In commercial real estate, one of the most commonly referenced but least understood concepts is title insurance. While it may not command the same attention as financing, site selection, or negotiations, title insurance can play an important role in protecting a buyer's or lender's interest in a property.
Unlike many insurance policies that primarily address future events, title insurance is generally designed to protect against certain covered title issues that existed before the policy was issued.
For companies acquiring commercial property, understanding what title insurance covers, and what it doesn't, is an important part of the due diligence process.
Why Does Title Insurance Matter When Buying Commercial Real Estate?
Title refers to legal ownership of a property and the rights associated with that ownership. Before a commercial property changes hands, the public record is typically reviewed for issues that could affect the buyer's interest in the property.
Potential issues include:
- Existing liens or other encumbrances
- Errors or defects in public records
- Easements, restrictions, or boundary issues
- Fraud, forgery, or undisclosed ownership claims
Depending on the circumstances and policy terms, title issues can affect a buyer's ownership rights, financing, future use of the property, or ability to sell it later.
What Is a Commercial Real Estate Title Search?
Before a title insurance policy is issued, a title search is typically conducted to review public records associated with the property. This may include deeds, mortgages, liens, tax records, easements, court filings, and other recorded documents that could affect title.
The findings help identify potential title issues and inform the terms, exceptions, and requirements associated with the title insurance policy.
Some title issues may need to be addressed before closing, while others may appear as exceptions or otherwise affect the terms of the policy.
What Is the Difference Between an Owner's Policy and a Lender's Policy?
Commercial real estate transactions often involve two types of policies:
Owner's Title Insurance
An owner's title insurance policy generally protects the property owner's insured interest against certain covered title defects, subject to the terms, conditions, exclusions, and exceptions of the policy.
Lender's Title Insurance
A lender's title insurance policy generally protects the lender's insured interest in the property and may be required as a condition of commercial real estate financing.
A lender's policy protects the lender's interest, not the buyer's ownership interest. A buyer should not assume that the lender's title insurance policy provides the same protection as an owner's policy.
What Does Commercial Real Estate Title Insurance Cover?
Coverage depends on the specific policy, but title insurance may protect against certain covered title defects that existed before the policy was issued. Depending on the policy and circumstances, these could involve issues such as:
- Certain undisclosed liens or ownership claims
- Errors in recorded documents
- Certain instances of fraud or forgery affecting title
- Defects in the chain of title
- Other covered matters affecting the insured's interest in the property
The policy itself determines what is covered, excluded, or excepted, making the specific policy language important.
What Doesn't Title Insurance Cover?
Title insurance does not eliminate every risk associated with owning commercial property. Policies contain exclusions and exceptions, and certain matters may fall outside the scope of coverage.
Depending on the policy and transaction, issues involving zoning, environmental conditions, property condition, future events, or specifically excepted matters may require separate due diligence or other protections.
Title insurance is one component of commercial real estate due diligence, not a substitute for it.
What Should Business Leaders Review Before Closing?
Title-related documents can contain information that affects more than ownership. Before closing on a commercial property, business leaders and their legal counsel may need to understand:
- The property's ownership record
- Existing liens and encumbrances
- Easements and access rights
- Recorded restrictions affecting use
- Exceptions identified in the title commitment or policy
- Survey-related matters
- Requirements that must be satisfied before the policy is issued
These issues can intersect with how a company intends to use the property, making title review part of the broader acquisition and due diligence process.
Why Is Title Review Part of Commercial Real Estate Due Diligence?
Title insurance can provide important protection in a commercial property acquisition, but the policy is only one part of the process.
Understanding the title search, exceptions, easements, restrictions, and other recorded matters can help business leaders identify issues that may affect ownership or the company's intended use of the property.
The goal isn't simply to obtain a title insurance policy. It's to understand what you're acquiring, what rights come with it, and what issues deserve attention before the transaction closes.
Frequently Asked Questions About Commercial Real Estate Title Insurance
What Is Title Insurance in Commercial Real Estate?
Title insurance is a type of insurance that generally protects an insured owner or lender against certain covered title defects associated with a property's ownership. Coverage depends on the specific terms, exclusions, and exceptions of the policy.
Is Title Insurance Required for Commercial Real Estate?
A lender may require a lender's title insurance policy as a condition of financing. Whether an owner's policy is required or appropriate depends on the transaction and should be evaluated with the appropriate legal and title professionals.
What Is the Difference Between Owner's and Lender's Title Insurance?
An owner's policy generally protects the buyer's insured ownership interest, while a lender's policy protects the lender's insured interest in the property. A lender's policy does not provide the same protection to the property owner.
What Does a Commercial Real Estate Title Search Look For?
A title search reviews public records for matters that may affect ownership or title, such as liens, easements, recorded restrictions, ownership claims, and other recorded documents associated with the property.
Does Title Insurance Replace Commercial Real Estate Due Diligence?
No. Title insurance addresses certain covered title risks, while commercial real estate due diligence may also evaluate zoning, environmental conditions, property condition, financial considerations, surveys, operational requirements, and other issues.
Citations
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Arizona Department of Real Estate – Guidance on Commercial Transactions
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Arizona Revised Statutes – Title 20, Chapter 9 (Insurance Regulation)
Disclaimer
This content was prepared by the Keyser editorial team. It is provided for educational purposes only and should not be construed as legal or financial advice.
