Victor A. Diaz, Esquire

The Golden Rule in lending - he who has the gold sets the rules - can lead Lenders to misapprehend their ability to control real estate transactions to their detriment. In reality, as providers of financing, and not parties to the purchase contract, Lenders have little or no ability to exert influence over those with whom they are not in privity, namely Sellers. This is often evident when it comes to raising objections to title exceptions, survey matters or title defects late in the closing process.  

The parties to a contract for sale and purchase of real property are generally only a Seller and a Buyer. All rights and obligations running between Seller and Buyer are contained within the four corners of the contract. Included among Seller's covenants is that of providing Buyer with evidence of title prior to closing and the Buyer's ability to object to the state of title as it relates to Buyer's intended use of the Property.

While the terms of most commercial real estate acquisition contracts are vastly different, all typically require Buyer to be provided with evidence of title, usually in the form of a title insurance commitment, within a specified timeframe. Buyer, is usually provided with a finite number of days during which to examine title for defects that could render the title unmarketable or covenants, restrictions, easements and other matters of record that may prevent the Buyer's intended use of the Property ("Title Examination Period").

In almost every case, running concurrently with the Title Examination Period, Buyer has the opportunity to survey the Property to: (i) identify any encroachments on the Property and (ii) determine that improvements on the Property, if any, are not encroaching on the lands of another, setback lines, or easements. Easements, restrictions, covenants, agreements or other matters of record could not only interfere with Buyer's intended use of the Property but also preclude its intended purpose altogether. For instance, a utility easement or setback lines may interfere with Buyer's intended location and construction of future improvements. Such encroachments or violations constitute title defects and objections must be raised by Buyer during the Title Examination Period. If Buyer fails to deliver notices of objections in a timely fashion during the Title Examination Period, Buyer is deemed to have approved and waived any title and survey objections.

Title Examination Periods vary in length but are generally relatively short in duration. In Florida for example, under the terms of the standard Commercial Contract promulgated by the Florida Association of Realtors for the acquisition of Property with improvements, Buyer only has 15 days from receipt of evidence of title to deliver written notice to Seller objecting to title defects. In some cases, the Title Examination Period can be as short as five days as in the standard Vacant Land Contract and the Standard Contract for Sale and Purchase approved by the Florida Bar.

It follows that Buyer should review the Title Examination Period timeframe of its contract carefully in order not to miss critical deadlines. Similarly, Lenders need to be mindful of these time constraints as a Buyer's failure to meet contract deadlines can undermine the Lender's ability to adequately address, and if necessary, delete adverse title matters or survey defects later. This is of particular importance in SBA financing where Borrowers usually are not sophisticated in handling real estate transactions and, worse yet, are generally not represented by legal counsel. A perfect elaborately drafted lender's instruction letter may be useless if the Title Examination Period has lapsed or expired. In such cases, Seller and the title insurance underwriter may be unwilling to delete or remove objections or insure over encroachments revealed by an untimely procured survey from Lender's loan policy.

Lenders need to remember they are not parties to the purchase and sale contract nor are they the intended third party beneficiaries of the contract. The Lender's sole, ancillary role is that of providing the financing to Buyer necessary to complete the transaction. For that reason, the best practice is to monitor the timeframes set forth in the purchase agreement, request or require Borrower to extend them if necessary, solicit from Borrower copies of its written title and survey objection notices and work in conjunction with Borrower in objecting to title and survey defects. This way, Lenders will be in a much better position to raise title and survey objections in a timely fashion and avoid unnecessary heartburn at closing.  

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