Title and Survey

Commercial Real Estate Toolkit

When purchasing commercial real estate, the purchaser should obtain title insurance, whenever possible. The insurance policy provides insurance coverage in the event that title to the property is not vested in the purchaser after the closing and provides coverage in the event that there is a lien or encumbrance on title that was not disclosed to the purchaser prior to closing in the title commitment, with a coverage limit usually equal to the purchase price. While it can vary depending on the location of the property, in Illinois, the seller is customarily responsible for paying for the title search and examination, the title insurance premium and an endorsement to the policy that provides “extended coverage” over the pre-printed exceptions contained in all title insurance policies.

In Illinois, purchase and sale agreements typically require the seller to obtain and pay for the survey. However, recent trends have begun to shift the obligation to obtain and pay for a new survey onto the purchaser, particularly in transactions with institutional parties involving high dollar value properties or when the seller has a recent existing survey that the title company will accept. Whenever the purchaser intends to develop or redevelop the property, I recommend that the purchaser obtain the new survey so that all detail necessary for construction, such as topography of the land, can be included.

In order to obtain extended coverage in Illinois, the title company will require a recent ALTA/NSPS Land Title Survey of the property and the seller must sign an ALTA Statement, GAP Undertaking, No Broker/No Property Manager affidavit and depending on the circumstances, other documents may be required. The purchaser is required to sign the ALTA Statement and, if the purchaser has a mortgage, a GAP Undertaking as well. The ALTA Statement requires the parties to disclose the existence of any known but unrecorded title encumbrances, such as boundary line disputes, service contracts, leases and construction work that has not been paid for in full. The GAP Undertaking is an indemnity protecting the title company in the event that the purchaser or the seller records an undisclosed instrument in the land records (such as a mortgage) that encumbers title after the date of the last title search but before the deed is recorded. The No Broker/No Property Manager affidavit confirms that there are no commercial real estate brokers or property managers entitled to compensation, as they have statutory lien rights in Illinois. If there are brokers or property managers involved with the property or the transaction, the seller must provide lien waivers to the title company at the time of closing.

The title company will list as exceptions to the insurance coverage in the policy all documents recorded on title, all of the title defects shown on the survey, and all of the title encumbrances disclosed in the documents delivered to the title company at closing that are not released or fully paid off at closing. The purchase and sale agreement should give the purchaser a reasonable period of time after receiving the title commitment and survey to object to any unacceptable title exceptions. A prudent purchaser should review the title commitment, the survey and all documents recorded on title to confirm that there are no conditions of title that are unacceptable, such as liens, judgments, unpaid taxes, encroachments, easements, restrictions or other agreements that will adversely affect the value or future use of the property.

A purchaser who plans to perform significant construction on the property should request an increase to the policy coverage limit to cover both the purchase price and the anticipated construction costs ensuring that the future construction on the land is adequately covered by the title insurance. For example, if the purchaser obtained a title insurance policy with a limit of $1,000,000 in connection with purchasing a parcel of land for $1,000,000, and the purchaser invests $9,000,000 to construct a building on the land, if there is a catastrophic title defect resulting in a total loss, the purchaser could lose 90% of the total cash invested and only receive up to $1,000,000 in connection with the insurance claim. The purchaser will be responsible for the incremental increase in the premium if the Seller is responsible for the cost of the owner’s policy.

A purchaser should also consider buying endorsements to the title insurance policy in addition to extended coverage. The most popular endorsements include: Contiguity, which insures that all of the parcels comprising the property being purchased are contiguous; Zoning, which insures that the property is located in a specific zoning district and that it complies with current set back, bulk, density and off-street parking requirements of that district; Access and Entry, which insures that the property has vehicular and pedestrian access to a public road; Utility Access, which insures that the property has direct access to utility infrastructure; Same as Survey, which insures that the property being acquired is the same as that depicted on a specific survey; Subdivision, which insures that the property has been subdivided in accordance with applicable laws; and Deletion of Arbitration, which modifies the insurance policy to delete the mandatory arbitration clause allowing the policyholder to litigate any claims against the title company in court.

Title and survey matters can be complicated which is why it is important to have an experienced commercial real estate attorney draft your purchase and sale agreement, review your title commitment and survey and draft your title objections.

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