Most liens, encumbrances or defects of title will be revealed by a title search. But what about matters that aren’t disclosed by a title search?
To protect themselves against possible unrecorded or owner specific matters, a typical title commitment will contain five standard title exceptions. These exceptions fill in the gaps created by legislation, personal knowledge and other unrecorded or super-priority matters that would affect an insured’s coverage.
Most insured parties are not comfortable with the standard exceptions remaining in their policy. As a result, many states protect the insured by requiring the underwriter to take on the risk of removing the standard exceptions, provided certain representations are made by the seller/borrower. These representations will typically be contained in an Owner’s Affidavit. If done correctly, an executed Owner’s Affidavit and Survey will usually serve to remove these pesky standard title exceptions.
The five standard title exceptions are detailed as follows:
“Taxes and assessments for the year 2013 and all subsequent years, which are not yet due and payable.”
The Standard Tax Exception takes exception for real estate taxes and assessments which may become due after the issuance of the title insurance policy. While a standard title policy will not insure forward in time from the effective date, future taxes and assessments could take a super-priority over an insured lien of mortgage or fee-simple estate. Because of these possible future implications over the policy’s insured interest, all underwriters will require the Standard Tax Exception to remain in all policies.
“Defects, liens, encumbrances, adverse claims, or other matters, if any, created, first appearing in the public records, or attaching subsequent to the effective date hereof but prior to the date the proposed insured acquires for value of record the estate or interest or mortgage thereon covered by this Commitment.”
The Standard Gap Exception to exception to any matters recorded in between the commitment’s Effective Date and the date of recording the insured instruments. For example, a closing occurs based upon a commitment with an effective date of May 1, 2013. The mortgage to be insured is then recorded May 5, 2013. A post closing update is performed and reveals a Claim of Lien recorded against the borrower on May 3, 2013. If the Standard Gap Exception was not removed at closing, the insured lender would have a lien of Mortgage subject to the Claim of Lien (the lender may be unable to foreclose out the Claim of Lien, as it predates the recorded Mortgage).
The good news for insured parties is that the State of Florida requires that the Standard Gap Exception be removed at closing. Under 627.7841, F.S., the title agent is required to delete this standard exception “upon disbursement of the closing funds”. From a practical standpoint, title agents will cross through this standard exception on their marked-up commitment when they’ve received all proceeds and are in a position to close. Most underwriters understand this risk (and the fact that it’s being put on them by the state) and therefore require the title agent to keep the gap period as short as possible; typically requiring a pre-closing update be performed within 3 days of closing.
Parties in Possession Exception
“Rights or claims of parties in possession not shown by the public records.”
Another concern for an underwriter is the risk a third party has rights in the insured lands via an unrecorded lease or other agreement. For example, Bill is contracted to sell a property to Jane. After purchasing the property, Jane learns that Bill rented one of the spaces to a tenant for a term of 8 months (not needing to be evidenced by a recorded notice). Neither Jane nor the Underwriter had notice of the tenant’s rights. Generally, if the Standard Parties in Possession Exception was not removed at closing, Jane’s Owner’s Policy would not cover her against a loss arising from the rights of the tenants – and would therefore have to wait 8 months for them to move out.
Some states shift the liability of undisclosed parties in possession from the buyer to the underwriter. Under Florida Statute 627.7842(1)(b), “If at closing the seller signs an affidavit swearing that there is no person in possession of the property or with a claim of possession to the property except the seller, the title policy may not exclude from coverage rights or claims of parties in possession not shown by the public records.”
A properly executed Owner’s Affidavit stating that there are no parties in possession of the property (or listing specific parties, whose rights would be taken exception to and therefore acknowledged by the insured) will serve for this standard exception to be removed at closing.
Construction Lien Exception
“Any lien, or right to a lien, for services, labor, or material heretofore or hereafter furnished, imposed by law and not shown by the public records”
Most states have legislation that goes above and beyond to protect contractors, sub-contractors and other vendors who perform construction/improvements on real property. This legislation will typically provide the provider with a lien priority based upon the date they perform the work – not necessarily based upon a recorded notice of commencement. Some states go a step further to protect the property owner as well. Under Florida Statute 627.7842 (1)(c), the state requires that an underwriter remove this standard exception if the seller: “signs an affidavit swearing that no improvements have been made to the property within the past 90 days for which payment has not been made in full, the title policy may not except from coverage any lien or right to a lien for services, labor, or material furnished which is imposed by law and not shown by the public record.”
Due to this legislation, most underwriters will require that a properly executed Owner’s Affidavit contain a clause stating that no work has been performed, or is planned, on the property within 90 days of closing in order to remove this standard exception at closing.
“Easements or claims of easements not shown by the public records.”
“Encroachments, overlaps, boundary line disputes, or other matters which would be disclosed by an accurate survey or inspection of the premises.”
Sometimes combined into one survey exception, this matter covers an underwriter against losses/claims that would be revealed by a survey of the property. For example, Bill sells a newly built house to Jane. A survey was not obtained and therefore the Standard Survey Exception remained in Jane’s Owner’s Policy. A year later, a neighbor informs Jane that her newly built house encroaches five feet into the neighbor’s yard. Since a survey was not obtained and the standard survey exception was not removed, Jane would be left dealing with neighbor to resolve the issue.
Like the other standard exceptions, some states protect the insured against such claims by requiring that the underwriter remove the standard survey exception when provided with an adequate survey. Florida Statute 627.7842(1)(a) states that “if a survey meeting the minimum technical standards for surveying required by the Department of Business and Professional Regulation and certified to the title insurer by a registered Florida surveyor has been completed on the property within 90 days before the date of closing, the title policy may only except from coverage the encroachments, overlays, boundary line disputes, and other matters which are actually shown on the survey.”
The minimum technical standards are detailed under Chapter 61G17-6.003 of the Florida Administrative Code. An “ALTA Survey” is typically more detailed and may also be relied upon. The title agent should review the survey to identify any specific encroachments, overlaps, boundary line disputes, or other matters which should be shown as a specific title exception. A specific survey exception may read:
“Matters as shown on the survey prepared by ABC Survey Company, Inc., being Job Number: 546739, dated April 2, 2013, specifically but not limited to:
A) Encroachment of fence along the Northerly portion of the property.B) Power pole without the benefit of an easement along the Southwest corner of the property.
C) Driveway pavers located within the county right of way along the Eastern portion of the property.”