October 24, 2018
Best Practices: The Survey Exception
by Kristen G. Dickey
The U.S. Small Business Administration (“SBA”) National 7(a) Authorization Boilerplate Version 2018 (“Boilerplate”) indicates SBA lenders must obtain a lien on 100% of the interest in the Borrower’s collateral and properly perfect all lien positions as stated in the SBA Loan Authorization. With respect to real estate collateral, Appendix B of the Boilerplate identifies eight types of evidence of title SBA requires for each state. The majority of states will require evidence of title to be based upon an American Land Title Association (“ALTA”) Loan Policy insuring the lender and its successors and/or assigns. The primary obligation of the title insurer is to indemnify the insured against losses resulting from a covered claim, and the typical remedy for an insured lender when a claim arises is to obtain lien priority. However, certain claims are excepted, or even excluded, from coverage. The Survey Exception (defined below) is an example of an excepted claim.
For lenders, an ALTA Loan Policy insures against loss or damage incurred by reason of any defect in, lien, or encumbrance on title, which includes, but is not limited to, insurance against loss from: “Any encroachment, encumbrance, violation, variation, or adverse circumstance affecting the title that would be disclosed by an accurate and complete land survey of the Land and inspection of the Land.” (“Survey Matters”). Typically, Schedule B-I of an ALTA Loan Policy will contain a general exception to the Survey Matters (“Survey Exception”) unless the Survey Matters are analyzed and addressed to the satisfaction of the title insurance company and its underwriter.
The purpose of the Survey Exception is to exclude from coverage those matters that cannot be ascertained from a search of the public records. Generally, for a survey of real property to be acceptable to a title insurer to delete the Survey Exception, detailed information must be presented in order to create a clear understanding between the insured, title insurer, lender, and surveyor. When a survey that meets these guidelines is provided to the title insurer, the title insurer should replace the Survey Exception in the title commitment with the following type of language if there are any survey matters to except from coverage in the Loan Policy: “Rights, easements, interests or claims which may exist by reason of, or reflected by, the facts shown on the survey prepared by XX, dated XX, bearing Job #XX: [itemize specific survey matters].”
In the interest of the general public, surveying profession, and title insurers, ALTA and the National Society of Professional Surveyors, Inc. (the “NSPS”) jointly promulgated the details and criteria setting forth a minimum standard of performance of an ALTA/NSPS Land Title Survey (the “ALTA Survey”). In essence, the ALTA Survey was developed to create consistency as a nationally recognized and accepted standard. A complete ALTA Survey includes the on-site fieldwork, preparation of the map showing the results of the fieldwork, and its relationship to the recorded documents detailed in Schedule B of the title commitment.
Lenders may require an ALTA Survey to be obtained in conjunction with an ALTA Loan Policy when financing the purchase, expansion, or ground-up construction of a commercial property, if required by the title insurer. Since surveys can be costly and add additional time to the loan closing process, it is important to note that for certain commercial loan transactions, an existing survey (whether it meets the ALTA Survey requirements or not) certified to the current owner of the property may be sufficient to delete the Survey Exception. For instance, when an ALTA Loan Policy is issued for a refinance or a straight purchase of a commercial building without any construction, a title insurer will typically waive the requirement for a current survey (within 90 days of closing) and rely on an older survey if (1) there have been no changes since the date of the survey; and (2) an affidavit is obtained from the owner of the property attesting to that fact. Some title insurers may even delete the Survey Exception from the title commitment for an ALTA Loan Policy (or issue an endorsement to the Loan Policy effectively deleting the Survey Exception) without a survey, but these requirements vary depending on the jurisdiction, and the lender or its counsel should consult with the title insurer directly to weigh the risks and determine if this is a reasonable option.
There are benefits to obtaining a survey in conjunction with an ALTA Loan Policy when financing the purchase, expansion, or ground-up construction of a commercial property. Obtaining an ALTA Survey, or another type of survey, allows a lender to obtain the most comprehensive title insurance, and should be considered in certain types of real estate commercial transactions.
For more information regarding survey and title insurance matters in the context of commercial real estate loan transactions, please contact Kristen at 407.618.0698 or firstname.lastname@example.org.