General. Ownership of real property is evidenced by a deed, which is the physical evidence that one has “title”, i.e. full ownership. When buyers purchase property, they require some assurance that their seller: (a) Is the true owner of the property, and (b) That the title being transferred is free and clear of any objectionable liens, claims or interests of third persons. With only limited exceptions,[1] all interests in, or claims against, land must be recorded on the public record. This requirement is designed to give notice to the world about the condition of title to a property. Unless an interest in real property is recorded, persons taking title or a lien as security (e.g. a trust deed) without notice of the claim, generally do so free and clear of the unrecorded interest.
Conveying title to land is accomplished by recording a deed in the public records of the county where the property is located. In Oregon, a deed contains the full names of the seller and buyer and the legal description of the property being conveyed, and is personally signed by the seller(s) before a notary public prior to recording. If all deeds to a particular parcel of property have been properly recorded, they create a “chain of title” beginning from the earliest conveyance and continuing up to the present time. [A current analogy might be an email chain; if Person #1 sends a message to Person #2, who forwards it to Person #3, and Person #3 forwards to Person #4, and so on, in examining the chain of communications, one can see the identity of everyone who had received and then sent the message. To put a fine point on the analogy, every sender of the email must have first been a recipient of it.]
Similarly, if there are several judgments against a person, and that person (the “judgment debtor”) owned real property in the county where the judgments were recorded, the judgments would act as liens against the property. A “lien” is a charge against the property, the nonpayment of which can result in the sale of the property.
So it is with unpaid property taxes, tax liens, and trust deeds. If there are easements, rights of way, deed restrictions, and other encumbrances on a parcel of land, they too must be publically recorded against the affected real property, thus giving notice to the world of the status of title to that property. An unrecorded lien or other restriction, in most [but not all] cases, has no effect upon the marketability of title to land. [See footnote 1, below, regarding construction liens.]
By examining the chain of title, one can get a snapshot of the legal history of a particular parcel of land before it is purchased. A title examination will disclose who the public record says owns the property, and if there are any interests in, or claims against it. Title that is free and clear of objectionable liens and encumbrances is called “marketable title.”
The Preliminary Title Report. As an essential part of any residential real estate transaction, there must be a “title search,” that is, an examination of the public record to make sure that the seller is capable of conveying marketable title to the buyer. This is where title insurance companies come in, since they are experts at examining title.
Title companies provide two essential services to buyers:
- They perform an extensive search of the public record and provide a written “preliminary” report to the buyer prior to closing.
- They insure to the buyer the accuracy of the information disclosed in their preliminary report. The actual title insurance policy is issued to the buyer after closing. The policy will contain the terms of coverage, and show the same exceptions contained in the final preliminary title report issued to the buyer before closing. The report can be updated and modified throughout the closing process, as the company must assure itself that nothing has been recorded between the time the first preliminary title report was issued, and the moment of closing.
However, it is important to understand that title insurance is not “insurance” in the conventional sense. When we think of fire insurance or auto or health insurance, we think of a policy that provides benefits, usually money, in the event of an unexpected loss. The loss, such as a fire, accident or illness, is the risk that is insured against, since no one knows if, or when, a loss will occur.
However, title insurance is not really based upon this concept of “risk,” since before the policy has been issued to the buyer, the title company has closely examined the public record and specifically excludes from coverage everything it discovers that could adversely affect the buyer’s title.
Exclusions from coverage are called “exceptions” to the title insurance policy. Thus, the title company attempts to eliminate every element of uncertainty, or risk, by a thorough title examination in advance of issuing the policy – and when the policy is issued, all known title risks that have been discovered by the company have been listed as exceptions from coverage.
Generally speaking, only if a loss arises from an interest or claim on the public record that is not shown as an exception on the policy, will there be title insurance coverage. If a defect in the chain of title is disclosed (i.e. “excepted”) on the policy, there will be no insurance coverage if the insured buyer incurs a loss that arose as a result of that defect.
Thus, a major service the title company provides to its customers is its skill and expertise in examining the quality of title to real property. The information it acquires is disclosed to the buyer before closing. Since all sellers are contractually obligated under the Sale Agreement to convey marketable title to their buyers, once the title company’s information is disclosed to the parties in the preliminary title report, if there are problems, it becomes necessary for the seller to remove any title objections before closing. If the seller cannot do so, the transaction cannot close.
Reading the Preliminary Title Report – Standard and Special Exceptions. Remember, “exceptions” are the title insurance company’s exclusions from coverage. If a claim arises because the insured property owner suffers a loss due to a title defect, the company will be financially responsible only if it failed to list the item as an exception in the policy of insurance. If the item is identified as an exception, it has, by definition, been excluded from coverage under the title policy.
There are two categories of exceptions: “standard” and “special.” Standard exceptions are those exclusions from coverage appearing in a title insurance policy that the company applies to all transactions. These exceptions are not unique to the specific property involved in the transaction – they are a standard part of all policies issued to homeowners. The standard exceptions found in most homeowner title insurance policies include the following:
- Governmental Regulations– E.g. zoning, water rights, mineral rights, etc. that are promulgated by federal, state, and local jurisdictions.
- Title Defects Known to the Insured – E.g. the insured knows that there is a pre-existing dispute regarding the validity of a recorded easement or right of way, but does not disclose it to the title insurance company.
- Matters That a Correct Survey Would Disclose – E.g. encroachments and other matters that would be revealed by an accurate survey. The title company does not perform a survey prior to issuance of the policy.
- Unrecorded Liens or Other Encumbrances – Since the title company is only responsible for reporting information on the public record, unrecorded lien rights are excluded from coverage. However, construction liens in Oregon can be recorded anytime up to 75 days after the labor or materials were provided to a property. This means that if the title company performed a title search during that 75-day period, the preliminary title report might not show the existence of the lien, since it still had not been placed on the public record. If a sale transaction closed during say, 30 days into that lien period, and title transferred to the new owner, there would still be 45 days for the construction lien to be recorded against the property. This risk is greatest when there is new construction, or a substantial remodel on the property, i.e. resulting in the buyer essentially becoming responsible for payment of a lien they knew nothing about. Homebuyers have certain protections against this risk under ORS 87.007. See Q-Law article, Homebuyer Protection Act.
- Parties in Possession – E.g. someone occupying the property other than the record owner/seller. This could be an adverse possessor, squatter, trespasser, or tenant under an unrecorded lease.
If a loss arises from an event that falls within one of the standard exceptions, there will be no title insurance coverage.
Special exceptions are those that pertain specifically to the property that is the subject of the transaction. These exceptions are based upon the information gleaned from the title company’s examination of the public record, i.e. the chain of title of the specific property being transferred.
Not all clouds or encumbrances affecting title are bad; some are actually necessary for the development and use of the land. For example, say a buyer is acquiring a home located in a subdivision. When that subdivision was first platted, certain utility easements would have been recorded against the property by the developer for installation and repair of the underground utilities and services such as telephones, electricity, sewer and water. These utility easements will appear on the title insurance policy as special exceptions. They generally are not objectionable,[2] and will continue to show as encumbrances against the title, even after it has been transferred to the new owner.
Other types of special exceptions that could show up on a title insurance policy could be liens. There are many different types of liens: Some are voluntary, such as trust deeds [e.g. for the purchase money to buy the home], and some involuntary, such as money judgments for child support. Other types of liens can include contractor’s liens for labor and material supplied to the property, and state and federal income tax liens.
The Broker’s Role. When the title company issues its preliminary report, it is usually provided to the seller, buyer and their respective agents. Should agents read the report? Although I believe the answer should be “Yes”, I do not believe it rises to the level of a “standard of practice”. In other words, the failure to read the report is not, in my opinion, negligence. Real estate agents are not title experts, and should not be rendering opinions about the contents of the preliminary report.
Then why read them? I maintain that it’s important for brokers to have a familiarity with all aspects their transactions, and this includes the title phase. Accordingly, I believe it is a part of being a professional, to understand the title process and its importance. This can only occur by learning to read and understand what the preliminary report says. After reading enough of them, one will become comfortable with the exercise.
Caveat: What brokers must also do, however, is to resist the temptation to render an “opinion” about the meaning of an exception to the client. If the client relies, without checking further, the broker could be held liable to the client the information imparted, if it is incorrect.
This does not mean the broker must be a silent participant in the process. If there is a problem, the title or escrow company will likely note it at the time the preliminary report is issued. This is because if there are liens on the property, escrow will need to get payoff figures from the creditor, so that they can be cleared prior to closing.
The title officer who issues the report can be a good source of information. Their contact information is noted at the end of the report. If there is a problem or concern, the title officer can be a good resource – as well as the escrow officer closing the transaction. If the client wants their broker to make the contact and get additional information, extreme caution should be exercised in making sure that the communication is clear. While good notes are helpful, I suggest confirming all information messages in email, identifying the nature of the problem, and what the title or escrow officer says is necessary to correct the matter. The email should include the client on all communications.
When the information is discussed with the client, it should be done so with the caveat that the broker is not an expert in these matters, and that the client should conduct their own investigation, either through legal counsel of their choice, or another expert, to verify the nature of the problem and the solution. In all instances, brokers should check with their managing principal broker for directions, advice, and assistance.
[1] One major exception is construction liens. They can be held by a provider of labor or material following completion even though they have not been filed on the public record. If not recorded by the 75th day, the claim can no longer act as a lien against the property. The money claim still exists, but the holder of the claim cannot force a sale of the property to pursue collection. In the vernacular, after the 75-day period, it has become an “unsecured” debt, since repayment is no longer secured by the property to which the labor or services were provided. See, ORS 87.001 et seq.
[2] If they are objectionable to the buyer, the matter will have to be resolved with the seller before closing.
