7 Major Questions You Should Consider When Evaluating Purchasing Title Insurance for Commercial Real Estate

Anyone who owns their residence has encountered the issue of purchasing title insurance. The purchase of a commercial property provides similar type of risks that you as borrower will want to insure against by purchasing commercial title insurance. However, commercial titles can present a slightly different set of real estate title problems you will want to insure are covered in your title policy.

Here are seven major questions you should consider when evaluating purchasing title insurance for commercial real estate.

Q: What is the most common issue with commercial real estate titles?

One of the most common questions I encounter with respect to property ownership is “Should I get title insurance?” The answer is almost always a resounding “YES!” Real estate is a significant investment, and if you do not acquire good title then your investment could be worthless. Unlike other forms of insurance, title insurance is paid in a single, lump sum premium upon acquisition of the property. Premiums are set by state law and correspond to the purchase price of the property. Your title insurance for commercial real estate will insure against problems that may be uncovered in a title search.

Q: What is the most common misconception about commercial real estate titles?

The most common misconception about commercial real estate titles is that having physical possession of a “deed” equates to legal ownership of the property. In reality, ownership is determined by public recording systems (usually at the county or municipal level), making the physical paper deed effectively irrelevant after it is recorded.

Q. What are the specific items the buyer of a commercial property should address in their title insurance shopping for commercial real estate?

When shopping for commercial title insurance, buyers must carefully evaluate the Title Commitment to ensure the property’s legal ownership is clear and adequately protected. Key areas of focus include verifying the legal description, clearing liens and encumbrances, addressing survey exceptions, and securing necessary policy endorsements.

Shopping for commercial title insurance requires a hyper-specific approach compared to residential policies. Buyers should specifically address the following elements:

1. Title Commitment & Schedule B Exceptions

• Permitted vs. Unpermitted Exceptions: Schedule B of the title commitment lists encumbrances the insurer will not cover (e.g., utility easements, restrictive covenants). Buyers must cross-reference these with their due diligence to ensure they don’t interfere with the intended use of the property.
• Removing “Standard Exceptions”: A standard title commitment usually contains pre-printed exceptions for mechanic’s liens, unrecorded leases, and parties in possession. Buyers should request that the title company remove (or “delete”) these standard exceptions so the policy actually insures against them.

2. Survey Matters

• Survey Endorsement (ALTA): A standard title policy typically excludes matters an accurate survey would disclose. Buyers should provide an up-to-date ALTA survey to the title company so that standard exception can be replaced with specific coverage protecting against boundary disputes, encroachments, or setback violations.

3. Policy Endorsements

Buyers should negotiate specific endorsements tailored to the exact asset class to expand their coverage. Common and essential endorsements include:

• Zoning (ALTA 3.1 or 3.2): Confirms the property’s current zoning designation and permissible uses.
• Access (ALTA 17): Guarantees the property has physical and legal access to public roads.
• Comprehensive Endorsement (ALTA 9.0): Protects against violations of restrictive covenants, future encroachments, and boundary issues.
• Contiguity (ALTA 18): Essential if the property is made up of multiple parcels, ensuring there are no gaps between them.
• Tax Parcel (ALTA 18): Ensures the land being insured matches the tax assessment parcel exactly.

4. Special Municipal and Tax Issues

• Municipal Liens and Violations: Commercial properties are often subject to unrecorded municipal liens, building code violations, or pending assessments that standard searches might miss. Buyers should specifically request coverage for these.
• Gap Coverage: Buyers must ensure the policy includes “gap coverage” to protect them against any adverse title issues (like a new tax lien or judgment) recorded in the interim period between the title search date and the actual closing date.

5. Type of Policy & Coverage Amount

• Owner’s Policy vs. Loan Policy: A Loan Policy only protects the bank’s financial interest, while an Owner’s Policy protects the buyer’s actual equity. Buyers must ensure an Owner’s Policy is issued in their name.
• Coverage Amount: The policy amount should reflect the full purchase price of the property, though buyers should consider increasing the amount if they plan substantial immediate renovations.

• minerals and subsurface substances;
•  loss determination;
• taxes;
• special use (for example, zoning);
• special mechanic’s lien coverage;
• project use;
• unusual loan document issues (for example, shared appreciation, swaps, re-characterization); and
• the standard ALTA 9.06 (Restrictions, Encroachments, Minerals—Loan Policy), ALTA 9.2-06 (Covenants, Conditions, and Restrictions—Improved Land—Owner’s Policy), ALTA 28.2-06 (Encroachments—Boundaries and Easements—Described Improvements), and ALTA 35.2-06 (Minerals and Other Subsurface Substances—Described Improvements).

Q: What should business owners know about titles before purchasing commercial real estate?

Business owners should understand that title to real estate, unlike titles to other assets such as automobiles, is not determined by a single document. Rather, title to real estate is determined by the entire collection (or “chain”) of documents that affect a particular property. It is not an easy process to determine exactly who owns a property, and this reinforces the importance of insuring against a defective title search to any purchased properties.

Q: What should buyers expect throughout the commercial real estate title process?

Buyers should expect clear communication with the title company that will issue the insurance policy with respect to their ownership. They should read the title-related documents that are provided and ask questions if any clarification is needed. The day before closing is not a good time to start asking questions, as most title issues take several days to resolve.

Q: What is the title process?

A contract to purchase property will generally designate a title company to issue a title insurance policy in favor of the buyer. As the consumer who will pay the costs of title insurance, you should become an educated customer by using the vast resources of the Internet. You can shop ahead of time to learn about the product and research companies that offer commercial title insurance. Once the contract is signed, a copy of the contract should be immediately delivered to the designated title company. Once the contract is received, the title company will initiate an “order” to analyze the collection of public records that affect the property. This process usually takes about two weeks (or longer depending on the complexity of the transaction). The outcome of the “order” is usually a commitment on behalf of the title company to issue a policy of title insurance to the buyer. This “title commitment” will conditionally obligate the title company to issue a policy insuring the buyer’s title to the purchased property, subject to certain stated exceptions and requirements. The buyer should review the commitment and accompanying documents to make sure that the title it receives will be acceptable for its intended purposes. If not, then the buyer can work with the title company and the seller to address any issues. Once the commitment is satisfactory to the buyer, the parties can then “close” the transaction, and the title company will issue the buyer’s title insurance policy.

Q: What constitutes a “good” or “clear” title?

There is no bright line rule as to what constitutes “good” or “clear” title. Generally, however, the term “good” or “clear” denotes title to real property that is totally free of claims, liens, or legal questions as to ownership and is considered to be marketable.