When buying property, the first line of defense against title defects is purchasing a title insurance policy. There are two types of title insurance policies, an owner’s policy, and a lender’s policy. As the buyer of the property, it is wise to acquire an owner’s policy to protect you, as the owner, against loss resulting from title defects or liens that existed at the time that the policy was issued.
Am I Protected Under My Lender’s Policy?
If you take out a loan to finance the purchase, the lender will have its own policy which indemnifies the lender against any loss resulting from the debt not being repaid as the result of a title defect that existed when the policy was issued. A lender’s title insurance policy does NOT protect the buyer if a title issue arises. The buyer remains at risk of loss and costs associated with the title issue unless they are insured under an owner’s title insurance policy.
Does My Title Insurance Cover Oil and Gas Rights?
When purchasing title insurance, the title agent will order a title report which for land is typically a 60-year search, although a longer search may be requested. It’s important to note that a land title search is different than a mineral title search. If as a buyer you want to know whether you are acquiring title to the subsurface minerals such as oil, gas, and other minerals, a separate mineral search would be required. The land title report should list all potential liens and encumbrances against the title.
Common Title Defects Include:
- Liens: tax liens, mortgage liens, mechanics liens, judgment liens
- Bankruptcies of a seller or seller’s spouse
- Undiscovered encumbrances such as restrictive covenants in declarations applicable to a property in a planned community or boundary encroachment on neighboring property
- Errors in public record
- Heirs of a seller disputing title based on a missing will
- Fraud in execution of a deed
- Lack of capacity to sign deed based on incompetency or defective power of attorney
Initiating a Prompt Title Search
When buying property, the buyer should negotiate to make the closing contingent upon their inspection and satisfaction with the title. The buyer should order a title search promptly after entering an agreement of sale. Prompt action with regard to the title search will bring any defect to light early and may eliminate additional and unnecessary inspection costs if the seller cannot give a clear and marketable title.
Once the title search is complete, the buyer should carefully review the title report and title policy, including all exceptions and exclusions. Often, a buyer may not read the report and policy or may read them but not appreciate the significance of certain content — to their own detriment.
Common Title Policy Exclusions
A title policy may exclude survey coverage which means there will be no coverage for loss caused by any encroachment, encumbrance, violation, variation or adverse circumstance affecting the title that would be disclosed by an accurate and complete land survey of the land. The term “encroachment” includes encroachments of existing improvements located on the land onto adjoining land, and encroachments onto the land of existing improvements located on adjoining land.
This makes it all the more important for a buyer to obtain a licensed survey, or risk the possibility of learning after closing that boundary lines are not as they appeared, and their garage or driveway is built on adjoining property. Without a survey and without survey coverage, a buyer facing this news will not have an insured loss and be forced to incur the cost of curing this defect in their title before they can sell the property to anyone else.
Another example of exclusion to title insurance is for loss caused by an unrecorded notice of violation of law. There should be coverage if the loss is caused by recorded notices of violation or enforcement of various “governmental laws or regulations.” However, loss that results from the mere existence of these laws or regulations and the effect of their violation is excluded. For example, if a buyer purchases a house that was being rented as multiple apartments, planning to continue with that use, only to learn after closing that such use is prohibited because of existing zoning classification of the property, unless there was a recorded notice of violation against the seller, this would be an excluded loss on the title policy. In such a case, the buyer would be forced to cure the title defect on his own.
Resolving a Title Defect
When a buyer, who has title insurance, discovers a title defect, they should make the insurer aware immediately. When a claim is made pursuant to an owner’s policy, the title insurer has the right under the policy to:
(1) pay the third-party claimant to remedy the defect;
(2) commence litigation to defend against the claim called “Defense and Prosecution of Actions”; or
(3) pay the insured damages equal to the amount of damage caused by the encumbrance.
Some title disputes can be resolved by simpler tasks such as obtaining and recording a quitclaim deed or a release of lien/judgment, but others may require protracted litigation. It is always best to seek the advice of an experienced real estate attorney who can assist you in avoiding pitfalls involving title issues that are discoverable before purchasing or assist in curing title defects discovered after closing.
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Pittsburgh Real Estate Attorneys
Krista Kochosky is Chair of the Real Estate Group at The Lynch Law Group. For more information about title insurance or curing title defects, please contact her at firstname.lastname@example.org or (724) 776-8000. You may also submit your information to Krista through our Contact Form and someone from our office will reach out to you.