Easing Title Problems: “Insurable” Title Clauses
by Lawrence Garfinkel
Wouldn’t it be nice if you didn’t need to clear as many title problems before you sold an REO property? Wouldn’t your life be easier if you didn’t need to ask for indemnification letters, or if you didn’t have to wait for your closing agent to get them from the title companies? Wouldn’t you be happier if you could cut down significantly on emails and voicemails telling you that a closing could not happen because of a title problem? And wouldn’t you be ecstatic if you could get all of this and it did not cost you or your company any money?
“Insurable” vs. “Marketable”
It is neither a pipe dream nor a fantasy; this can be accomplished fairly easily. The mechanism to accomplish all of this is to insert a clause into the addendum that you require to be attached to the purchase and sales agreement or the contract. The clause will simply state that the seller is conveying insurable title to the buyer. The standard in all real estate contracts is that the seller is conveying marketable title. There are many definitions as to what marketable title is, but I believe the easiest one is that the buyer may sell the property tomorrow with no title issues. Some other definitions include “title that is free from reasonable doubt,” “title that is free from defects and encumbrances,” or “title a reasonable [or prudent] person would accept.” (“Marketable” Title - Extent and Scope of Title Insurance Coverage, John C. Murray, First American Title Insurance Company)
The bottom line is that if you, as the servicer or lender, sign the standard contract and do not specify insurable title in the addendum, then most of the title defects that arise will have to be fixed by the closing attorney or the foreclosure attorney. As we all know, that takes time and can cause many problems with the sale. Often times, title defects are handled by an indemnification letter from one title company to another. However, there is no requirement that a buyer’s title company has to accept one of these indemnification letters, and often times the buyer’s title company or attorney will not accept the indemnification letter for a variety of reasons.
One of the main objections that may arise to an indemnification letter is that the buyer is an investor who intends to fix up the property and then resell the property fairly quickly for a profit. This type of buyer will not want to accept an indemnification letter as it may diminish the value of the property or it may cause delay when the buyer ultimately sells the property. Therefore, the buyer of the REO property will reject the offer of an indemnification letter, and the title defect will have to be cleared.
There are some REO sellers who presently have insurable title clauses in their standard addendum, and this can be used to cut through the problems. Insurable title is defined as “one which a reasonably prudent title insurance company would be willing to insure, free from exceptions and at normal title insurance rates,” James M. Pedowitz, Marketable Titles in Real Estate Titles, 2nd Edition, (1998) Page 24-21. To simplify this definition, if the seller’s closing agent contacts a title insurance company that it uses, and the title insurance company agrees to insure the title, even with the defect on record, without taking exception and without charging additional premiums, then the seller can convey insurable title.
Closing the Deal
From a practical standpoint, the rest of the process is fairly simple. The closing agent should get this statement from the title insurance company in writing. With the insurable title clause in place, and the written agreement from a title insurance company to insure this title at standard rates and without exception, the closing agent can then contact the buyer’s closing agent or attorney who stated that there is defective title that must be cured prior to closing. The closing agent can then make the buyer’s closing agent aware that the addendum provides for insurable title, that it has a written agreement from XYZ Title Insurance Company to insure this title without taking an exception, and at standard rates. Accordingly, insurable title is being conveyed. The buyer’s closing agent may argue, but it will not prevail. This battle is over; no more title problem for the REO seller.
There are many instances of relatively harmless defects that title insurance companies will typically insure over. These are the issues that will be resolved by the insurable title language in the contract. Obviously, if there is a major defect such as the wrong property was foreclosed or the wrong owners were foreclosed, then this clause will not help at all. In that case, the title would still need to be cleared because the seller’s closing agent would not be able to convince a title insurance company to insure this title without taking exception for the defect.
of the defects that relate to hyper-technical issues, or prior
unreleased mortgages that are extremely old but not old enough to be
invalidated, can be cleared just by putting insurable title in the
addendum to the contract. There is no downside to this; there is no
additional risk or liability incurred by the REO seller for putting this
in the addendum. So, the only question is, how long will it take you to
clear this with your legal department? As always, if you have any
questions regarding specific clauses and their usefulness or
applicability in different jurisdictions, contact your local USFN
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