As a purchaser of real estate, commercial or residential, why should you be concerned about title? In fact, what is “good title” and why is it important?
The importance of good title
“Title” is the legal ownership and right to use a piece of property. It is established through searching the public deed records for the history of ownership and for items filed against the property, and also by physically examining the property for current occupancy and use. “Good” or “marketable” title is one that a reasonable man (or woman), advised of the facts and legal significance, would willingly accept or purchase. Title need not be absolutely free from every technical defect and encumbrance in order to be good.
Why is good title important? An owner of property must have good title in order to insure it, to pledge it as collateral, to develop it, to grant leasehold or easement rights to third parties and ultimately, to sell it.
Receiving good title
Evidence of title is found in the deed delivered from the seller. There are several ways to ensure you are receiving good title:
- Purchasers should require a warranty in the deed from the seller indicating that the seller owns the property and has the right to convey it;
- Purchasers may seek a legal opinion from counsel verifying the current status of title to property; and
- Purchasers can obtain a title insurance policy that indemnifies the purchaser against risks of flawed title.
Title policies guarantee against forgeries in the chain of title, incapacity of parties, unrecorded interests that may affect the property, and virtually any other defect of which the owner has no actual knowledge or constructive notice. A title company is not required to defend any claims on items excluded from coverage or excepted to in the title policy. Therefore, it’s important to understand the contents of a commitment for title insurance since it forms the basis for the title policy to be provided at closing.
Encumbrances and exceptions to title
Exceptions to the proposed title policy are found in Schedule B of the title commitment. Texas has a list of standard exceptions that can’t be modified or removed and will be “excepted” from coverage in the policy. Schedule B will also include any encumbrances found against the title. Some examples of encumbrances are:
- use restrictions,
- recorded leases,
- previously reserved mineral rights, or
- items appearing on a survey of the property.
Each tract of land is unique, so each title commitment will contain a list of encumbrances specific to the property being purchased.
A thorough title review requires review and reading of the actual encumbrance documents, analysis and understanding their impact against the property, and a determination of whether they are acceptable to the purchaser or not. Title to a property may not be defective, but can be encumbered by restrictions that limit use or development. Most real estate purchase agreements allow a purchaser to terminate the contract if they determine that the property is burdened by unacceptable encumbrances that the seller is either unwilling or unable to cure or remove. Sometimes listed documents don’t affect the subject property, are expired, or no longer necessary. The purchaser should object to these items and request that they be removed from the title commitment. Failure to object, however, means that all listed items will be exceptions to the purchaser’s title insurance coverage.
As a general rule, the fewer the exceptions, the better. As noted above, good title does not mean it’s completely clear of encumbrances, but title that a reasonable purchaser is willing to pay for.
An experienced real estate attorney can provide valuable services to purchasers by conducting the title review, understanding the significance of encumbrances, advising the purchaser concerning the encumbrances and making valid objections when necessary.
Paula Beasley practices in the areas of commercial real estate transactions; specifically, purchases and sales, leasing and lease enforcement, secured financing transactions, and affordable housing. Ms. Beasley is currently President of CREW Dallas and is an adjunct professor at SMU Cox School of Business. Her law degree is from the SMU Dedman School of Law.