrow. Bankruptcy: If the seller has filed bankruptcy, the bankruptcy trustee will have to approve of the sale prior to close of escrow or a court order may be necessary. The seller’s bankruptcy attorney should be able to assist in obtaining the approval, but be sure to allow enough time for the process. Liens: There are numerous types of liens that may need to be paid and released before escrow can close. These liens may include state and federal tax liens. State tax liens are extinguished if the state takes no action for six years. By filing a Notice of Federal Tax Lien, the government establishes its interest in the property and any property acquired after the lien is filed. Mechanics liens and liens arising from environmental laws may also become an issue. Endorsements In addition to the coverage available under the title insurance policy, a buyer can obtain additional coverage through endorsements. These endorsements may be available for little or no cost. For a list of available endorsements, visit the ALTA website at: www.alta.org/forms/EndorsementList.pdf. The Title Insurance Policy The title insurance policy will be issued as of close of escrow. Title insurance does not insure that a title defect will not occur; it insures that if a defect that occurred prior to the policy date becomes apparent, the buyer will be indemnified if the defect cannot be cured. A standard policy generally insures against the title to the property being vested other than stated in the policy; any defect in or lien or encumbrance on the title; unmarketability of title; and lack of a right of legal (not necessarily physical) access. The ALTA Homeowner’s Title Insurance policy provides coverage for additional defects. The policy generally contains the same sections as the Title Commitment and includes:
K. Michelle Lind, Esq. K. Michelle Lind is General Counsel/Assistant CEO to the Arizona Association of REALTORS® (AAR). She serves as the primary legal advisor to the association. Michelle oversees AAR’s Risk Management Committee, which includes professional standards administration for twenty of the state’s local REALTOR® associations, and the development of standard real estate forms. She is the author of Arizona Real Estate: A Professional’s Guide to Law & Practice and a regular contributor to the Arizona REALTOR® and the Arizona Journal of Real Estate & Business. Please note that this article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel. |
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