April 6-April 19, 2016 —
COLORADO REAL ESTATE JOURNAL
— Page 27
Law & Accounting
T
his is the eighth in
a series of a dozen or
so articles that come
from some years of experience
using the Colorado Real Estate
Commission-approved contracts
for purchase and sale of real
estate for commercial real estate
transactions. Previous articles
addressed the buyer’s name, the
seller, the property, water rights
and ordering the title commit-
ment. This article continues the
title commitment discussion by
focusing on choices and difficul-
ties relating to obtaining owner’s
extended coverage.
The parties must choose
whether the title commitment
will or will not agree to delete
the so-called “standard excep-
tions” from the title insurance
policy. The standard exceptions
are: 1) parties in possession; 2)
unrecorded easements; 3) survey
matters; 4) unrecorded mechan-
ics’ liens; 5) gap period (period
between the effective date and
time of the title commitment to
the date the deed is recorded);
and 6) unpaid taxes, assessments
and unredeemed tax sales prior
to the year of closing. The con-
tract refers to the deletion of the
standard exceptions as “owner’s
extended coverage,” or “OEC.”
If the buyer wants OEC, the par-
ties have to choose whether the
buyer or the seller pays for it.
Tip:
Before you start a major negotiation
about who pays for OEC, find out
how much it costs.
The cost might
be so little that it’s not worth
discussing.
Trap:
What the parties often miss
whendecidingwhether the buyer gets
OEC is finding out what is required
to obtain OEC.
For example, the
contract does not require the sell-
er to sign the title company’s title
affidavit or agreement, yet one is
almost always required to obtain
OEC. Inmost ordinary residential
and commercial transactions, it is
presumed that the seller simply
will sign what the title insurance
company requires or will succeed
in getting it revised. But should
the seller refuse, the buyer might
have a problem getting OEC.
Tip:
Before settling on a title
insurance company for the transac-
tion and agreeing to obtaining OEC,
find out what kind of title affidavit
or agreement is required to provide
OEC.
The title affidavit or agree-
ment can be quite onerous. Some
title insurance companies require
an
affida-
vit executed
under penal-
ties or per-
jury (invok-
ing criminal
penalties for
a false state-
ment). Aseller
understand-
ably might
not sign one
of those. Fur-
ther,
these
agreement s
often include indemnifications
that, if the seller thinks about
them, could be quite costly if
called upon. Many title insur-
ance companies use an affidavit
or agreement that is far more
extensive than the seller’s deed
warranties. In some cases, it rep-
licates what the title insurance
company is insuring, allowing
the title insurance company to
sue the seller if a claim is made
by the buyer on its title insurance
policy. The seller wants the agree-
ment to be limited to matters that
the title company can’t readily
search: the existence of leases and
unrecorded agreements, if any;
violations of covenants, if any;
and, most importantly, that no
work has been done on the prop-
erty that is not paid for and could
be the basis for a mechanics’ lien.
Tip:
Consider agreeing in advance
the contents of the title affidavit or
agreement each party will be required
to sign.
The number of claims under
mechanics’ lien coverage sky-
rocketed following the 2008
crash in the real estate market.
Today, title insurance companies
are reluctant to provide mechan-
ics’ lien coverage. Even affirma-
tions and indemnities by the
seller often do not satisfy the title
insurance company, as the sell-
ers’ indemnity is only as good as
the solvency of the seller. Some-
times, title insurance companies
dismiss mechanics’ lien coverage
out of hand if the seller is a single-
purpose entity whose sole asset
is the property, which, of course,
the seller will no longer own fol-
lowing the closing.
Tip:
Before
settling on a title insurance company
for the transaction and agreeing to
obtain OEC, the seller should find
out if the title insurance company
will delete the mechanics’ lien excep-
tion from the title insurance policy
and, if so, what the company will
require of the seller in order to do so.
OEC usually requires a tax cer-
tificate showing no taxes due.
These certificates are customar-
ily obtained from county treasur-
ers for a modest fee (see CRS
§ 39-10-115). Unpaid taxes usu-
ally pose no problems at closing
since they can be paid from the
amount payable to the seller. If
the taxes are not to be fully paid
at or before closing, the contract
should say so. In addition, the
seller should exclude the real
property taxes exception from
OEC and alter §§ 2.5.2 and 13 of
the contract accordingly, as these
sections require title to the prop-
erty and inclusions be delivered
free and clear of the lien of taxes.
The last major requirement to
obtain OEC is a new improve-
ment location certificate or new
survey. The first three standard
exceptions of the title commit-
ment are sometimes referred
to as the “survey exceptions”
because they disappear when the
title insurance company gets a
satisfactory new ILC or new sur-
vey. Future articles in this series
will discuss ILCs and surveys.
Trap:
Certain choices regarding
title and survey may make the sur-
vey and OEC provisions illogical.
For example, the contract does
not make sense if it provides for
OEC, but does not require the
seller or the buyer to obtain a
new ILC or new survey satisfac-
tory to the title insurance com-
pany so OEC can be obtained.
Similarly, if the contract requires
the seller to obtain OEC and the
buyer to obtain the new ILC or
new survey, it only makes sense
that the contract relieve the seller
of its obligation to obtain OEC if
the buyer does not timely obtain
the new ILC or new survey. The
contract does not require, or even
prompt, the parties to make only
logical choices about the title
commitment and the survey.
The parties have to do that for
themselves
Tip:
When the contract
requires the seller to obtain OEC, it
also should include a requirement
that the seller use commercially rea-
sonable efforts to do what is required
in order to obtain OEC.
The contract makes no men-
tion of endorsements to the
title insurance policy the buyer
might require the seller to obtain.
Endorsements are customarily a
Beat U. Steiner
Partner, Holland &
Hart LLP, Boulder
Adding value to the commercial
real estate industry for over 25 years.
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