Amy Brownstein, Esquire

Title policies contain what are generally referred to as "standard" exceptions. These exceptions to coverage are the non-property specific exceptions that will appear in the title policy unless the lender negotiates their alteration or removal. They are usually the first exceptions listed in Schedule B of any title commitment or policy.

The first standard exception in a title commitment is usually for matters that attach (e.g., judgments and liens) or are recorded after the effective date of the commitment but before the insured instrument is recorded. This is known as the "gap" exception because it relates to the gap in time between completion of the title search and recording of insured instruments. Lenders should require this exception to be removed at closing, as the title company should perform a bring-down title search immediately prior to closing or recording to confirm that no such additional matters exist, and because the 2006 form of ALTA loan policy (available in all nearly all states) specifically provides coverage for the gap period. While this exception is removed as a matter of course in some states, in others the owner may be required to provide a "gap affidavit" as a condition to its removal.

Another standard exception is for rights of parties in possession of the premises under unrecorded leases or agreements of sale. This exception excludes coverage if an occupant has possession of the property under a record interest (such as a recorded Memorandum of Lease or Installment Sales Agreement). Generally, a lender needs to know who might have rights to occupy a property in which it is taking a security interest, and in many cases the lender will want a subordination agreement from any such party subordinating such party's interest to the lender's lien. To provide coverage in the event that a third party has rights to possess the property, this exception can be revised so that it is limited as follows "Rights of [insert known tenant name], as a tenant only, pursuant to a written lease, without rights of first refusal or options to purchase the property." In order to make this revision, the title company will usually require an affidavit from the owner identifying all tenants or averring that such tenants do not exist. If the exception is limited, the lender would likely have the basis for a title claim if a third party tenant not known to the lender is discovered to exist.      

Removal of the "survey" exception, commonly phrased as "any variation in location of lines or dimensions or other matters which an accurate survey would disclose", is also desirable. If this exception is not removed, the lender will not have title coverage with respect to matters that are visible on the land and would have been known to the lender and the title company had a survey been obtained. These matters can be significant, such as a portion of a collateral building being located outside of the property, and therefore obtaining a survey (and learning the information it discloses) is almost always preferable to not obtaining a survey. In many states, title companies are willing to remove the survey exception without requiring a survey. In other states, however, the survey exception will be removed only if an acceptable survey is provided, and for this reason it is advisable to determine the title company's requirement for removing the survey exception early in the process of making a loan to avoid closing delays.

One additional exception that lenders frequently require to be removed is the exception for mechanics' liens, e.g. "any lien, or right to a lien, for services, labor or material heretofore or hereafter furnished, imposed by law and not shown by public records." Because mechanics' liens often have "superpriority" over other liens and therefore could, in some states, constitute a lien senior to the lien of a lender's mortgage even if not filed at the time of closing, having this exception removed can provide the lender with valuable protection when construction work has recently been completed or is contemplated in connection with a loan. Because of the high number of title claims associated with mechanics' liens, if construction has recently been completed or is contemplated the title company will likely have certain underwriting requirements that must be met before this exception will be removed. Therefore, lenders should advise the title company early in the process that removal of this exception will be required.

For more information regarding Title Insurance, please contact Amy at ABrownstein@starfieldsmith.com
or (215) 542-7070.

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