Most real estate purchasers assume when they receive a title insurance commitment that the title company has searched the public records and listed any liens and encumbrances of record. They may believe that any title problems will be resolved at closing and that they will receive a “clean title.” After all, title insurance is supposed to protect against title issues that arose before the buyer’s purchase. Unfortunately, these assumptions may be put to the test when it comes to any title commitment exceptions made for (a) the gap period and (b) recorded covenants, restrictions, easements and mineral rights.

The subject of title insurance — with all of that boilerplate language and fine print — often cause buyers’ eyes to roll back in their heads and even some licensees have been observed with that glassy-eyed look when the topic is discussed. A brief review of Title Insurance 101 is in order.

Title insurance 101

The title insurance company checks the various public records and issues a title insurance commitment that gives information about the title to the property prior to the contemplated real estate transaction. The title commitment indicates who currently owns the property and lists any liens such as a mortgage or unpaid tax bills that the seller should pay off before selling, and any easements and restrictions that will affect future use of the property.

Schedule A: The basic blueprint for an owner’s policy title commitment starts with Schedule A, which indicates (1) the effective date, which is the “as of” date of the search, (2) the proposed insured, which are the buyers, (3) the amount of the insurance, usually the purchase price, (4) the title holders of record, which are typically, but not always, the sellers; and (5) the legal description of the property.

Schedule B-I: Schedule B-I is the road map for the documents and signatures that will be required at closing if the title insurance policy is to be issued. Typical requirements include payment of the title insurance policy premiums, the execution and recording of the buyer’s deed and mortgage, payment and release of existing mortgages, and satisfaction of tax liens, judgment liens, etc.

Schedule B-II: It is standard practice for Schedule B-II of the title commitment to list exceptions that will be excluded from coverage in the buyer’s title insurance policy. Owner’s policies often contain exceptions for: (1) the gap period; (2) taxes and assessments; (3) construction liens; (4) parties in possession, such as tenants or unrecorded land contract buyers; (5) easements or claims of easements not shown in the public records (through adverse possession, etc.); (6) mineral and/or water rights; and (7) encroachments and boundary line disputes. Many of these exceptions, like for parties in possession, encroachments or easements not of record, are understandable because these items cannot be discerned based solely upon examination of the public records.

If an exception is unacceptable to the buyer, the buyer and the buyer’s attorney may be able to convince the title company to remove it, insure over it with an endorsement or eliminate the exception by obtaining a special assessment letter, owner’s affidavit, survey map or other document. The buyer may have the option of paying an additional fee to obtain “extended coverage” that will remove some exceptions. 

One classic example of this is illustrated in First American Title Insurance Company v. Dahlmann, 2006 WI 65. The survey and encroachment exceptions had been removed from the policy when Dahlmann purchased the Madison Inn in January 1999. In this case, the Wisconsin Supreme Court held that a substantial encroachment onto the adjacent property was covered by Dahlmann’s title insurance policy, which wouldn’t have happened if those exceptions had not been removed. To read more about this case, see pages 9-10 of the March 2007 Legal Update at www.wra.org/LU0703.

Cutting the title search short

The Schedule B-II exceptions found in most title commitments are standard fare, but there is an unusual exception that has appeared recently in some title commitments in Wisconsin that can cause serious problems for the seller and the buyer. Instead of excepting easements and other items that are not of record, this exception provides an exception for “Covenants, conditions and restrictions, if any, affecting title which appear in the public records; easements, if any, which appear in the public records or are shown on any recorded plat or certified survey map; reservations of mineral rights or mineral rights, if any, appearing in the public land records, or the "Recorded Covenants Exception.”

While most people believe it is the job of the title company to search the public records for liens and encumbrances that negatively impact title to the property the buyer is purchasing, this Recorded Covenants Exception essentially says that the title company will not provide coverage for recorded covenants, restrictions, easements and mineral rights. In an effort to reduce costs, the title company apparently is not conducting a full search of the records. The company searches far enough back to find the current deed, mortgages and liens but does not attempt to look for easements or restrictions, farther back in the record.

These reduced costs may be passed to the party paying for the owner’s title insurance policy — in Wisconsin that is typically the seller. Other times the title company may be using the reduced costs to generate company profits.

In the WB-11 Residential Offer to Purchase, lines 342-343 indicate that the seller will provide an owner’s policy of title insurance in the amount of the purchase price. The Provision of Merchantable Title subsection on lines 351-355 of the WB-11 indicates that the title commitment delivered to the buyer must show merchantable title “subject only to liens which will be paid out of the proceeds of closing and standard title insurance requirements and exceptions, as appropriate.” It would seem that the Recorded Covenants Exception or similar language is not a standard title insurance exception and that it is difficult to prove or disprove merchantable title with a limited records search. Thus, if a seller provides a title insurance commitment that has the Recorded Covenants Exception, the seller is apparently providing a commitment that is not acceptable for closing. In the Title Not Acceptable for Closing subsection on lines 356-362 of the WB-11, the buyer can object to the seller in writing and the seller has 15 days to correct the situation and get the Recorded Covenants Exception removed. If this is not done, the seller is at risk of losing the sale.

From the buyer’s perspective, if Recorded Covenants Exception language is not detected and the buyer closes, the buyer may sue once he discovers, for example, that he cannot make anticipated improvements to the property because they impede a recorded easement.

REALTOR^® practice tip: If an agent in a transaction becomes aware that the title commitment contains Recorded Covenants Exception language, the agent should point out the language and recommend that the party immediately discuss the exception with his or her attorney or the title company. CAUTION: Agents should not attempt to provide legal advice. Just point out that there may be a problem and send the party to an appropriate expert for evaluation!

Filling the gap 

The gap exception puts the buyer at risk for any title defects which appear of record after the effective date of the title insurance commitment and before the buyer’s deed is recorded, such as the “gap period.” Some of the title defects that may appear of record during the gap period include mortgages, deeds to third parties; lis pendens filings for foreclosures or other litigation, construction liens, federal tax liens and judgments. The actual risk to the buyer of an intervening lien may be greater in short sales or with REO properties.
Lines 346-350 of the WB-11 require the seller to provide a gap endorsement “provided the title company will issue the endorsement,” or equivalent gap coverage. If a gap endorsement or equivalent gap coverage is not available, the buyer may give written notice to trigger the Title Not Acceptable for Closing subsection on lines 356-362. While the intent of this provision is more to cause the parties to reach a mutually agreeable solution than to cause the offer to become null and void, that can be the result. This is a serious issue for the buyer and intervening liens can be very expensive for all involved.

Whether a particular title company will provide a gap endorsement in a particular transaction or for particular types of closings, such as short sales and REO sales, is basically a business decision. The title company evaluates the potential risk, the circumstances of the parties, the purchase price involved and other factors and decides whether to provide gap endorsements. The title company cannot know any better than anyone else what might pop up on title before the new deed and mortgage are recorded. They decide which risk they are comfortable insuring.

REALTOR^® practice tip: Prudent agents may wish to become familiar with which title companies in their market areas do not provide gap endorsements in certain types of transactions. It may be wise to learn which gap coverage alternatives are offered by other title companies or attorneys to ensure the highest level of protection possible for buyers.

Debbi Conrad is Senior Attorney and Director of Legal Affairs for the WRA.