How to Read a Title Commitment
February 14, 2012
Whether you are a purchaser of real estate, a lender against real estate, a borrower offering real estate as collateral, or a seller of real estate, you can be fairly certain that prior to closing your deal, a title agent will issue a title commitment for your transaction. For all intents and purposes, a title commitment is a legal contract from a title insurance company to issue a title policy to the "Insured" upon the satisfaction of certain express conditions. The purpose of this article is to help you understand the title commitment.
The key to understanding the title commitment is to understand its organization. The key parts of the title commitment are Schedule A, Schedule B-1 and Schedule B-2.
Schedule A provides specific information regarding the transaction and the title policy.
• Commitment Number: This is typically the settlement company's file number for your transaction. It is a good number to use if you ever need to reference your deal with someone in the settlement company (alternatively, the property address usually works just as well). • Effective Date (Paragraph 1): This is typically the date on which the settlement company's abstractor performed its title exam of the real property (or the date through which land record's recording information is current). The status of title promised by the title commitment is through the Effective Date. This Effective Date can also be an important date since the title company's obligation to issue a title policy will lapse if the B-1 Requirements are not satisfied within six months of the Effective Date. • Insured and Amount of Insurance (Paragraph 2): For an owner's title insurance policy, the "Insured" will be the purchaser and the amount of insurance will be the purchase price. The deed conveying the real property to the purchaser is the instrument being insured. For a lender's title insurance policy, the "Insured" will be the Lender and the amount of insurance will be the loan amount. The deed of trust or mortgage securing the loan will be the instrument being insured. • Current Vesting (Paragraph 3): This identifies who the current fee simple owner of the real estate is. In a real estate sales transaction, this will be the seller. In a real estate refinance transaction, this will be the borrower. • Legal Description (Paragraph 4): This provides the legal description of the property at issue. The legal description will also appear in the instrument being insured. There are generally two types of legal descriptions: for a subdivided lot there is a recorded plat description and for undeveloped land there is a metes and bounds description. The difference between these two types of descriptions is beyond the scope of this article. What is important is that the legal description is usually pulled from the title commitment by the persons preparing the transaction documents for inclusion in the deed, deed of trust or mortgage. • Issuing Entity: This should be the title agent or settlement agent who is handling the escrow and closing. It is important to understand that when writing the title commitment, this Issuing Entity is acting as an authorized agent of a national title company, like First American or Old Republic Title. The Issuing Entity identified on the title commitment should be the same agent identified in the insured closing protection letter.
Schedule B-1 (Requirements) sets forth the conditions that need to be satisfied pre-closing in order for the title company to issue the title policy. It is important to review the Requirements carefully and ascertain who is responsible for satisfying these Requirements. Many of the Requirement must be addressed by the seller, for example, getting pay-off information for existing mortgages or deeds of trust. Other Requirements are the responsibility of the lender, for example, providing its loan documents to the settlement company. Still other Requirements must be addressed by the purchaser, for example, providing copies of the purchaser's organizational documents if the purchaser is a business entity. The key to understand is that the title company's legal obligation to issue a title policy is expressly conditioned upon satisfaction of each of these conditions, and if the Requirements are not fully satisfied, no title policy will be issued.
Schedule B-2 (Exceptions) is perhaps the most important section of the title commitment. It is this part of the title commitment that sets forth what title encumbrances will be senior to the instrument being insured. So, for example, if there are any easements encumbering the property, these easements will have rights upon the property senior to the rights of the fee simple owner. Usually, this is not a problem (e.g., an easement that brings electricity to the property adds value to the property). Other times it may be problematic (e.g., an easement to an adjacent land owner granting him rights to hunt on the property may hinder the development of the property).
It is important to understand that Exceptions fall into two categories: Standard Exceptions and Property-Specific Exceptions. The Standard Exceptions, for the most part, are boilerplate language that can be typically removed by doing something affirmative. For example, a standard exception for mechanics' liens can be removed by an affidavit from the seller stating that no work has been performed on the property during the last 90 days, or the survey exception can be removed by obtaining a survey of the property (but this may then lead to a specific exception for an encroachment revealed by the survey).
With regard to the property-specific exceptions, these should be reviewed carefully. In some instances, it will be prudent to review the underlying instrument creating the exception to better understand the encumbrance. Some specific exceptions may adversely affect your intended plans for the property. It will be far better to understand the implications of the specific exceptions before closing than trying to deal with them after closing. This is why most commercial sales contracts contain provisions requiring seller's to address and correct "title objections" identified by the purchaser. It is by far better for a purchaser of real estate to let the seller take care of as many title issues as possible before the purchaser becomes responsible for the property. An "Insured" should make sure that any objectionable B-2 Exceptions are removed from the title commitment before closing occurs.
Lastly, if a claim is ever made on the title policy, the claim will be denied if it derives from an exception revealed in Section B-2 of the title commitment (which will become Section B of the final title policy). In other words, the title company will not insure an instrument against encumbrances that it identified to you (through the title commitment) before settlement.
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