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March 18, 2015

Best Practices: Real Property Surveys

by Starfield & Smith

To perfect a lien on commercial real property, evidence of title based upon an American Land Title Association (“ALTA”) Loan Policy, or a state-specific equivalent, is commonly required.  An ALTA Loan Policy serves to insure the Lender and its successors and/or assigns against claims regarding its lien priority, among other things.  ALTA Loan Policies come with standard exceptions from coverage, meaning that the Lender will not be protected if certain, specified issues arise.  A recurring exception from ALTA coverage is the Survey Exception.  The Survey Exception states that the ALTA Loan Policy will not insure the Lender against loss from, “[a]ny encroachment, encumbrance, violation, variation or adverse circumstance affecting title that would be disclosed by an accurate and complete land survey of the land.”

In nearly all instances, the Lender should get the Survey Exception removed from its title policy.  To remove the Survey Exception, a Lender may either (1) obtain a new survey, or (2) use an existing survey with an affidavit from the property owner stating that there have been no material changes to the property since the date of the survey.

Whether to obtain a new survey is an important question for Lenders to consider when the loan is secured by real property.  First, obtaining a new survey is a time-consuming process.  A new survey generally takes three to four weeks to complete.  Further, a new survey may cost thousands of dollars, depending on the location, character and size of the property.  Alternatively, using an existing survey with an affidavit of no change will enable the Survey Exception to be removed and provide the Lender with an avenue of legal recourse against the title company if a problem arises.

Removing the Survey Exception in and of itself, however, does not provide the Lender with the same protection as a new survey, practically speaking.  If the old survey failed to catch an issue or if the property has changed since the last survey, the Lender and Borrower can run into a problem that affects their ability to use the land as intended.  This, in turn, depending on the nature of the issue, could possibly result in the inability of the Borrower to operate its business and make payments on its loan.  Additionally, removal of the Survey Exception only gives the Lender the ability to make a claim against the policy, which may be denied or defended by the insurer.  For this reason, there are certain types of commercial transactions for which a new survey should always be obtained.

An new ALTA survey should always be obtained for ground up construction, building additions and expansions.  An ALTA survey is a comprehensive survey with national minimum standard detail requirements.  While non-ALTA surveys vary widely in the standards used and information provided, an ALTA survey should consistently use the same standards and provide the same information, regardless of the location of the property.  An ALTA survey provides the most thorough examination of the state of the property.  Getting an ALTA survey for ground-up construction, additions and expansions is necessary to ensure that the Borrower is not building on an easement, encroaching upon another parcel of land, or violating setback lines, etc.

On the other hand, a non-ALTA survey or an old survey with an affidavit of no material change is likely sufficient if the loan is not financing a change in the building footprint.  In this situation, the survey is used to confirm that the property boundary matches the legal description of the land in the loan documents and to indicate the location of the building and other items that affect the property.    For more information about surveys, please contact Sarah at 267-470-1217 or at sminteer@starfieldsmith.com.