Maintaing and enhancing title insurance coverage (with forms)

Headnote

Making sure that there are no holes in the title insurance coverage is an ongoing task for commercial real estate owners and lenders.

THROUGH THE USE OF ENDORSEMENTS, the basic coverage of the title insurance policy can be maintained and enhanced. Without these endorsements, the coverage of a policy's insuring provisions may be limited, if not effectively lost, by the workings of other policy provisions found in the Exclusions from Coverage and the Conditions and Stipulations.

This article deals mainly with the lender's title concerns in commercial real estate transactions. It does not present a comprehensive list of endorsements that you may use. Rather, it discusses the issues that you will typically encounter in multi-site and multi-state loans. It also explains how to maintain title coverage for various loan features and in loan modifications. Sample forms of the endorsements are appended for purposes of the discussion that follows. The availability of these endorsements, as well as their content, may vary widely from state to state.

OWNER'S ENDORSEMENTS

Before looking at the lender's concerns, two endorsements relating to owner's coverage deserve discussion:

The Non-Imputation Endorsement; and

The Fairway Endorsement.

These endorsements are needed for transfers of interests in entities that own real property, as opposed to transfers of the properties themselves. These transfers may be partial or total. They are partial when investors buy into existing entities. They are total when investors buy all the entitys' interests. Transactions are often structured as entity transfers when transfer taxes are high and entity interest transfers are not taxed.

Non-Imputation Endorsement

When ownership interests in an entity that owns real property are transferred (e.g., partnership interests or corporate stock), the transferee does not receive the benefit of the recording act statutes. Generally, the recording acts protect purchasers for value who have no knowledge of adverse title matters. Nevertheless, interests in real property are created without regard to whether they are recorded. Easements, leases, and mortgages, for example, are generally valid between the original parties whether or not they are recorded. A purchaser of entity interests will be bound by the acts of the entity and will generally be imputed with the knowledge of persons acting on behalf of the entity.

A policy of title insurance excludes from...