Buyers of commercial property typically have a long list of tasks when evaluating a potential purchase: negotiating the purchase agreement, evaluating potential build-outs, and environmental testing, just to name a few. Two other items that should be on every buyer’s list are getting title insurance and a survey. In fact, if the buyer is financing the purchase, the lender will typically require the buyer to get a survey and purchase a “lender’s policy” of title insurance (this article focuses on the “owner’s policy” of title insurance). Experienced buyers will also know that most purchase agreements call for the property seller to pay for a “commitment” for title insurance for the buyer’s review before the buyer gets its title insurance policy. The survey, in turn, helps the buyer visualize the property’s legal boundaries and may impact certain matters addressed in the title insurance commitment and policy. This article discusses some of the reasons why title insurance and a survey will benefit a buyer.
“Title” describes the legal rights of ownership of property. Every property has an owner, but because properties are bought, sold, and encumbered over the years, knowing who has “title” is sometimes more complicated than it may seem. While the system of public real estate records maintained by Minnesota and Wisconsin counties allows users to research the title status of a property to a certain degree, using the system is not straightforward for every buyer and will not give a full picture of the title.
Other types of insurance protect against the risks of future events. Title insurance, in contrast, is an insurance policy against past events that come to light after the insured person buys a property and pose risks to the person’s rights of ownership and use of the property. The benefits title insurance actually provides are the title insurer’s promises to defend the owner against claims by others that the property’s title is different from how the policy defines the title and to pay the owner for any financial losses suffered if title is in fact determined to be different from what is stated in the policy.
A real estate purchase agreement should require the seller to pay a title company to prepare a commitment for title insurance for the buyer to review before the purchase is finalized. In preparing the title commitment, the title insurance company will review public records to determine what risks exist that may affect the title the buyer receives should the purchase go through. The records reviewed often include not only the county records of property deeds, mortgages, easements, and other publicly recorded documents, but also court judgments, tax records, and public survey maps. When the review is complete, the title company delivers the commitment, which is its proposal for insuring title to the property. The commitment will identify certain title “defects” and exclude them from coverage. But, some terms of the commitment can be negotiated among the buyer, seller, and title insurer. For example, the buyer can request that the insurer remove certain exceptions to coverage or negotiate with the seller for the seller to take steps that would allow the insurer to remove one or more exceptions.
Whether or not the title commitment gets revised, at the closing of the property purchase, the buyer will elect whether to buy the title policy and, if so, will pay a one-time policy premium (unless the buyer has negotiated for the seller to pay it). The premium amount is based on the property purchase price. The policy then insures the buyer’s (now owner’s) title as long as the buyer owns the property.
In simple terms, a survey is the process of measuring the physical features of a property, including the exact locations of lot lines, buildings, easements, landforms, and adjacent streets. The product of this process is a map depicting these features, giving the buyer a visual representation of what is being purchased. The benefits to a buyer of obtaining a survey – and, more particularly, an ALTA (America Land Title Association) survey, which is generally the most comprehensive survey available – are many. A few of them are:
First, the purchase agreement will typically include a “legal description” of the property that describes its location and boundaries in words. But, legal descriptions are often difficult to understand by people not used to reading them, and a buyer should not assume to know where the exact boundaries are simply by viewing the property in person. A survey will show the property boundaries where they appear on the ground, potentially saving the buyer the difficult surprise of discovering too late that the boundaries assumed from a mere visual inspection are not the legal boundaries.
Similarly, although the title commitment will describe in words any recorded easements or other encumbrances on the property found in the title search, a survey will show their exact locations and dimensions, allowing the buyer to better understand their potential impact on the buyer’s intended use for the property.
Third, an ALTA survey must show the location of all buildings on the property and, optionally, can show things like building dimensions and the locations of other improvements such as driveways, parking lots, landscaping, and signs. This information allows a buyer to know whether any buildings or other improvements encroach on any required setbacks, easements, or even adjacent lots.
Fourth, an ALTA survey will improve the buyer’s title coverage by requiring the title insurer to remove the “survey exception” from the title policy, which, if left in, would except from coverage any title defects that would be revealed by a survey.
Buying commercial property is a big investment. All of the information provided by a title commitment and survey, and the coverage provided by a title policy, is important to understanding and protecting that investment. The buyer should have its attorney review both the title commitment and survey well before the closing date so that any concerns or questions raised by them can be addressed before the purchase closes and the title policy issues.
Eric Johnson is an attorney at Fryberger Law Firm. He can be reached at Fryberger’s Duluth office at (218) 722-0861.