The Importance of Title Insurance Policy Endorsements in Commercial Real Estate Transactions

Most buyers and lenders engaging in commercial real estate transactions understand that title insurance is needed to protect their respective interest in the title to the property, but do not stop to think in detail about what is covered or, perhaps more importantly, what is not covered but could be with a few well-chosen policy endorsements. Some buyers and lenders who have certain endorsements on their checklists do not know or understand the large number or significance of additional benefits which can be obtained by adding endorsements tailored to the needs of the of the land being insured.  Depending on the nature of the property and/or the specific project currently or slated to be located on the land, choosing the right endorsements can greatly enhance a title policy’s benefits.  These endorsements are generally issued at no or very little cost, so it only makes sense to build in extra levels of protection. Due to space limitations, this article will only touch on some of the most beneficial endorsements available which are often overlooked.

Owner's Title Policy and Loan Title Policiy

Before jumping into the endorsements, however, I will provide a brief summary of what the basic policy covers. There are two types of policies offered by title insurance companies:

• Owners' policies which protect the buyer/owner’s title to the property, insuring that one hundred percent of the title is owned by the insured; and
• Loan policies which protect the financing lender’s interest in the property by insuring the priority of the lender’s lien on the property.

Commercial Real Estate Title Insurance Policy Endorsements

The basic policy protections are generally sufficient regarding residential mortgage transactions, particularly if the general survey exception is removed from the policy. Commercial transactions, however, due largely to the varying number of applicable laws, property types and uses, and several other factors require more comprehensive coverage. The following is a list of many of the endorsements which should be considered in almost any commercial transaction; some of them are part of a “Series” from which one must choose depending on the type of land or structure being insured.

The first endorsement Series which insureds should consider adding to the policy are related to zoning issues, known as the 3 Series. Generally speaking, all of the 3 Series endorsements provide coverage that the structure presently located on the land or to be constructed with the lender’s money complies with and is authorized by the applicable zoning code classification.  Just because a particular business has been operated on the property in the past or appears to “fit” with its neighbors does not guarantee that it is compliant or will stay compliant in the event of a change in ownership or to the structure itself. The applicable zoning endorsement, which is only issued after the title insurer is provided with confirmation from the municipality, provides protection in the event there is a subsequent violation notice.

The appropriate endorsement from the 4 Series (Condominium), 5 Series (Planned Unit Development) and 7 Series (Manufactured Housing Unit) should be considered if that is the type of structure located on the insured land.  The first two provide affirmative protection regarding assessments whereas the 7 Series protects against a manufactured housing unit not being considered a part of the insured real estate.

The next highly recommended series of endorsements, Series 8, relate to environmental protection.  These endorsements insure against loss or damage sustained due to any recorded environmental liens not otherwise shown as an exception in the policy.  Environmental liens can be massive and wipe out the entire value of property on which the environmental condition exists.  Lenders generally know to request the applicable endorsement from this Series, and it should be on every checklist. 

Another commonly requested and very important endorsement is from the 9 Series, also referred to as the “Comprehensive” endorsement, which provides a variety of coverages related to violations of land covenants, conditions and restrictions, as well as coverage related to encroachments on or by the insured property. For example, if the adjoining property’s paved dumpster pad is located partially on the insured property, this endorsement protects the owner or lender from any loss which might occur as a result. 

If the policy is insuring the lien priority of a deed of trust securing a loan being advanced over time, one should definitely include the appropriate endorsement from the 14 Series (Future Advance).  In broad terms, this Series insures against loss sustained as a result of (i) loan advances made by the insured lender after intervening liens such as mechanics or materialmen’s liens have been filed, (ii) re-advances and repayments made under a revolving line of credit, (iii) adjustment of the interest rate or the addition of interest to the principal balance.

The next endorsement I typically recommend is from the 17 Series which relates to access and entry to the insured property. Sometimes when a property is subdivided, one of the parcels is not allowed access for some reason such as being too close to an intersection or municipal right of way facility.  The 17 Series provide coverage against loss or damage suffered as the result of (i) the insured land not having physical access to a public right-of-way via an access easement shown in the policy or, (ii) the limitation of the right of access via existing curb cuts or entries to a public right-of-way.  Obviously, a current survey will be required for the carrier to issue this endorsement, but a current survey should be mandatory in any event. 

In the commercial real estate arena, where parcels are frequently subdivided, combined, have their boundary lines adjusted, etc., the next two Series of endorsements are well worth considering.  The 18 Series provide coverage for the land insured by the policy does not constitute a distinct tax parcel or parcels for real estate tax purposes, separate and apart from other property. The 19 Series are typically necessary when the insured property is made up of more than one parcel and insure that they are contiguous to each other with no intervening gaps or other parcels.  Once again, a survey will be required for the carrier to issue this endorsement. 

Another endorsement which should not be overlooked is the 20-06, which is available when the insured property consists of more than one parcel of land.  It provides insurance for lender rights found in almost every commercial deed of trust in use today, namely, that the carrier will pay a claim (if conditions warrant) without the lender needing to (i) accelerate the indebtedness, (ii) pursue remedies on other parcels of the collateral or, (iii) pursue any guarantor. 

Speaking of the necessity of a survey, I highly recommend Series 25 (Same as Survey) endorsement.  As some unfortunate owners and/or lenders have learned, there is a big difference between just removing the general survey exception from the policy and obtaining affirmative coverage that the policy is insuring the same property which is depicted in the survey. When possible, it is also advisable to have the legal description in the Deed and Deed of Trust refer to the new survey. 

As noted, these are just some of the almost fifty distinct endorsements available. An experienced commercial real estate attorney can evaluate the land, structure, loan terms and other factors to request the endorsements applicable to a given transaction to provide the client with the highest possible level of title insurance protection.

Richard Biemiller is a Pender & Coward shareholder focusing his practice in the areas of creditors’ rights, banking and financial institutions, commercial transactions and real estate.