While many businesses rent or lease their locations savvy business owners will often buy their own buildings. You may choose to do this as an individual, limited liability company, or as the business entity. An attorney can advise you on the benefits and risks of each option. There are always going to be risks involved, but you want to limit your risk as much as possible. Which is why, however you choose to take ownership when purchase your business location, you are probably going to want title insurance.
Title insurance has been around since 1874 and is an integral part of commercial real estate transactions. Commercial entities, businesses and business owners, are considered shrewd educated parties with lawyers who do not need special protection, which is why most states have legislation covering residential real estate but not commercial real estate. This is why insurance to protect against defects in title or problems with chain of title is so important for businesses.
Title is the ownership of real estate. Whenever you buy a piece of real estate, what you are buying is the seller’s rights and interests to the real property subject to any limitations, easements or (unresolved) liens. Those rights are conveyed through deeds, but not all deeds are the same. Some may convey only partial ownership. You want title that is unclouded, “clear title” when purchasing real estate. In other words, you want no doubt that the person selling the property has the legal ability to sell you everything you are purchasing. If the seller doesn’t have a clean title they cannot sell you what they don’t really own.
The first step to protecting any buyer is the title search. Title companies provide title search services, and in many states lawyers provide title searches too. Commercial real estate holdings can be quite complicated, with multiple recordings of property transfers between holding companies and developers and innumerable revised surveys (reference to the wrong survey could mean the difference between a building and a section of the parking lot). The title search will look at the chain of title, which is the record of who owned what and in which order, and it will also look at encumbrances. How many mortgages stand against it? Are there any mechanics liens? What recorded easements are there? Mortgages and liens are typically cleared as part of the closing process, but easements (typically for utilities and right of way or roadways) stay with the property and will affect your ownership. The title report issued after the completion of the title search will provide details and explain exactly what is available to purchase in that piece of property. If any property rights (mineral, timber, water, etc) have already been sold or if the property is subject to a life estate this is where you will find that information. Be sure to review the preliminary title report with your attorney before agreeing to proceed.
You understand liability insurance, health insurance and flood insurance; those are regular monthly expenses. Title insurance from a company like TitleSmart is a one-time fee, when you purchase a piece of real estate, which then protects you for as long as you own the property. It is the security of knowing that every possible problem has been called to your attention to be corrected before you make your purchase—and if something slipped past and becomes a problem later, it’s not your headache. Most people think of insurance as protection against the expense of dealing with something that will happen in the future, title insurance is protection against the expense of something that may already have happened and no one caught it. Title insurance covers undisclosed claims that threaten your ownership of your real estate. Issues over defects in title for commercial real estate are either easily fixed typos, or they’re the sort of thing that ends up in court. The title insurance company will provide attorneys to fight that legal battle for you, and in a worst case scenario, if you are dispossessed will provide reimbursement.
How It Works
You can shop around for title insurance. Your lawyer, realtor or settlement agent may have companies they regularly work with and can recommend. Most title insurance companies offer a free quote based on purchase price and property type.
Each policy will have slight differences, but typically most will cover your legal fees over a title fight and the reimbursement for they buyer if the property is awarded to a third party claimant.
Standard exceptions will be listed near the front of the title insurance policy and will include things like public right of way and utility easements. These are standard easements because, for example, you need to allow the electric company to have an easement in order to have electric to the building.
You can request special endorsements (for a fee) to cover additional concerns, such as defects to title that are not obvious from a physical inspection of the property or a survey. Endorsements may include boundary errors, zoning issues and environmental impact problems.
If you are using a lender, your commercial loan will have a lenders title insurance policy required. The owner’s title insurance is a separate policy. You want both, otherwise only the lender’s interests will be protected.
In most states it is standard for sellers to pay for standard title insurance in commercial transactions. However, that is not the case in all states. As the buyer it is important that you take responsibility for making sure you are covered even if you pay for the title insurance yourself.
Title insurance is a one-time expense that protects you if someone ever comes forward to claim you don’t own the building you’ve bought. For commercial transactions it is an affordable business expense to protect your investment. If a claim is made against your title, the title insurance company will cover the expense of investigating and defending your ownership. They may pay a settlement to keep you in the property or reimburse you if you lose in court—and the title insurance company pays the attorneys’ fees. For commercial real estate transactions, the stakes are so high title insurance is really the only way to do business.