For most people, buying a home is the single largest investment in their lifetime. That’s why title insurance should be part of that transaction. Title insurance specifies that an owner has “good and marketable” title to the property, i.e., that the owner owns the property free of any adverse claims by others—except those to which the owner has consented.
Most commonly, an owner might consent to utility easements for electric, phone and others that do not significantly interfere with the owner’s use of the property. An owner presumably would not consent to: (a) a utility easement that cuts across the property and does significantly interfere with an owner’s use of or building plans for the property; (b) a neighbor’s building that encroaches on the property; (c) restrictions set forth in the chain of title, and apart from the applicable zoning ordinance, that specify limitations on the home to which the owner does not consent (e.g. setback requirements, building height limitations and building lot coverage maximums); and (d) prior liens on title to the property, such as a previous mortgage or tax lien.
If a buyer is purchasing property with mortgage financing, his mortgage lender will require that the buyer pay for a title insurance policy. This insures that the title to the property is “good and marketable” and free of title defects. In that case, the buyer, for a nominal additional fee, has the option to purchase owner’s title insurance. If the buyer is not using mortgage financing, he or she has the option to purchase title insurance for the full premium charged (which is set by statute).
The title insurance commitment (which is forwarded by the title insurance company prior to closing) will contain a list of any adverse claims against the property. At the closing, the title insurance clerk will “mark up” the commitment so as to indicate those adverse claims that will be eliminated or insured against and those adverse claims that will not be eliminated or insured against. For example, the commitment would list the seller’s outstanding mortgage on the property as an adverse claim (known as an “exception”); but, because the title insurance company will handle payoff of that mortgage as part of the closing, that exception will be marked removed and will be insured against as part of the title insurance policy that will be issued after the closing to the buyer (and to the mortgage lender, if there is one).
Other exceptions, such as the typical utility easements mentioned above, are not marked removed but rather are marked to remain. They are not insured against by the title insurance policy and will be listed in the policy as “exceptions.” The “marked up” commitment is the basis for the title insurance policy that is issued to the buyer (and to his mortgage lender, if any) after the closing, generally within 30 days. The “marked up” commitment, in effect, is a contract between the title insurance company and the buyer to issue a policy that conforms to the “marked up” commitment.
In the vast majority of real estate closings, adverse claims do not arise afterwards. It is the significant minority of real estate closings, however, that title insurance is intended to cover so as to relieve the buyer of both the substantial expense of attorney’s fees (the title insurer providing an attorney its cost) and the substantial expense and frustration of plans that can result from an adverse claim against the title being upheld. Unlike most insurance for which premiums have to be regularly paid, the premium for title insurance is a one-time payment at closing and the insurance remains in effect for so long as the buyer or his heirs own the property.
The Role of a Lawyer in the Title Process
Notwithstanding the importance of title insurance, most buyers in South Jersey, whether they are getting mortgage financing or not, and to minimize their expenses, do not have a lawyer represent them and, as part of that representation, review the commitment and its “marking up” at the closing. Instead, most buyers rely upon their realtor to take care of the contract and issues that arise between contract and closing as well as issues for the closing and also rely on the title agency clerk at the closing. However, realtors are not trained to review and analyze title commitments and their “marking up” and title agency clerks do not represent the buyer. In fact, the required notice from realtors to buyers and sellers advises them on the limitations of the realtor’s expertise and advises them to consider hiring an attorney. The title commitment itself advises that the title company does not represent the buyer and, likewise, suggests the buyer consider retaining an attorney.
Only attorneys are trained, have the experience and responsibility to review, analyze and advise the buyer concerning the title commitment and the “marking up” of the title commitment. Given that a buyer’s purchase of a home is likely to be the single, largest investment he or she makes during their lifetime, buyers should purchase title insurance and should retain an attorney for the transaction if, for no other reason, to review the title commitment and its “marking up” at the closing.
The premium and legal fees involved are a small percentage of the cost of a home and, in the unfortunate event that an adverse claim against the buyer’s title later arises, the title insurance policy will save the buyer many thousands of dollars.
Lewis J. Schweller is an experienced real estate attorney at Cooper Levenson, based in the firm’s Atlantic City office.