What Title Insurance Does NOT Cover

Transcription

1 What Title Insurance Does NOT Cover 2012 Texas Land Title Institute Paul McNutt, Jr. Executive Vice President and General Counsel Title Resources Guaranty Company, Dallas

2 INSTRUCTOR PROFILE PAUL MCNUTT, JR. Company: Title Industry Background: Executive Vice President and General Counsel Title Resources Guaranty Company 8111 LBJ Freeway, Suite 1200 Dallas, Texas years in the title industry, 22 years with Title Resources Educational Background: B.B.A., University of Texas L.L.B., University of Texas Dale Carnegie, Effective Speaking and Human Relations, 1989 Previous Teaching Experience: Industry Associations: Speaker, Texas Land Title Institute 2000 Optimizing Policy Coverages 2002 Illegal Subdivisions: Not Just a Platting Issue 2003 Powers of Attorney: How and When to Use 2004 Closing the Construction Project 2005 Maximizing Your Premium Dollar 2006 Commitments and Binders 2007 Access: Physical vs. Legal 2008 Frequently Asked Questions Resulting from Rule Changes 2009 The Title Objection Letter-a Panel Discussion 2010 RESPA Reform: Top 10 Things to Know 2011 What Does the Schedule B Tax Exception Really Mean? Speaker, State Bar of Texas Advanced Real Estate Course 2005 Premium Saving Tricks-Strategies 2011 The Title Objection Letter: Guidelines and Solutions 2012 What Title Companies Won t Insure Speaker for numerous training classes on commitments, rates and rules, ethics, current issues of the title industry, and for real estate agents Recipient: Peggy Hayes Teaching Excellence Award, 2000 from the Texas Land Title Association State Bar of Texas Dallas Bar Association Texas Land Title Association - Director 2000/2001 Texas Real Estate Commission Certified Instructor Legal Update MCE and Ethics MCE

3 WHAT TITLE INSURANCE DOES NOT COVER Boundaries on Water Boundaries for water adjoining or on your land, a general exception is taken in the Owner s title policy T-1 in Schedule B #4 as follows: This policy does not insure against loss or damage (and the Company will not pay, costs, attorneys fees or expenses) that arise be reason of the following matters: 4. Any titles or rights asserted by anyone, including but not limited to, persons, the public, corporations, governments or other entities, a. to tidelands, or lands comprising the shores or beds of navigable or perennial rivers and streams, lakes, bays, gulfs, or oceans, or b. to lands beyond the line of the harbor or bulkhead lines as established or changed by any government, or c. to filled-in lands, or artificial islands, or d. to statutory water rights, including riparian rights, or e. to the area extending from the line of mean tide to the line of vegetation, or the right of access to that area or easement along and across that area. As this exclusion was incorporated into the policy by the Texas Department of Insurance to prevent the title industry in Texas from taking the risk of determining where boundaries lie, or what rights others have to any property described as having any of these water bodies, an attorney representing a purchaser of such property will have a duty to investigate with the appropriate government bodies that regulate the body of water involved as to the purchaser s rights and duties. Several examples might help illustrate the complicated issues that may be involved. EXAMPLES First, an example of purchasing a lot fronting on a navigable river requires both that the surveyor involved determines the extent of ownership to the river, and any lines of restriction as to building or development that might exist from the government authority that controls the river. This could include elevations required for building on the river if any body regulating the river had condemned the land to a certain elevation. While the filing of the taking of the land should alert the owner if an exception is taken in the title examination to the condemnation and the take lines, all these documents must be carefully reviewed if the property has ever been altered by any condemnation. Or the placement of boat docks or other piers into the river or on a lake. For instance, it might involve the rights of the Lower Colorado River Authority on the Colorado River, or the Brazos River Authority on the Brazos River. One example from a claim we handled involved two adjoining lot owners building a shared floating boat dock in Palo Pinto Lake. A lake managed by the Brazos River Authority. The dock was placed in front of one lot, I will refer to as the easy access lot, 2012 Texas Land Title Institute What Title Insurance Does Not Cover Page 1 of 7

4 due to the access being steep from the other lot. It was built for about $25,000 with funds equally shared between the lot owners, and had two boat slips for raising each lot owners boats in the dock. It was anchored in the Lake. But, when the easy access lot was sold, with the dock in front, no provision was included in the contract for the shared ownership of the dock with the steep lot, and no easement for access across the easy access lot to that dock for the steep bank lot was stated in the earnest money contract. But, an easement agreement, entered years before, was filed in the title gap by the steep bank lot owner, just before the sale documents were filed on the easy access lot. And the steep bank lot owner claimed rights under the easement to jointly use the boat dock on the lake, and to cross over the easy access lot to reach the dock. Several years of litigation were involved in the missed easement claim for the title company, but no easy solution was found, even though the new owner did not at first even want the boat dock, in part because the Brazos River Authority refused to allow the dock to be moved over to in front of the steep bank lot. They decided it would block a channel for other boats in the lake that they determined existed, so they further complicated the issues of the claim. The warning for an attorney who reviews a contract for a lake lot that might have a dock or pier is to inquire about any rights shared with others to access the lake, to also inquire as to the permits obtained for the dock or pier from the authority that controls the lake, and to confirm that the pier or dock was entirely paid for by the seller. If no easement had been missed in the gap on this claim, the buyer might have been defending their rights in the dock, and in preventing access across their lot at their own expense, or only with their attorney. Another aspect of this issue is that even with a current survey the only authorized surveyor that may determine the boundary of any water body with State land is a Texas Land Surveyor, who will determine the boundary for the State of Texas to their land. This requires careful determination for the choice of surveyors if issues might exist of State claims to parts of the property being sold. And of course no rights can be claimed by owners against any governmental body for adverse possession establishing a defense. One claim on Clear Lake we handled had a swimming pool in the deck overlooking the lake as an amenity to an apartment. Unfortunately the pool was beyond the historical boundary of the property, and therefore a Patent had to be secured from the State of Texas, with a Texas Land Surveyor determining the area of the pool and deck that was beyond the land title boundary, and the expense was a buyer cost. The exclusion from coverage prevented the claim coverage. One other claim to illustrate another governmental body with power regulating some lakes is a claim we had on Lake Lewisville involving the Army Corp of Engineers Texas Land Title Institute What Title Insurance Does Not Cover Page 2 of 7

5 The developer of condos overlooking the Lake had placed some stairs with uprights that were below the elevation of the take line for the water in the lake, even though the taking for the boundary of the ownership was beyond that elevation. The Corp objected to the 4 x 4 posts into their lake elevation, which they contended shrank the capacity of Lake Lewisville below it s stated capacity. At that point we had not policy coverage, as the easement for flooding had been excepted to for the elevation of the Lake. But, after meeting with the Corp, the issue changed to their ownership claim of land far beyond the surveyed line of the condemnation taking of title. They claimed they had full title, based on a series of treated posts they had placed near the Lake Lewisville water edge, with cables between the posts that prevented vehicular access beyond that set of posts. They claimed a right of ownership of all of the developers land down to those posts, based on their adverse possession for years by those posts. This brought us in to defend the title to the owner, and after several years of discussion with numerous meetings, a final settlement of the disputed ownership of the land title with a compromise allowing our condo builder to keep the stairs posts in place, that they claimed decreased the lake capacity, but to give the Corp some of the land toward the Lake, to prevent anyone having access from the insured s land into the lake. It was a real issue that was not seen by the parties, even though the survey clearly had shown the row of posts with cables erected by the Corp. of Engineers. If you have land fronting on a Corp Lake, be sure to watch for those posts, and study the exceptions taken in the title policy that may include flooding easements over some of the land retained by the owner in condemnation. Zoning or Building Regulation Zoning or Government regulation such as building by a City or police power. Exclusions from Coverage in Owner s Title policy T-1. The following matters are expressly excluded from the coverage of this policy and the Company will not pay loss or damage, costs, attorneys fees or expenses which arise by reason of: 1. (a) Any law, ordinance, permit, or governmental regulation (including those relating to building and zoning) restricting, regulating, prohibiting, or relating to: (i) the occupancy, use, or enjoyment of the land; (ii) the character, dimensions or location of any improvement erected on the land; or (iii) environmental protection; or the effect of any violation of these laws, ordinances or governmental regulations. This Exclusion 1(a) does not modify or limit the coverage provided under Covered Risk 5. The exclusion should be carefully studied by counsel representing a purchaser of property, and the intended use of the property should be fully discussed; then the 2012 Texas Land Title Institute What Title Insurance Does Not Cover Page 3 of 7

6 zoning of the land by the City, if any, should be explored fully by the attorney directly with the City. Also, as the intended us might involve the government regulation of building the ordinances regarding height, amount of footprint and green requirements that may apply should also be studied. The limitation of not limiting Covered Risk 5 is that if any governmental entity has placed of record a notice, describing any portion of the land of violation or intention to enforce any law, ordinance, permit, or governmental regulation (including those relating to building and zoning) then the exclusion does not apply, but only to the extent of the violation or enforcement referred to in the notice.. EXAMPLES Examples for consideration when representing a client include: 1. Zoning- in a case in Dallas entitled Coldwell Banker Whiteside v. Ryan Equity, 181 S.W.3d 879, the Dallas Court of Appeals held that zoning was not a defect, and the seller was not required to disclose that the City of Dallas had changed the zoning status of the apartments being sold from multi-family to single family several years before the sale. The court defined defect, they said for the first time with the following: It is some irregularity in a surface or a structure of the property that mars its appearance or causes some aspect of the property to weaken or fail. It involves tangible aspects of the property, whether its physical appearance or its physical structure. When we call something defective, we mean it is blemished, broken, deficient or imperfect in some physical sense.. There was no coverage in the owner s title policy, due to the exclusion #1. 2. A City building inspection has found a broken slab and red tagged the property. If the City files a notice of the defect, a purchaser is taking the property with Coverage #5 against the defect, unless it is excepted to in Schedule B of the title Commitment. If the notice is posted on the door, but no notice is filed in the real property records, then Exclusion #1 applies and the purchaser is not protected. In representing a client purchasing the property, you should be certain if your client purchases property at tax sale, foreclosures of liens or other non-contractual method, that they carefully inspect and have a search done for any City action citing the property. Even accepting a known violation can be an issue. We had one policy holder, buyer at tax sale who was planning to repair the damage he saw in the notice, but did not realize the red tag included that no permits would be issued for repairs, because of the broken slab. Therefore, his purchase at a tax sale was not the bargain he believed he had received. He knew he had no coverage, as there was a notice that was excepted to in Schedule B of his title policy, but he had not studied the entire violation Texas Land Title Institute What Title Insurance Does Not Cover Page 4 of 7

7 Marketable Title versus Indefeasible Title The Owner s Title Policy T-1 provides under Covered Risks #3. Lack of good and indefeasible Title. Often parties ask the title company for marketable title coverage. This is used in many other states, and is part of the coverage given in ALTA policies in many states. However, Texas has always only allowed policies to insure against the lack of good and indefeasible title. This is a slightly lesser degree of title that basically can be defined as having a title superior to any other claimant. We historically had many properties sold at Sheriff s sales during the Great Depression that raised questions of marketable insurability. This led to an owner s title policy only insuring indefeasible, or better than anyone else claiming it, coverage. It avoids lawsuits and claims that a party contracting to buy has examined the title and found some defect they use to escape from the requirement to close on the contract. For instance, if a prior mortgage is in the chain of title unreleased, and the lien holder cannot be found to obtain a release to file of record. While this appears to cloud the title, under the rules of the title industry, if Procedural Rule 11 allows insuring over the filed lien, such as when another title company has already insured the title without taking exception to the lien and evidence of payment is obtained from that closing, title insurance can be issued, giving a buyer and lender indefeasible title, and a buyer can be compelled to close. No large risk is taken by the title company, but no arguments over marketable title are involved. In addition, the Exclusions from Coverage states in #3 (k) (k) Unmarketable title Title affected by an alleged or apparent matter that would permit a prospective purchaser or lessee of the Title or lender on the Title to be released from the obligation to purchase, lease or lend if there is a contractual condition requiring the delivery of marketable title. This provision makes the title company not responsible to any policy holder for any claim that the title is lacking marketable title. Therefore, the attorney will need to be careful if a contract provision requires delivering marketable title for a Texas property, as they will not have protection for any allegation of failure to deliver that degree of title from the title company based on the exclusion under #3(k). Mechanic s Liens During Construction In Texas, when a Construction Loan is insured an exception is made in the Loan policy for any mechanic s lien claims that might be filed during the construction by anyone. The Procedural Rule 8 b provides the wording as follows: 2012 Texas Land Title Institute What Title Insurance Does Not Cover Page 5 of 7

8 (1) When a Mortgagee Policy (sic) is issued prior to completion of improvements made under a mortgage given in while, or in part, for the cost of improvements, the policy must contain the following exception under Schedule B: Any and all liens arising by reason of unpaid bills or claims for work performed or materials furnished in connection with improvements placed, or to be placed, upon the subject land. However, the Company does insure the insured against loss, if any, sustained by the Insured under this Policy if such liens have been filed with the County Clerk of County, Texas prior to the date hereof. This is a fundamental risk avoidance for the payment of all bills during construction, leaving that for the lender and contractor and owner to work out as to risk. A bond procedure can also be used from the contractor to assure the lender and owner that all payments that they make to the contractor will be used in payment of the work. If you are handling the procedures for a lender doing construction lending, the additional protection that can be obtained from the title company is to ask for a down-date endorsement to the construction loan policy This can coincide with each draw by the contractor to have the title brought forward as close to the disbursement date as possible, to see if any mechanic s liens have been filed on the property with the County Clerk of the County. This simple procedure only costs $50 per down-date, and should be built into the initial cost of title insurance, so that the payment has been collected ahead of the need date, as all title policies must be paid for before issuance. Mineral Coverage Title insurance companies are not required to insure the mineral estate of land by HB 2408, effective January 1, Title policies may take the general exception to minerals of P-5.1: A. As used by this rule, minerals means coal, lignite, oil, gas and other minerals in, under and that may be produced from the Land, together with all rights, privileges, and immunities relating thereto. The Policy is not an abstract of title nor does a Company have an obligation to determine the ownership of any mineral interest. A Company may insert into a Policy or any other title insuring form an exception or an exclusion for minerals as provided below: 1. On Schedule A, Item 2: "subject to, and the Company does not insure title to, and excepts from the description of the Land, coal, lignite, oil, gas and other minerals in, under and that may be produced from the Land, together with all rights, privileges, and immunities relating thereto."; or 2. On Schedule B: "All leases, grants, exceptions or reservations of coal, lignite, oil, gas and other minerals, together with all rights, privileges, and immunities relating thereto, appearing in the Public Records whether listed in Schedule B or not. There may be leases, grants, exceptions or reservations of mineral interest that are not listed." 2012 Texas Land Title Institute What Title Insurance Does Not Cover Page 6 of 7

9 The surface protection endorsements, T-19.2 or T-19.3, are no longer required to be issued when requested, when a general exception to the mineral interest is taken in Sch A or B under P-5.1. The surface protection endorsement T-19.2 or T-19.3 may be offered, at the election of the title company and their agent, and are being routinely given. The cost of the T-19.2 or T-19.3 endorsements is changed to be free for lenders, and remains $50 for Owner s title policies, effective January 1, The required 2% credit in the Owner s title policy, if a general exception for minerals is taken, is eliminated effective January 1, Texas Land Title Institute What Title Insurance Does Not Cover Page 7 of 7

10 11/19/2012 What Title Insurance Does Not Cover Paul McNutt, Jr. Executive Vice President/General Counsel 8111 LBJ Freeway, Suite 1200, Dallas, TX Boundaries on Water Boundaries for water adjoining or on your land, a general exception is taken in the Owner s title policy T-1 in Schedule B #4 as follows: 2012 TEXAS LAND TITLE INSTITUTE 2 Boundaries on Water This policy does not insure against loss or damage (and the Company will not pay, costs, attorneys fees or expenses) that arise be reason of the following matters: 4. Any titles or rights asserted by anyone, including but not limited to, persons, the public, corporations, governments or other entities, 2012 TEXAS LAND TITLE INSTITUTE 3 1

11 11/19/2012 Boundaries on Water a. to tidelands, or lands comprising the shores or beds of navigable or perennial rivers and streams, lakes, bays, gulfs, or oceans, or b. to lands beyond the line of the harbor or bulkhead lines as established or changed by any government, or c. to filled-in lands, or artificial islands, or d. to statutory water rights, including riparian rights, or e. to the area extending from the line of mean tide to the line of vegetation, or the right of access to that area or easement along and across that area TEXAS LAND TITLE INSTITUTE 4 Boundaries on Water As this exclusion was incorporated into the policy by the Texas Department of Insurance to prevent the title industry in Texas from taking the risk of determining where boundaries lie, or what rights others have to any property described as having any of these water bodies, an attorney representing a purchaser of such property will have a duty to investigate with the appropriate government bodies that regulate the body of water involved as to the purchaser s rights and duties. Several examples might help illustrate the complicated issues that may be involved TEXAS LAND TITLE INSTITUTE 5 Examples Purchasing a lot fronting on a navigable river Placement of boat docks or other piers into the river or lake Authorized surveyors Army Corp of Engineers 2012 TEXAS LAND TITLE INSTITUTE 6 2

12 11/19/2012 Zoning or Building Regulation Zoning or Government regulation such as building by a City or police power. Exclusions from Coverage in Owner s Title policy T TEXAS LAND TITLE INSTITUTE 7 Zoning or Building Regulation 1. (a) Any law, ordinance, permit, or governmental regulation (including those relating to building and zoning) restricting, regulating, prohibiting, or relating to: (i) the occupancy, use, or enjoyment of the land; (ii) the character, dimensions or location of any improvement erected on the land; or (iii) environmental protection; or the effect of any violation of these laws, ordinances or governmental regulations. This Exclusion 1(a) does not modify or limit the coverage provided under Covered Risk TEXAS LAND TITLE INSTITUTE 8 Zoning or Building Regulation The exclusion should be carefully studied by counsel representing a purchaser of property, and the intended use of the property should be fully discussed; then the zoning of the land by the City, if any, should be explored fully by the attorney directly with the City. Also, as the intended us might involve the government regulation of building the ordinances regarding height, amount of footprint and green requirements that may apply should also be studied TEXAS LAND TITLE INSTITUTE 9 3

13 11/19/2012 Zoning or Building Regulation The limitation of not limiting Covered Risk 5 is that if any governmental entity has placed of record a notice, describing any portion of the land of violation or intention to enforce any law, ordinance, permit, or governmental regulation (including those relating to building and zoning) then the exclusion does not apply, but only to the extent of the violation or enforcement referred to in the notice TEXAS LAND TITLE INSTITUTE 10 Examples Zoning case in Dallas Coldwell Banker Whiteside v. Ryan Equity, 181 S.W. 3d 879 Notice of Defects or Violations 2012 TEXAS LAND TITLE INSTITUTE 11 Marketable Title versus Indefeasible Title The Owner s Title Policy T-1 provides under Covered Risks #3. Lack of good and indefeasible Title. Often parties ask the title company for marketable title coverage. This is used in many other states, and is part of the coverage given in ALTA policies in many states. However, Texas has always only allowed policies to insure against the lack of good and indefeasible title. This is a slightly lesser degree of title that basically can be defined as having a title superior to any other claimant TEXAS LAND TITLE INSTITUTE 12 4

14 11/19/2012 Marketable Title versus Indefeasible Title We historically had many properties sold at Sheriff s sales during the Great Depression that raised questions of marketable insurability. This led to an owner s title policy only insuring indefeasible, or better than anyone else claiming it, coverage. It avoids lawsuits and claims that a party contracting to buy has examined the title and found some defect they use to escape from the requirement to close on the contract TEXAS LAND TITLE INSTITUTE 13 Marketable Title versus Indefeasible Title For instance, if a prior mortgage is in the chain of title unreleased, and the lien holder cannot be found to obtain a release to file of record. While this appears to cloud the title, under the rules of the title industry, if Procedural Rule 11 allows insuring over the filed lien, such as when another title company has already insured the title without taking exception to the lien and evidence of payment is obtained from that closing, title insurance can be issued, giving a buyer and lender indefeasible title, and a buyer can be compelled to close. No large risk is taken by the title company, but no arguments over marketable title are involved TEXAS LAND TITLE INSTITUTE 14 Marketable Title versus Indefeasible Title In addition, the Exclusions from Coverage states in #3 (k) (k) Unmarketable title Title affected by an alleged or apparent matter that would permit a prospective purchaser or lessee of the Title or lender on the Title to be released from the obligation to purchase, lease or lend if there is a contractual condition requiring the delivery of marketable title TEXAS LAND TITLE INSTITUTE 15 5

15 11/19/2012 Marketable Title versus Indefeasible Title This provision makes the title company not responsible to any policy holder for any claim that the title is lacking marketable title. Therefore, the attorney will need to be careful if a contract provision requires delivering marketable title for a Texas property, as they will not have protection for any allegation of failure to deliver that degree of title from the title company based on the exclusion under #3(k) TEXAS LAND TITLE INSTITUTE 16 Mechanic s Liens During Construction In Texas, when a Construction Loan is insured an exception is made in the Loan policy for any mechanic s lien claims that might be filed during the construction by anyone. The Procedural Rule 8 b provides the wording as follows: 2012 TEXAS LAND TITLE INSTITUTE 17 Mechanic s Liens During Construction (1) When a Mortgagee Policy (sic) is issued prior to completion of improvements made under a mortgage given in while, or in part, for the cost of improvements, the policy must contain the following exception under Schedule B: Any and all liens arising by reason of unpaid bills or claims for work performed or materials furnished in connection with improvements placed, or to be placed, upon the subject land. However, the Company does insure the insured against loss, if any, sustained by the Insured under this Policy if such liens have been filed with the County Clerk of County, Texas prior to the date hereof TEXAS LAND TITLE INSTITUTE 18 6

16 11/19/2012 Mechanic s Liens During Construction This is a fundamental risk avoidance for the payment of all bills during construction, leaving that for the lender and contractor and owner to work out as to risk. A bond procedure can also be used from the contractor to assure the lender and owner that all payments that they make to the contractor will be used in payment of the work TEXAS LAND TITLE INSTITUTE 19 Mechanic s Liens During Construction If you are handling the procedures for a lender doing construction lending, the additional protection that can be obtained from the title company is to ask for a down-date endorsement to the construction loan policy This can coincide with each draw by the contractor to have the title brought forward as close to the disbursement date as possible, to see if any mechanic s liens have been filed on the property with the County Clerk of the County TEXAS LAND TITLE INSTITUTE 20 Mechanic s Liens During Construction This simple procedure only costs $50 per downdate, and should be built into the initial cost of title insurance, so that the payment has been collected ahead of the need date, as all title policies must be paid for before issuance TEXAS LAND TITLE INSTITUTE 21 7

17 11/19/2012 Mineral Coverage Title insurance companies are not required to insure the mineral estate of land by HB 2408, effective January 1, Title policies may take the general exception to minerals of P-5.1: A. As used by this rule, minerals means coal, lignite, oil, gas and other minerals in, under and that may be produced from the Land, together with all rights, privileges, and immunities relating thereto. The Policy is not an abstract of title nor does a Company have an obligation to determine the ownership of any mineral interest. A Company may insert into a Policy or any other title insuring form an exception or an exclusion for minerals as provided below: 2012 TEXAS LAND TITLE INSTITUTE 22 Mineral Coverage 1. On Schedule A, Item 2: "subject to, and the Company does not insure title to, and excepts from the description of the Land, coal, lignite, oil, gas and other minerals in, under and that may be produced from the Land, together with all rights, privileges, and immunities relating thereto."; or 2. On Schedule B: "All leases, grants, exceptions or reservations of coal, lignite, oil, gas and other minerals, together with all rights, privileges, and immunities relating thereto, appearing in the Public Records whether listed in Schedule B or not. There may be leases, grants, exceptions or reservations of mineral interest that are not listed." 2012 TEXAS LAND TITLE INSTITUTE 23 Mineral Coverage The surface protection endorsements, T-19.2 or T- 19.3, are no longer required to be issued when requested, when a general exception to the mineral interest is taken in Sch A or B under P-5.1. The surface protection endorsement T-19.2 or T may be offered, at the election of the title company and their agent, and are being routinely given. The cost of the T-19.2 or T-19.3 endorsements is changed to be free for lenders, and remains $50 for Owner s title policies, effective January 1, The required 2% credit in the Owner s title policy, if a general exception for minerals is taken, is eliminated effective January 1, TEXAS LAND TITLE INSTITUTE 24 8

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