As a follow-up to my article Best Practices: The Survey Exception, where I discussed deletion of the standard survey exception from an ALTA loan policy, this article is intended as a brief overview of some of the “general title exceptions,” which typically appear in one form or another on a title commitment for an ALTA loan policy. Most of the general title exceptions should be addressed with the title agent by the lender (or lender’s counsel) so that: (i) they do not appear on the final loan policy; or (ii) the title insurance underwriter insures over them if they remain on the final loan policy. NOTE: All references to a “loan policy” in this article refer to an “ALTA loan policy.”
- GAP: Defects, liens, encumbrances, adverse claims or other matters, if any, created, first appearing in the public records or attaching subsequent to the effective date hereof but prior to the date the proposed insured acquires of record for value the estate or interest or mortgage thereon covered by this commitment.
- This general title exception excludes from coverage any title matters that appear in the gap between the effective date of the title commitment and the time and date of recording of the insured instrument post-closing. Lenders can (and should) request that the effective date of the title commitment be updated just prior to closing so that it narrows the gap within which undiscovered liens could exist. Lenders should always confirm that the title agent will provide gap coverage either automatically or by gap affidavit.
- TAXES AND ASSESSMENTS: Taxes or assessments that are not shown as existing liens by the records of any taxing authority that levies taxes or assessments on real property or by the public records.
- This general title exception excludes from coverage taxes and assessments that are not already liens on the property. All taxes that are due and payable should be paid at closing. A lender can confirm amounts due and payable via the tax collector. This general title exception should be removed from the loan policy and replaced with a specific exception limited to those taxes and assessments not yet due and payable.
- PARTIES IN POSSESSION: Rights of or claims by parties in possession of the land not shown by the public records.
- This general title exception excludes from coverage all rights of third-party tenants on the property whether or not a document has been recorded evidencing their existence. If there are no third party tenants, the title agent should be able to rely on an affidavit signed by the buyer and seller in order to remove this general title exception from the loan policy.
- If there is an existing third-party tenant lease affecting the property or a new EPC/OC lease executed between the future owner of the property and the operating company, the lender should provide the title agent with a copy of the executed lease and recordable subordination agreement subordinating the lease to the insurable instrument and request the general title exception be replaced with a subordinate matter on schedule B-II of the loan policy which states: “Rights of ________________________, as tenant only, without right of first refusal or option to purchase, pursuant to a written lease.”
- SURVEY: Any encroachment, encumbrance, violation, variation, or adverse circumstance that would be disclosed by an inspection or an accurate and complete land survey of the Land and inspection of the Land.
- See my previous article dated October 24, 2018 and found here.
In order to obtain the most extensive title insurance coverage, lenders should work with the title agent in order to remove (or at least narrow the scope of) any general title exceptions from the loan policy. If you get stuck on an issue, request the title agent to provide affirmative coverage over the title exception (whether general or specific). For more information regarding title insurance matters in the context of commercial real estate loan transactions, please contact Kristen at 407.618.0698 or at kdickey@starfieldsmith.com.