Protect Your Industrial Real Estate Investment with Title Insurance

Sep 26, 2013 by

Title insurance can provide coverage for some known defects†

As a commercial real estate transaction progresses, issues may be uncovered that affect the property or the title to the land. Once revealed, these issues, which are called known defects, can often lead to additional legal and administrative costs and a delay in closing if they need to be corrected. Even worse, they could result in your deal falling through entirely.

As mentioned in my previous post about commercial title insurance, one of the advantages of this type of insurance is the ability of the insurer to underwrite and provide coverage over many known defects to the satisfaction of eager purchasers, prudent lawyers and notaries and risk-averse lenders.

I asked Sandi Sheppard at FCT for some examples — here are two cases where commercial title insurance allowed a deal to close on time.

Required permit was not obtained for new construction on a property

The purchaser of a newly constructed building was attempting to close the transaction in three days time when the lender’s lawyer discovered that a required fill permit had not been obtained prior to construction. The municipality confirmed that the permit was available but wouldn’t be issued for another two-to-four weeks. The lender refused to release funds until the permit was issued, however the purchaser had spent considerable time and money planning to move its operations into the new building over the weekend to ensure it was operational as of Monday morning.

Knowing that the fill permit had been applied for by the purchaser’s lawyer and would be granted, FCT assumed the lender’s risk of closing without it. The lender proceeded to fund the deal on the scheduled closing date, allowing things to move ahead exactly as planned for the purchaser.

Existing real property report revealed an encroaching curb

A previously issued real property report revealed a portion of the structure encroached into the side yard setback. Since the purchaser didn’t want to risk incurring any expenses to relocate the structure, or a potential diminution in the property value by removing the portion of the structure encroaching on the setback, they were willing to walk away from the deal without the proper protection in place. The purchaser’s lawyer contacted FCT to inquire about whether coverage was available in the event the purchaser was forced to remedy the known defect at any point throughout their period of ownership. Because the encroachment had existed for a number of years without issue, FCT agreed to insure over the known defect for the current purchaser and provide the same coverage to subsequent purchasers so that the encroachment would not impede the sale of the property in future.

Knowing that they would be covered by FCT in the event they were forced to remove the structure during their period of ownership, the purchaser agreed to go forward with the deal and close on the scheduled date.

What you need to know about known defects

Sandi emphasized that contacting a title insurer as soon as a defect is uncovered could save valuable time and money.  In many instances, the insurer may be prepared to assume the risk on behalf of the lender or purchaser so that both parties are covered in the event of a loss related to that particular issue.  It’s important to know that known defects must be disclosed to the title insurer so that the insurer has the opportunity to underwrite the problem.  With title insurance coverage in place, a known defect does not have to mean the end of a deal.

 †All content herein has been provided by FCT with their permission to reproduce and publish it in this blog. FCT is the brand name for a group of companies that includes Canada’s leading title insurer. Commercial title insurance is provided by First American Title Insurance Company (Canada Branch). The content provides general information only. For specific coverage and exclusions refer to the applicable policy – copies can be obtained from the insurer.  This content has been provided for your own internal business purposes and should not be reproduced or published outside of your organization without the consent of FCT.