SBA Digest: Preventing the “Fear of Commitment

Title insurance is a form of indemnity insurance which insures against financial loss or damage experienced due to liens, encumbrances, or defects in title to real property. Because many commercial loans involve real property collateral, a lender's title insurance policy is commonly required as a prerequisite to closing.

Before providing a title insurance policy, a title insurer will issue a title commitment ("Commitment") in which it agrees to provide the policy if certain conditions are satisfied. The Commitment discloses aspects such as liens, defects, and burdens/obligations that affect the real property. When reviewing a Commitment, lenders should pay close attention to the insurance premium, named insured on the policy, current fee owner, legal description of the property, endorsements, policy requirements, and exclusions from coverage (commonly referred to as "Exceptions"). Although lenders should thoroughly review all aspects of the Commitment, the Exceptions are particularly important.

The Exceptions represent aspects that will be excluded from title insurance coverage. The first Exceptions listed on the Commitment are commonly referred to as standard exceptions ("Standard Exceptions"). In addition to the Standard Exceptions, the Commitment will include all other exceptions, which can include aspects such as previous deeds, easements, liens, surveys, covenants/restrictions, etc. ("Special Exceptions"). The Special Exceptions provide notice of anything that may pose issues with title to the property, impact its value, or impede future use. If issues arise post-closing in relation to any exceptions listed on the final policy, lenders cannot turn to the title company for help. Therefore, it is vitally important for lenders or their counsel to weigh in on the Commitment and address any Exceptions before closing the transaction.

The Special Exceptions listed on the Commitment only provide limited information. To find out more, lenders should request copies of each recorded document from the title company for review. Although Exceptions appear intimidating, there are some aspects that can be addressed in order to remove certain Exceptions from the final title policy. Before closing, lenders should request a "marked up" version of the Commitment or a pro forma title policy in order to make sure all issue Exceptions are removed.

After closing, lenders should receive the actual title policy from the title company. Upon receipt, a lender should compare the title policy with the marked up commitment or pro forma title policy to make sure all information accurately reflects previous negotiations.

Title insurance allows lenders to recover from their lien in the event of failure of title or an intervening lien. Because a Commitment is much more than surface information, it is important for lenders to request each Exception to determine whether or not additional negotiations are required to preserve the value of the collateral.

For more information regarding title insurance or other commercial lending matters, please contact:

Chris Poling: cpoling@lewis-kappes.com

Kevin Morrissey: kmorrissey@lewis-kappes.com

Scott Oliver: soliver@lewis-kappes.com

Disclaimer: This article is made available for educational purposes only and is not intended as legal advice.