Know Your Title: Managing Real Estate Title Risks in Project Development

In the early stages of a renewable energy project, project developers must take steps to secure rights to the land on which the project will be located. This frequently means obtaining a long-term lease of the property, and sometimes means purchasing the property outright. Whether the project developer leases or purchases the project site, the developer is well-advised to obtain a preliminary title search before executing a letter of intent or offer to purchase the property and to commission a title exam of the property and obtain title insurance before closing on the lease or purchase. Even when no lender is involved in the early stages of project development, taking the appropriate steps to research title and mitigate title risks through the purchase of title insurance can be critical in laying the groundwork for future project development and financing.

Preliminary Title Search

We advise project developers to obtain a preliminary title search at the outset of a project, preferably before signing a letter of intent or offer to lease or purchase property. A preliminary title search involves obtaining a copy of the deed of the property held in the name of the current owner and copies of all instruments that have been recorded against the property since the date of the owner’s deed to the present time. A preliminary title search provides useful information to the developer and to us as developer’s counsel. It enables us to establish the correct name of the record owner of the property to be inserted as the name of the landlord or seller. It also reveals any mortgages or other monetary encumbrances recorded by the owner against the property which will need to be subordinated (in the case of a lease) or paid off (in the case of a purchase) at closing, and helps us to determine whether there are covenants, restrictions or other matters that have been recorded against the property since the owner’s deed which would prohibit or materially interfere with the planned project.

The cost of obtaining a preliminary title search varies depending on how complicated the title is and who conducts the search. Factors that affect the cost include how difficult it is to determine the location of the property and the current record owner, as well as how many matters affecting the title have been recorded against the property since the deed in to the owner. For example, when project developers are locating a project on land that has never been developed or subdivided, determining the location of the property and record owner can be tricky. If project developers are instead leasing a roof of an existing commercial building, locating the property and record owner is typically much easier.

The cost of obtaining a preliminary title search also varies depending on who is performing it. Massachusetts real estate records are available online and accessible through the websites of Massachusetts registries of deeds, so it is possible for a developer to conduct his or her own preliminary title search. However, we recommend that our clients obtain a preliminary title search from a reputable title insurance company, together with a title report on the status of title and copies of all documents mentioned in the report. The cost of obtaining this type of preliminary title search and report is relatively modest.

Title Exam and Title Insurance

Once a letter of intent or offer to purchase has been executed, we advise project developers to obtain title insurance in connection with their lease or purchase of property. Title insurance protects leasehold owners, purchasers and lenders from financial loss in the event that certain covered problems develop regarding their property rights. If a lender is involved in financing a project, obtaining title insurance will almost certainly be a requirement of closing on the financing. Developers sometimes ask us why they need to purchase title insurance if there is no lender involved to require it. The reason is that title issues can be complicated and difficult to resolve and knowing what these issues are in advance of closing makes it easier to address the issues and mitigate risk through the purchase of title insurance. In addition, there can be a host of hidden, off-record title defects that even the most careful title search will not reveal, some of which could derail a later financing or sale. Title insurance can protect against those defects. Finally, in addition to protection from financial loss, title insurance pays the cost of defending against any covered claim up to the dollar limit of the insurance purchased.

A title company engaged to provide title insurance will start by issuing a commitment for a leasehold, owner’s or lender’s policy based on a full examination of title to the property. A full title exam involves researching the title back at least 50 fifty years to a so-called warranty or quitclaim deed which on its face does not suggest a defect in the title. The title commitment issued by a title company following a full title exam will list all matters of record affecting the property and each requirement that must be met before a policy can be issued. The title commitment assists the developer and its counsel in determining whether or not there are any defects in title or matters of record that would interfere with project development as well as providing a road map of all actions that must be taken before a title policy will be issued.

For example, if the property to be leased is farm land in Massachusetts, there may be an agricultural tax lien recorded against the property under Chapter 61A of the Massachusetts General Laws, giving the municipality in which the property is located a right of first refusal to purchase the property if it is to be converted from agricultural to commercial use. In this situation, a title company will typically require that a waiver of the right of first refusal be obtained from the municipality and recorded in the applicable registry of deeds before a policy of title insurance is issued. The title company will also require that so-called roll-back taxes be paid to the municipality and a release of the tax lien obtained from the municipality and recorded in the applicable registry of deeds before the title company will remove the tax lien as an exception from its title insurance policy.

A title company will require the developer to provide an ALTA survey of the property in order to remove the survey exception from the title policy it issues. An ALTA survey is an additional cost to be borne by a developer; however, it is typically required by lenders as a condition to financing and is also helpful to the developer because it will depict the locations of any exceptions to title that can be shown on the survey (such as utility easements) so that the developer can determine whether such recorded matters will interfere with the proposed project. If, for example, the proposed project will require a new access road into the site and the access road will cross over an existing utility easement, it will be important for the developer to know this so that the developer can obtain permission from the utility to install the road over the easement area or consider adjusting the location of the road so that it does not cross the existing easement area. Even when no lender is involved, if the developer is leasing a portion but not all of the landowner’s property, a title company will typically require preparation and recording of a survey plan depicting the leased area in order to issue title insurance in connection with the leased site.

A title commitment is a legally binding obligation on the part of the title insurance company to issue a policy of title insurance to the holder of a leasehold interest in property, a property owner, or a lender that will be recording a mortgage against the property, stating that the party to whom the commitment is being issued holds an interest in the property subject only to the exceptions listed in the commitment. Upon request, a title company will also provide what is called a pro forma title policy to accompany the commitment. The pro forma policy is a sample policy that shows the developer and its lender what the title policy will look like that the title company is committed to issuing under the terms of its commitment, provided that the commitment requirements are met.

There is typically no cost involved in obtaining a title commitment or a pro forma policy, and lenders typically require both in advance of closing. Title insurance is purchased and title policies issued at consummation of the transaction. If the developer is leasing property for a project, a leasehold title insurance policy may be issued after execution of the lease and recording of the related notice of lease with the applicable registry of deeds. In the event of a purchase, the title insurance policy may be issued after the property is deeded to the developer and the deed has been recorded. A lender’s policy will be issued at the time the financing is closed and funded.

The cost of obtaining a title insurance policy varies and is dependent on the dollar amount of the policy, which is tied to the estimated value of the leasehold estate or fee interest in the land if purchased before a project is constructed, or to the value of the project to be constructed if issued to a lender, as well as the title insurance company’s assessment of risk. Title insurance policies entail payment of a single, upfront premium typically quoted at a particular rate per $1,000.00 of value insured. Title insurance companies typically handle any necessary recording of documents in connection with a transaction, and the costs of recording are billed separately and in addition to the cost of obtaining the title insurance itself.

Although researching title and obtaining title insurance before securing site control for a project adds to project development costs, project developers who are willing to incur these costs are taking important steps to protect the value of their project assets and typically find it much easier to develop, finance and sell their projects after their closing is consummated.

FURTHER INFORMATION

For further information about these matters, please contact Sarah Matthews at smatthews@klavenslawgroup.com or 617-502-6282.

DISCLAIMER

This document, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Klavens Law Group, P.C. or its attorneys. Please seek the services of a competent professional if you need legal or other professional assistance.

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