Jason Kruse, Managing Broker of the Colorado Group, Inc.

Commercial real estate sales transactions require several steps to get to the closing table.  These steps include a physical inspection of the property, an environmental report, financial analysis, competitive market analysis, securing a loan, and an appraisal and survey. An essential step is getting title insurance. Title insurance is absolutely necessary for a variety of reasons. Most importantly, it provides the buyer with a “clear and marketable” title to the property.  A clear and marketable title is defined as protecting the purchaser’s legal rights to the property if another party challenges ownership, along with assurances that the property can be resold at full market value without fear of litigation or reasonable title defects. Common examples include protection against unpaid mortgages, unpaid property taxes, child support liens, unpaid judgments, forged deeds, mortgages, and releases, and public-record clerical errors. What makes Title Insurance unique is that it provides legal coverage for pre-existing problems, unlike other types of insurance, and protects against future risk. Commercial property buyers should buy two policies: lender’s title insurance and owner’s title insurance. While the deed affirms the seller has the right to transfer ownership, title insurance covers the financial risk if that claim is untrue. A buyer of a commercial building needs this coverage because a title defect could affect use, development, and rental income for years. The policy needs to account for lost cash flow, not just the building’s value. 

Commercial policies also offer the advantage of special endorsements. Some examples of these endorsements are Deletion of Standard Exceptions 1-4 ($100); this endorsements deletes standard exceptions on the policy, thus providing coverage for 1. Parties in Possession, 2. Unrecorded easements, liens, encumbrances that exist, 3. Survey matters that would be disclosed by an accurate and complete land survey (why Title ask for surveys), 4. Unfiled Mechanics liens. A few other common endorsements are comprehensive zoning coverage (ALTA 3.1 $100-1500), which protects against violations that could shut down properties; environmental lien coverage (ALTA 8.2 $100), and specific access and easement endorsements that guarantee owners, tenants, and their customers can reach the building using the preferred access route.  These endorsements are worth the extra cost. Who pays for the coverage? While this can be negotiated, the cost for the owner’s policy is typically paid by the seller. Experienced commercial real estate brokers can provide referrals to title companies that they have worked with and have commercial experience. It is also advisable to have a commercial real estate attorney to review all the title work.  

Title insurance isn’t optional in a real estate transaction; it can save your butt!