BEST PRACTICES: TITLE INSURANCE

Ethan W. Smith, Esq.

When closing loans secured by commercial real estate, most prudent lenders require their liens to be insured by a title insurance policy. However, lenders should be mindful that the mere existence of a title insurance policy does not mean that lenders can put things "on auto-pilot" and relax their obligations of prudent lending. Lenders must always keep in mind that the obligation to act prudently cannot be substituted with a policy of title insurance. Some tips to keep in mind:

When dealing with a title insurance agent (as opposed to dealing directly with the title insurance company), always obtain a "Closing Protection" or "Insured Closing" letter, addressed to the Lender and referencing the title commitment, the property address and the purchaser/owner of the property. A closing protection letter insures the lender against any malfeasance or defalcation of the title agent or if the agent fails to comply with the lender's written closing instructions. Obtaining this letter is essential to bringing a successful title claim in the future.

Always obtain copies of documents referenced as exceptions to coverage in the title commitment. The nature of some of these documents is readily ascertainable (i.e., utility easements); however, other documents may have provisions that must be reviewed. If you are uncertain what a particular document is that is being excepted from coverage, a complete copy should be obtained and reviewed to determine what risk, if any, may be associated with accepting the document as an exception to coverage.

Do not rely on the title agent to obtain payoff letters without reviewing the terms. Many title agents will accept payoff letters that do not contain warranties that liens will be released or that the payoff is a complete payoff of all debts owed. This can be problematic if the lien is cross collateralizing several debts which are not all paid off with the proceeds of your loan. Even if the title insurance company insures over the lien, as a lender, you want to make sure that the other lender releases its lien. Most lenders will not be happy to discover that they do not have a first lien on the property, but have a title insurance claim instead (which claim may be contested by the insurer). Requesting a copy of the payoff letter from the title agent and requiring the letter to unconditionally agree that the lien will be released or satisfied upon receipt of the payoff amount will avoid issues down the road.

Title insurance is a great safety-net for lenders making loans secured by real estate. However, don't be lulled into a false sense of security by title insurance - it can never become a substitute for diligent and prudent lending practices.

For more information on closing loans secured by real estate, please contact the author at esmith@starfieldsmith.com, or 215-542-7070.

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