Part 5 of a 12-part series by David A. Zobel on Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process
Once you’ve established your legal entity, the next step will be to purchase the real estate you wish to lease (or invest in). The appropriate type of real estate for your business will vary depending on a number of factors, including your location, level of investment, and potential tenant base. Not surprisingly, thorough research, inspections, and planning are critical to ensuring success. In this and the next two posts in this series, we’ll outline several important issues at this juncture: title insurance, indenture review, and ensuring appropriate loan documentation.
When you purchase real estate you may be purchasing more (and maybe less) than the land and improvements you actually see. The land is likely encumbered by third parties who may have rights (possibly superior to your rights) to your land which could restrict your use and ownership in various ways. Encumbrances can be minor, such as a minimum set-back restrictions simply preventing owners from building up to a property line, but others can be more severe, such as utility or access easements, and even unreleased mortgages and liens – requiring the purchaser to pay up or lose the property.
As such, before you close on your purchase, it is critically important for you to inspect any property’s title. You can inspect a property’s title yourself by searching through the records maintained by the county recorder of deeds and other public databases; however, most people contact a local title company to perform a search on their behalf and issue a report as to the various encumbrances and discovered issues affecting the property.
That report, also known as a commitment, can later be transitioned into a title insurance policy at closing. This will insure against various undiscovered issues affecting the property which were not uncovered by the title search. In this regard, title insurance operates differently from other types of insurance: it insures backwards against unknowns which occurred prior to your purchase, whereas more well-known insurance types such as casualty policies insure against unknowns occurring after your purchase.
Note: Title insurance policies are contracts just like all other insurance contracts. Only certain risks are covered based upon certain circumstances. It is very important for you to review and understand which risks are covered by the policy and which are not.