First American Title Insurance Company recently won a case which highlights an important limitation of title reports and title insurance policies. First, a title report is nothing more than an offer to sell a title policy. You cannot sue a title company over something omitted from a title report. Second, a title policy only insures owned interests in the subject property. There are a variety of notices which get recorded which are not interests in the property. Omitting such notices from a title report, even from a title insurance policy is not covered.
In Stockton Mortgage v. Tope, the county health department had recorded a Notice of Abatement regarding 26 safety violations. The lender insured by the policy had made release of the Notice of Abatement a condition to closing. The escrow company, which was not First American, closed anyway. First American successfully defended, at trial and on appeal, because the Notice of Abatement did not evidence an insured-against interest in the property. It was a notice of a prospective future lien which would encumber the property, if the violations were not cured and other steps were taken to perfect a lien on the property. It did not create such a lien,…yet.
You already know that title insurance doesn’t cover anything that is not shown in the official real estate records of the county recorder. It does not cover anything that could be discovered by visually inspecting the property. It does not cover anything the insured actually knows about. It does not cover anything in the records of the zoning department, the building department, or any other government office. It does not cover the Secretary of State’s records regarding the legal existence or status of the grantor which signs the deed or UCC financing statements. In addition, Stockton Mortgage is a reminder that there are even recorded documents that the title insurance policy does not cover.
A notice of action or lis pendens similarly does not create an interest in real property. It notifies the world that the plaintiff is claiming an interest in the property, but the notice does not create or establish such an interest. That won’t happen until a judgment is entered and a certified copy is recorded. The notice of action is intended to put prospective buyers and lenders on notice of the plaintiff’s claim, so that any such buyer or lender cannot be a bona fide purchaser or lender, because of the notice provided by the recorded notice. However, the Recording Act creates constructive notice only of recorded “instruments.” A recorded document is an instrument and can create such constructive notice, only if it actually conveys some interest in the property. A mere notice does not count.
Other commonly recorded documents which do not actually convey an interest in real property include notices of default and notices of sale under deeds of trust, and an unskillfully drafted memorandum of lease or memorandum of option which does not actually convey an interest in the property. A prospective buyer, lender or tenant has a serious need to know if there is already a lease or a deed of trust is already in the foreclosure process and the owner may soon lose the property.
The most common solution is to use a high net worth title insurance company as both the title insurance company and the escrow holder. That’s the custom in most of Northern California, but not in Southern California. You can cover in your escrow instructions preconditions to closing escrow that are not covered by the title insurance policy. In Stockton Mortgage, the plaintiff still had a claim against the escrow company, to the extent that it had assets or insurance to cover it. First American was not the escrow holder in that case. So its assets were not available to satisfy the claim.
For some exceptions, you might be able to negotiate a manuscript endorsement to the title insurance policy covering your issue. The title companies have a standard endorsement and premium for a zoning endorsement. You can ask for copies of all recorded documents after the seller’s seller acquired the property, in addition to those on the current prelim. You should thoroughly inspect all of the seller’s records. If you discover a recorded issue not disclosed in the prelim, you can negotiate with the title insurer to deal with it.
Title insurance is still a bargain, given the modest amount of the title insurance premium and that the policy remains in effect as long as the insured owns the property.
That was another issue in Stockton Mortgage. Stockton Mortgage had resold the loan and assigned the promissory note and deed of trust to investors. Without arranging with the title insurance company for an endorsement extending the title insurance policy to those investors, the terms of the title insurance policy provided that it terminated automatically when the insured ceased being the owner of the loan and the lien of the deed of trust.
Title insurance policies are not automatically assignable. One owner’s or lender’s title insurance policy does not automatically cover the interest of the person to whom that owner or lender transferred its interest. It can be, but it needs to be specifically negotiated.
Real estate transactions don’t have to be complicated, but they can have hidden problems. Lawyers are trained to anticipate and cover every possible issue. This can be exasperating, when turning over every stone to look for possible problems and crossing-every-t-and-dotting-every-i takes time and costs money. Real estate deals are too expensive and real estate investments involve enough risk, that minimizing the risk by taking advantage of the knowledge and experience of a real estate attorney who has done many such transactions is worth the time and expense.
If I you would like me to help you with your next deal, please call me.