By The Scali Law Firm, contributing authors Robert D. Daniels and Gus N. Paras
Robert D. Daniels
Real estate title issues are of major concern in any real estate sale transaction. This article provides a basic overview of how title provisions are handled in real estate purchase agreements, or “REPAs,” with a focus on the seller’s warranty of title, the buyer’s approval of title, and title insurance.
Insist on your right to review the preliminary property title report
Gus N. Paras
Though a seller will typically provide a warranty of title to the buyer, the scope of this warranty may be intensely negotiated. The seller may be reluctant to give a warranty other than, “Seller shall convey title to the Property, subject only to real estate taxes not yet due, and covenants, conditions, restrictions, rights of way and easements, if any, which do not materially affect the intended use of the Property.”
The meaning of “materiality” is not always clear, so the scope of this warranty may be unacceptably uncertain to the buyer. Since most real estate transactions will include the issuance of a preliminary title report reflecting liens, encumbrances and other title exceptions of record, the buyer should insist on the right to review and approve the preliminary title report, together with a warranty that the property is being conveyed subject only to liens, encumbrances and other exceptions of record which are approved (or not rejected) by the buyer. This will require the seller to remove any matters of record disapproved by the buyer.
Dealing with disapproved items
The Buyer’s approval of title should be set forth in the REPA as a condition precedent to closing and the timing and manner should also be specified. To that end, the REPA should provide that the buyer will be given a preliminary title report, with copies of all exceptions of record, issued by an identified title company acceptable to both parties. It should also state who will pay the cost of the preliminary report, though that is often the seller.
The buyer should then carefully review the preliminary report and exceptions (preferably with legal counsel), to determine whether there are any exceptions—such as unpaid tax liens, mechanic’s liens, burdensome easements, etc.—that are not acceptable.
Procedurally, the REPA should (i) provide buyer with a fixed period of time to review the preliminary title report and notify the seller if the buyer disapproves of any exceptions; (ii) state that if the buyer does not so notify the seller, the preliminary report will be deemed approved, but (iii) if buyer timely disproves of any exceptions, the seller will have a stated period of time to correct the disapproved item(s) to buyer’s satisfaction. If a disapproved item is not corrected by seller, the buyer can either walk away from the deal for failure of this condition or waive his or her objection and proceed with the transaction (with or without a reduction of the purchase price).
Beware of “off-record” matters
Issuance of title insurance in favor of the buyer is essential for the buyer and should be agreed to by the seller. The REPA should provide that the issuance of title insurance in favor of buyer by the title company who issued the preliminary report is a condition precedent to closing, that the coverage amount should be in the amount of the purchase price, and that the policy will be subject only to the exceptions approved by the buyer, the lien for taxes not yet due, and the standard preprinted exceptions in the preliminary report.
The REPA should also specify who will pay for the policy. Though the seller will oftentimes bear that expense, the parties are free to negotiate a division of that cost. Finally, the REPA should specify the particular type of coverage to be issued. Generally, the buyer will accept issuance of a California Land Title Association (CLTA) policy, which will insure the buyer’s title as reflected in the public record.
The CLTA policy will not cover any “off-record” matter, such as boundary line discrepancies or encroachments. For coverage against those risks, the buyer can insist upon issuance of an American Land Title Association (ALTA) extended coverage policy. However, that type of coverage is more expensive and may require a survey, which can lead to substantial delays.
For this reason, sellers may be reluctant to agree to an ALTA policy. But if the buyer’s physical inspection of the property reveals the potential for any such problems, the buyer will be taking a risk if he or she does not insist that the REPA provides for issuance of an ALTA policy.
Real estate title issues vary from transaction to transaction, and can be complex and difficult to handle. It is therefore crucial that seller and buyer rely on experienced real estate counsel in negotiating and drafting a REPA’s title provisions.
The Scali Law Firm, with offices in Los Angeles and San Diego, is a full service dealership defense firm and represents dealers in matters ranging from transactions and corporate compliance to litigating franchise claims and disputes between dealers and among owners. Robert D. Daniels and Gus N. Paras can be reached at 213-239-5622 or RDaniels@scalilaw.com and GParas@scalilaw.com
