You're buying real estate. Before closing you're given a commitment to issue a title insurance policy. At closing, a premium is paid to the title company to issue the policy. You're all set, right? You have title insurance so you should have no worries about whether someone else owns or has a claim on your property.
Wrong. A title policy, like any insurance policy, contains exceptions from coverage. Here are some of the most significant:
The requirements: A title commitment lists requirements that must be met before the title company will insure title. Some are obvious, like delivery of a deed from the seller to you, along with payment of the purchase price. Others might include delivery of documents to cure title flaws, a mortgage discharge or evidence the seller is authorized to sell the property. If any of these requirements is not satisfied, then it may be listed as an exception to your title insurance coverage on the policy when issued.
Specific listed exceptions: Your title policy doesn't insure against specific listed exceptions for things like mortgages, construction liens, easements and restrictions recorded in the public records. That's why it's important to insist the title company provide you with copies of those listed exceptions so you can read them and decide whether they affect the value or your intended use of the property. You can live with some listed exceptions. You'll want to insist that others be released before you complete your purchase.
Blanket exceptions: Title companies sometimes slip in "blanket" exceptions that don't cite a particular recorded document. For example, many policies except all coverage for oil, gas and mineral rights. In other words, you aren't being insured that you will receive good title to those rights. Someone else may own them and could show up and start drilling on your property. You are left to hire an attorney to check title to those rights. Another common blanket exception is for rights of others in any roadway affecting your property. Often the title company will, upon request, limit this exception to use for a particular named roadway.
Standard printed exceptions: A typical title commitment excepts coverage for matters arising after the effective date of the commitment, rights of parties in possession, matters that would be disclosed by a survey, certain matters such as unrecorded easements and construction liens not yet recorded. If you ask, the title company will limit or remove entirely all of these exceptions at no charge.
A title commitment is a “picture” of title as of the given moment in time the title company reviewed the public real estate records. You can remove the “gap” from coverage between the effective date of the commitment and the closing date by insisting the title company check the title records again just prior to closing and obtain an affidavit from the seller certifying it has done nothing to impair title.
Similarly, the title company will remove the exception for rights of parties in possession such as tenants, based on the seller's affidavit certifying that no one other than the seller occupies the property.
Obtaining a survey of a property is valuable. It can highlight issues like boundary line encroachments, zoning setback violations, or encroachments into easements. If you obtain a survey prepared to the standards set by the American Land Title Association and have it certified to the title company, the title company will remove survey exception and list only any specific problems shown by the survey.
A title company will also rely on a seller's affidavit that no unrecorded matters and construction liens exist to remove those standard exceptions. If construction has occurred recently, then the title company will require evidence that all contractors and suppliers were paid in full so they can't claim a lien on your property for any unpaid amounts.
Don't be deceived. You must read and understand your title policy before concluding that it truly does give you the insurance coverage you want. In many cases you can take action to strengthen the scope of your title coverage and remove exceptions from coverage if you assert yourself and provide the information the title company needs to extend coverage.
Bill Hall is a partner with Warner Norcross & Judd LLP, where he routinely deals with title issues in connection with the sale, purchase, leasing and mortgage of commercial real estate, oil, gas and minerals. He can be reached at firstname.lastname@example.org.