Best Practices: Navigating Title Commitments in Commercial Lending

When documenting a commercial loan for financing the acquisition of real estate or when there is real estate as collateral for your commercial loan, you will  likely require a loan title insurance policy to verify ownership and lien position.  A title commitment will include details as to the named insured and amount of insurance as well as a series of requirements to be satisfied prior to the title insurance underwriter issuance of the loan policy together with title matters to be excepted from coverage under the loan policy.  You will need to carefully review the entire title commitment to determine any issues that need to be resolved before closing and which endorsements are required.

The title commitment will include information on the current owner, name of proposed insured, the legal description of the real property, restrictions and exceptions.  If not included in the commitment, you should request the chain of title or a copy of the vesting deed, i.e., the deed into the current owner.  If your transaction is a purchase, then confirm that the owner matches the seller on the purchase agreement.  For your borrower, you will need to provide the title company with a copy of the formation documents and the appropriate entity documents (by-laws and corporate minutes/resolution electing the officers for a corporation and operating agreement for a limited liability company) to ensure that your borrower is listed correctly on the title commitment and deed and that the individual signing on behalf of the borrower has the necessary authority.

The title commitment will include requirements that need to be met in order to close the loan and issue the title policy.  Review these carefully as there may be documents that need to be obtained or issues that need to be resolved, well in anticipation of closing.  For example, there may be a trust on title requiring trust documents, a deceased seller requiring estate documents or the property may be a condominium requiring receipt and review of condominium documents and condo association approval.  Review and resolve these requirements as soon as possible to provide for a smooth closing.

Review the title commitment for general exceptions that could end up in your final loan policy, such as the general survey exception, inspection exception, tax exception and gap exception.  For the general survey exception (any encroachment, encumbrance, violation, variation, or adverse circumstance that would be disclosed by an inspection or an accurate and complete land survey of the real property), you will need to inquire with your title agent what needs to be done to remove the general survey exception.  In some states, you can simply ask for removal of the general survey exception.  Some states offer an endorsement which removes the general survey exception.  However, many states require a current survey in order to remove the general survey exception.  If you provide a current survey which is accepted by the title company, the title company will remove the general survey exception and replace this with any specific exceptions found on the survey.  For the inspection exception (exception for any facts that could be ascertained by an inspection of the land), you can typically have this removed simply by asking for its removal.  For the tax exception (exception for taxes that are not shown as existing liens by the public record), you can request that the title company limit to those not yet due or payable or ask for its removal.  For the gap exception (exception for any defect, lien, encumbrance or adverse claim appearing for the first time in the public records between the commitment date and the date that all requirements are met), you can request gap coverage and removal of the exception.  Finally, remember to ask for the deletion of any arbitration provisions from your final loan policies.

Review the title commitment for specific exceptions such as liens, judgments, easements and other encumbrances.  Request copies of all of the specific exception documents so that you can review the documents and determine if further action is needed.  Any specific exceptions will remain on the policy unless they have been resolved to the satisfaction of the title company.  

For assistance with commercial transactions and SBA lending matters, contact the attorneys at Starfield & Smith, PC at 215.542.7070 or visit us at www.starfieldsmith.com.