JUDGING A PROPERTY BY ITS “TITLE”

Reading through the title work on a commercial real estate transaction can be a daunting and unpleasant task.   Many buyers, and sometimes even their real estate agents, do not look carefully enough at these documents.  Without scrutiny, the purchaser may subject themselves to buying a property that does not meet their needs. It is important to carefully review a property’s title work and examine all exceptions and requirements necessary to obtain a clear title.  This will ensure that the property does not have impediments that may hinder the buyer’s intended use.

Exceptions

The list of exceptions contains many standard clauses such as liens, easements, and claims that are not shown in the public records.  Exceptions to the title policy also include clauses for utility easements and road right of ways.  Towards the bottom of the list are the exceptions that pertain to recorded documents with references to the liber and page number of the document.  These should be carefully analyzed as they often include additional deed restrictions and easement.

To highlight the need for scrutiny, I will share some examples of issues I have come across.  Last year I sold a building that had been used as a financial institution.  The institution stated that they would put a 10-year deed restriction on the property preventing anyone from performing financial operations on the site.  When the title work was ordered, we discovered there was a restriction on the previous deed from the 1970s that prevented the site from ever being used as a restaurant or gas station.  Thankfully, the buyer was ok with these restrictions and purchased the property anyway.  I also sold a development property that had an old deed restriction against any alcohol sales on the property.  When this restriction was placed over 40 years ago the sellers lived next door and did not want a bar adjacent to their house.  By the time I sold the property, it was the last residential house in the neighborhood and was surrounded by commercial properties, including bars & restaurants.  The buyer was developing the site for a hotel and having a restaurant with alcohol sales was an important part of their use.  Because we could not find the heirs of the original sellers that conveyed the deed with the restriction, we could not get it changed.  Luckily, we were able to find a title company that agreed to insure over the restriction, but only because they had accidentally insured over the neighboring property that had the same restriction. If we had not been able to do that, we would have had to file a “quiet title” lawsuit which would have involved contacting the owner of every property in the originally platted subdivision.

Easements are also a red flag to watch out for.  I sold a property that had a high-speed fiber internet line running through the middle of the 10-acre parcel.  The developer planned to build homes on the whole property but ended up only being able to build on the front half of the property. The reason for this was because the cost of putting a road over the fiber cable, while still providing access for the easement, became too expensive.  The seller had to reduce the price because the value of the property was decreased by the inability to affordably build on the back half.

Requirements

The title policy also has a list of requirements that need to be satisfied in order to close on a property.  The requirements include items such as having the officers of a corporation show they have the right to sign on behalf of the company, as well as paying off previous financial obligations so that mortgages, assignments of rent, and other liens are released from the property before closing.

I am currently working on a closing where a wall was built on a property line and slightly encroached on the neighbor’s property.  The building had been built over 100 years ago and in the 1980s the neighbor conveyed one foot of his property to the subject property owner so that there would not be an encroachment.  Unfortunately, when the current owner bought the property in the 1990s the title company forgot to convey this extra one foot of land, leaving its ownership to the owner from the 1980s.  Luckily, we were able to find the previous owner and he agreed to sign a quitclaim deed transferring the ownership of the missing one foot to the current owner.

In another example, the owner of a piece of property had purchased the property on a land contract.  Before the owner paid off the land contract, the previous owner died.  Not knowing better, the children of the deceased changed the deed from their deceased parent’s name to their names.  When the land contract was paid off, the new owner received a deed that showed conveyance from the deceased parents he bought the property from.  This was not a problem until the owner tried to sell the property over 30 years later.  The title company told him that his deed was not from the rightful owner of the property since the property was owned by the children at the time, he received his deed.  It took almost a year to locate all of the heirs and work out an agreement where the heirs would sign off on the correct conveyance of the title.

Not surprisingly, adding time to a closing to settle title work disputes can easily terminate a real estate transaction. Likewise, a deed restriction can materially change the value of a property if it restricts the use against a desirable use for that property.  I have sold many bank buildings for 20-30% of what it cost to build the building, due to the fact that the building was no longer allowed to be used as a bank.  If you are buying a property, make sure you fully understand your title work and ask your real estate agent and attorney to review the documents and answer all your questions.  You may save yourself a lot of money and headache in the process.
Dan Stiebel, CCIM