Anyone who owns their residence has encountered the issue of purchasing title insurance. The purchase of a commercial property provides similar type of risks that you as borrower will want to insure against by purchasing commercial title insurance. However, commercial titles can present a slightly different set of real estate title problems you will want to insure are covered in your title policy.
Here are seven major questions you should consider when evaluating purchasing title insurance for commercial real estate.
Q: What is the most common issue with commercial real estate titles?
One of the most common questions I encounter with respect to property ownership is “Should I get title insurance?” The answer is almost always a resounding “YES!” Real estate is a significant investment, and if you do not acquire good title then your investment could be worthless. Unlike other forms of insurance, title insurance is paid in a single, lump sum premium upon acquisition of the property. Premiums are set by state law and correspond to the purchase price of the property. Your title insurance for commercial real estate will insure against problems that may be uncovered in a title search. Check your perception of what title insurance is against how other consumers answer the question in this video.
Q: What is the most common misconception about commercial real estate titles?
A common misconception is that possession of a physical “deed” to a property is the equivalent of ownership. Colorado has adopted a recording system whereby all documents of real estate ownership are recorded at the county clerk’s office in which the property is located. Once a deed is recorded, ownership is vested in the buyer regardless of who actually possesses the actual paper deed. Essentially, the deed becomes irrelevant once it is recorded (although it is generally a good idea to hold on to the original as a backup in the very unlikely event that the county clerk’s records are damaged).
Q. What are the specific items the buyer of a commercial property should address in their title insurance shopping for commercial real estate?
Based on the recommendations of the American Bar Association, to adequately make sure you are covered in this transaction regarding the title search, they recommend an Owner’s Policy or Loan Policy that includes addressing;
- extended coverage;
- a closing protection letter, with verification of issuance and continued validity;
- available and relevant endorsements, such as endorsements relating to
- survey issues;
- minerals and subsurface substances;
- loss determination;
- special use (for example, zoning);
- special mechanic’s lien coverage;
- project use;
- unusual loan document issues (for example, shared appreciation, swaps, re-characterization); and
- the standard ALTA 9.06 (Restrictions, Encroachments, Minerals—Loan Policy), ALTA 9.2-06 (Covenants, Conditions, and Restrictions—Improved Land—Owner’s Policy), ALTA 28.2-06 (Encroachments—Boundaries and Easements—Described Improvements), and ALTA 35.2-06 (Minerals and Other Subsurface Substances—Described Improvements).
Q: What should business owners know about titles before purchasing commercial real estate?
Business owners should understand that title to real estate, unlike titles to other assets such as automobiles, is not determined by a single document. Rather, title to real estate is determined by the entire collection (or “chain”) of documents that affect a particular property. It is not an easy process to determine exactly who owns a property, and this reinforces the importance of insuring against a defective title search to any purchased properties.
Q: What should buyers expect throughout the commercial real estate title process?
Buyers should expect clear communication with the title company that will issue the insurance policy with respect to their ownership. They should read the title-related documents that are provided and ask questions if any clarification is needed. If the title company cannot answer their questions, then they should engage a real estate attorney in Denver to assist them with the process. The day before closing is not a good time to start asking questions, as most title issues take several days to resolve.
Q: What is the title process?
A contract to purchase property will generally designate a title company to issue a title insurance policy in favor of the buyer. As the consumer who will pay the costs of title insurance, you should become an educated customer by using the vast resources of the Internet. You can shop ahead of time to learn about the product and research companies that offer commercial title insurance. Once the contract is signed, a copy of the contract should be immediately delivered to the designated title company. Once the contract is received, the title company will initiate an “order” to analyze the collection of public records that affect the property. This process usually takes about two weeks (or longer depending on the complexity of the transaction). The outcome of the “order” is usually a commitment on behalf of the title company to issue a policy of title insurance to the buyer. This “title commitment” will conditionally obligate the title company to issue a policy insuring the buyer’s title to the purchased property, subject to certain stated exceptions and requirements. The buyer should review the commitment and accompanying documents to make sure that the title it receives will be acceptable for its intended purposes. If not, then the buyer can work with the title company and the seller to address any issues. Once the commitment is satisfactory to the buyer, the parties can then “close” the transaction, and the title company will issue the buyer’s title insurance policy.
Q: Do you have to have an attorney through the title process, or is a real estate broker enough?
An attorney is certainly not required, as real estate transactions are closed every day without the involvement of an attorney. Some buyers are comfortable working only with their broker and title company. However, brokers and title companies cannot give legal advice. The decision to engage an attorney is like any other business decision — and the costs, benefits and risks of the decision should be analyzed. Commercial real estate is often a significant capital investment, and even small risks can be magnified due to the sheer size of the transaction. As such, many parties view the cost of an attorney as a worthwhile investment.
Q: What constitutes a “good” or “clear” title?
There is no bright line rule as to what constitutes “good” or “clear” title. Generally, however, the term “good” or “clear” denotes title to real property that is totally free of claims, liens, or legal questions as to ownership.
If you are in doubt about the title insurance….you may want to consider speaking with a Colorado real estate attorney.