If you are buying or selling real estate, hopefully your transaction includes title insurance. Title insurance effectively protects both parties to the transaction by offering the buyer a source for recovery other than the seller if the condition of title is discovered to be other than as contemplated by the parties. This blog provides a basic overview of the preliminary title report review process, which results in a title insurance policy.
The preliminary title report is typically issued after a fully executed purchase and sale agreement is deposited with an escrow officer. This document sets out the terms and conditions under which the insurer will issue a title insurance policy. Of primary concern for a buyer, the preliminary title report discloses certain “exceptions” to coverage under the title insurance policy. Most purchase and sale agreements provide a narrow window in which the buyer must review and approve the preliminary title report. Failure to timely object to matters disclosed in a preliminary title report can result in a waiver ofany title contingency (i.e. a right to withdraw from the transaction and receive a refund of the earnest money based on dissatisfaction with the condition of title). Accordingly, it is important that the buyer thoroughly review and understand the preliminary title report.
A preliminary title report is comprised of several sections. The first section usually sets out the nature of the proposed title insurance policy including the amount of coverage (typically the amount of the purchase price). Most transactions involve an American Land Title Association (ALTA) standard coverage policy, which is typically provided at the expense of the seller. The buyer then has the option to pay the differential for an extended coverage policy and other endorsements to expand the scope of coverage. The basic difference between standard and extended policies is that a standard policy typically only provides coverage against the title company’s failure to disclose matters of record (i.e. recorded instruments). In contrast, an extended policy typically includes a survey of the property to evaluate
encroachments and provides coverage for other unrecorded matters (i.e. unrecorded construction liens, leases, etc.). Lenders typically obtain their own title insurance policy and often obtain an extended coverage policy.
The next sections identify the current owner of the property, the nature of the ownership, and the legal description of the property. Make sure the seller identified in the purchase and sale agreement is the same party identified in the preliminary title report as vested in ownership of the property. If the transaction is an outright purchase of the property, then the title report should indicate that the seller holds “fee simple” title to the property (the highest form of title). Legal descriptions can be difficult to understand, particularly if the legal description is described in metes and bounds (a series of courses and distances). Title companies will often provide courtesy maps of the property upon request, but will disclaim the accuracy of such maps. However, the only way to confirm a legal description on the ground is to retain a surveyor.
The meat of the preliminary title report is the exceptions to coverage, which are classified as either “general exceptions” or “special exceptions.” General exceptions are the boiler plate exceptions to coverage under an ALTA standard policy (i.e. unrecorded liens, encroachments, and other matters not of record). An extended coverage policy will exclude or modify the general exceptions as discussed above. Special exceptions are exceptions to coverage unique to the property. The initial set of special exceptions usually involve property taxes. Sellers should pay for any back taxes and taxes for current assessment year should be prorated between the buyer and seller. The remainder of the special exceptions could include any number of matters such as easements, CCRs, liens, leases, recorded agreements, land use restrictions, judgments, governmental orders, and mineral rights. Such exceptions should be assessed for the extent the exception inhibits your intended use (and thus the value) of the property or allows others to disrupt your quiet enjoyment. The title company should provide copies of all instruments listed as special exceptions to facilitate this analysis. In some instances, a special exception can be removed with appropriate legal documents.
As discussed above, it is the buyer’s responsibility to evaluate and accept the condition of title. While your real estate agents may offer advice, the form contracts typically used by Oregon real estate agents provide the following disclaimer:
“If [the preliminary title report is] not fully understood, Buyer should immediately contact the title insurance company for further information or seek competent legal advice. Neither the Listing nor Selling Licensee is qualified to advise on specific legal or title issues.”
If you have questions regarding your preliminary title report, give BLJ a call. A thorough review of your preliminary title report can avoid more costly problems after you’ve purchased the property.