Thought Leaders: The Importance of Due Diligence – Title Commitments

By Stacey Shea - Otis and Bedingfield, LLC — 

Regardless of if you are purchasing commercial or residential property, it is always a good idea to make sure you do your due diligence. Due diligence can cover several aspects of property and document review including, but not limited to, everything from obtaining a survey and property inspection; reviewing prior property tax bills, and profit and loss statements; reviewing recent insurance claims and current lease agreements; and obtaining an environmental inspection. Also included in recommended due diligence tasks is a thorough review of the preliminary title commitment (“Commitment”), focusing on two key areas: the Requirements and Exceptions sections.

     The Requirements section of the Commitment covers information and document requirements to be provided by either side of a transaction for the title company to close the transaction and issue a title insurance policy. The Requirements section for business, nonprofit, estate, or trust parties will also include governing documents or other documents authorizing a party to buy or sell property. The sooner these documents are provided to title, the more efficient the closing process will be.

The Requirements section will also list any deeds of trust or liens on the property that must be released prior to closing. While the Buyer in a transaction can generally rely on the title company to ensure that these are released at or before closing, it is always advisable to be an informed buyer and review these items. These deeds of trust and liens are particularly important for the Seller to pay attention to. It does not happen frequently, but occasionally the Requirements section will disclose liens that a Seller was unaware of for various reasons or that they believed had already been released. This thorough review will give the Seller the opportunity to correct any erroneous liens in time for closing.

The Exceptions section details those documents that have been recorded in the public record that represent some form of encumbrance on the property. These often include oil and gas leases, surface use agreements, utility or access easements, surveys, development agreements, or restrictive covenants. These documents represent items that the title insurance company will not insure. It is important to review each exception (even the standard exceptions) and review each of the supporting documents linked to the exceptions. The Exceptions section is of particular importance to the Buyer, because if no objections to title are raised, all the exceptions are deemed to have been reviewed and accepted.

Exceptions will disclose recorded access or utility easements and other issues affecting the property that may not be discoverable through a visual inspection of the property. These types of encumbrances could have a negative effect on your intended use for the property or those plans you have for your dream home. The Exceptions section may also disclose a restrictive covenant, or a document that limits the uses of the property. These can come in the form of a standalone document, restrictions expressly stated on the deed to the property, or the governing documents of a commercial or homeowners’ association.

Reviewing the Requirements and Exceptions sections of the Commitment as soon as the Commitment is received may save you valuable time and money. You will be able to begin providing required documents, correcting any erroneous liens, and evaluating the impact of certain encumbrances on your intended plans for the property. By doing this early in the transaction, you can help to ensure that the transaction closes smoothly, reduce the likeliness of surprises after closing, and preserve any right you may have to terminate the transaction should anything disclosed in the Commitment prevent your intended use.

If you or your real estate agent have questions regarding items listed in a Commitment, you should consult a real estate attorney in the area for assistance in addressing or overcoming any concerns.