If your business is purchasing real estate, you will need to obtain title insurance to protect your business’ ownership rights to that real estate. Prior to the consummation of your purchase and the associated issuance of an owner’s title insurance policy (and a loan policy, if a lender is providing some of the financing for the purchase), you will obtain a title insurance commitment, which is the title company’s offer to provide title insurance for the property specified in the commitment. If you have little to no experience in reviewing title commitments, the form may initially be difficult to navigate.
A careful review of the commitment and all documents referenced within the commitment is essential, and a basic understanding of the title commitment form will help such a review. The commitment contains non-property-specific notice language and commitment conditions that should be read. But more importantly, there are three property-specific sections that will be easier to digest if you understand the purpose of each.
The first section is Schedule A, which sets forth the transaction’s facts, such as what person or entity currently holds title to the property, the name of the proposed insured, the amount of the proposed policy, and the legal description of the property. When you are first looking at Schedule A, check to make sure that these items match your understanding of the transaction. For instance, is the title vested in the party who has agreed to sell the property? If not, a purchase and sale contract amendment is probably necessary to correct any discrepancy.
The other two sections are the title requirements and title exceptions sections, which are Schedules B-1 (requirements) and B-2 (exceptions) in ALTA commitments (in Texas, which follows TLTA, Schedule B is the exceptions section and Schedule C is the requirements section). Examples of Schedule B-1 requirements are the recordation of a deed conveying the property to your purchasing entity, the payment of all property taxes that are due, evidence that the seller and buyer entities are in good standing, required affirmations from the seller, and the payoff and release of any indebtedness associated with the property. The title company will not issue its policy or policies until these title requirements are satisfied.
As for Schedule B-2, it lists the title exceptions, which are the items excluded from the title insurance coverage. Schedule B-2 includes standard exceptions, such as rights of tenants in possession, encroachments that would be shown by an accurate survey of the property, and unrecorded liens. Standard exceptions can be modified or deleted based on owner affidavits and a current survey. Schedule B-2 also includes additional, specific exceptions that affect the subject property. These are the exceptions revealed by the title company’s search of public records. Such a search might discover utility, access or other easements, unpaid taxes, property covenants and restrictions, a lien or judgment, and matters shown on a plat. Without a review of the B-2 source documents, which the title company will provide to you (often hyperlinked in the electronic copy of the commitment), and a survey showing what portion of the property is affected by the specific exceptions, it is impossible to know the full impact that these items have on the use and ownership of the property. For example, an existing easement, without relocation or termination, may severely limit your development plans for the property.
Possibilities like the existence of a very burdensome easement are what make the review of a title commitment a vital part of the due diligence that takes place when you are contemplating the purchase of real estate. With a basic understanding of the title commitment form, the title review portion of your due diligence is much more manageable.