Buying commercial real estate often involves great sums of money, from a buyer’s own funds or from one or more lenders. Title insurance can offer some protection for the buyer and lender’s investment, if there is ever a claim placed on the buyer’s ownership of the property.
What Is a Title Report?
In order to understand the purpose of title insurance, people must know what a title report might contain. The title to a property indicates many legal details about the property and grants the owner certain rights to the property. Sometimes, the owner of a property incurs certain claims on the title. These claims might come in the form of unpaid property taxes, or zoning violations.
These issues could make it difficult for a buyer to sell the property later, or even force them to pay more to fix any problems caused by previous owners. As part of a purchase, a buyer would pay for a title report to confirm that there are no other claims on the property. The company creating the title report carefully analyzes the terms of the property and confirms that nothing seems out of the order, and that no third party has an existing claim on the title.
How Does Title Insurance Coverage Work?
There is always the chance that a title report might not be comprehensive. There could be hidden defects related to the property, or undiscovered claims to the property. Title insurance serves to protect the owner’s interest, in the event that something goes wrong with the title after they close on the purchase. For example, a neighboring property owner might claim that a building on one piece of land encroaches into their own property. That owner could make a claim on the neighboring property’s title. Title insurance may provide coverage for legal fees to fight the claim, and compensation for the land’s owner if the third party claim proves successful.
Why Do Some Lenders Think Title Insurance Is Important?
Any company forming a title report as part of a commercial real estate purchase will do their best to identify any possible claims on the title. However, it is possible that some information may come out despite that search. Lenders often use title insurance as a protection against issues that may surface sometime after the title report is completed and filed. Sometimes, people or companies may have cause to place a lien on the property for unpaid services, but they have not done it by the time the title report was generated. Claims could be made years after the fact.
What Is the Difference Between Owner’s Title Insurance and Lender’s Title Insurance?
Title insurance coverage could be held by either the property owner or the mortgage lenders. Often, both parties will have a policy. In each case, the title insurance provides coverage to the holder (either the owner or the lender) in the event of a claim on the title. Buyers should keep in mind that a policy designed to protect the lender may not provide any coverage for the buyer’s legal fees or compensation. Owners may need to purchase their own policies to support their individual investment. Usually, the buyer pays for these title insurance policies, although a portion of the cost may be rolled into the mortgage. If there are multiple lenders, each lender may require its own title insurance for its interest in the property.
How Does Title Insurance Fit Into the Buying Process?
The role of the title insurance agent in a commercial real estate transaction is to confirm that all parties are working toward a common goal without conflict. This agent works with the title company performing the title search and creating the initial title report, to ensure that all steps happen according to plans laid out in the purchase contract. The title insurance agent might also serve as an escrow agent, to hold earnest money and other funds during the buying process.
Title insurance could cost a commercial real estate buyer thousands of dollars, and it plays a role that may affect both the buyer and the mortgage lender. A title insurance policy may protect an owner from paying expensive legal fees over a claim on the title, making it a common part of a commercial real estate transaction.