When you are purchasing a home, it is important to know that there won’t be any questions about your ownership of the property once the purchase is complete. Historically, attorneys were often hired to research the history of the property to confirm that there were no questions in this regard. Currently, in Colorado, the seller typically pays for similar research by a title insurance company. The title company then issues a title policy insuring that the new owner has good title to (clear ownership of) the property. The standard Colorado purchase contract generally establishes an agreement that the seller will provide the buyer with a commitment for title insurance by a specific date. It also provides a period for the buyer to review the commitment and object to unacceptable title conditions. We typically allow a week to 10 days for the commitment and 3-5 days for the review.
While title insurance policies are designed to cover you if there is outright fraud in the sale of the property — if it was the husband’s girlfriend rather than his wife that signed the closing documents for example — these kinds of problems are not common. Typically, our review of the title commitment focuses on four issues:
Limitations on Use. As I’ve noted elsewhere, your right to use your property can be limited by local regulations and state laws. But there can also be use restrictions that are connected with a specific property or set of properties. Subdivision covenants can limit the way you use the property, as can limitations placed in earlier deeds by a previous seller or agreements between the city and a developer.
Obligations of Ownership. Financial and other obligations can be recorded in similar ways. In the mountains, for example, covenants, deeds, or other agreements can create obligations to contribute to building roads, plowing roads, or drilling and maintaining wells.
Rights of Others to Use the Property . Almost without exception, others will have “easements” which give them the right to use portions of your property for specific purposes. In nearly all residential subdivisions, there are easements that allow utility companies to install and maintain utility lines on certain portions of your property. Easements can also give someone the right to drive across your property, fly over your property, mine your property, or visit their wife’s grave on your property.
Liens Against the Property. A lien is a record of a right to collect money when a property is sold. Lenders file liens to record loans on a property. Governmental entities file liens to record taxes owed by the properties owner. Contractors and vendors file liens to record money owed for work they have completed or products they have installed on a property. You don’t want to buy the property with the lien in place.
In the title commitment, the title company will reference recorded documents that can create these kinds rights and obligations. In some cases, references to problematic issues will be obvious, a reference to a $30,000 tax lien for example. In others, the commitment may simply refer to the subdivision covenants. If you don’t read the associated document carefully, you may not learn about your responsibility to provide easements, to pay for road construction or maintenance, or to get permission from your neighbors to change the color of your house. You need expert assistance, either a good real estate agent or a good real estate attorney (or both), to assist in the review of the title commitment.
There are four parts to the title commitment:
The Pre Printed Form. The pre printed language that outlines the general parameters of the coverage and the title company’s commitment to deliver the insurance policy.
The Descriptive Details. A page listing the property covered, the type of policy to be provided, the names of the buyer and seller, and the cost of the coverage. Check to make sure they have your name spelled right!
The Requirements. Schedule B, Section 1 (Requirements) is where the title company outlines what they will require before they will close and insure the property. Typically, this refers to routine things such as the signing of the deed, the payoff of the seller’s loan, and the recording of your loan. But this is also where they’ll reference liens that need to be paid off before the sale closes.
The Exceptions. Schedule B, Section 2, (Exceptions) is the list of items that the company is “excepting” or excluding from coverage, the list of documents placing limitations on your rights to the property that they are not going to insure you for. This is where they’ll have the documents, like subdivision covenants or road maintenance agreements, that limit your rights to the property or create financial obligations for the owner of the property. This is also where they will list documents that give others rights to use your property via easements or other means.
We typically recommend that our clients obtain a specific type of title insurance policy called an ALTA Residential policy rather than the standard ALTA Owners policy. This policy is commonly called an “extended coverage” or “plain language” policy. This type of policy provides substantial protection not provided in the standard policy. For example, it insures the buyer for liens filed on the property after closing, but arising from actions of the previous owner, and for any damages that might result because of survey errors.
If serious problems are reflected in the title commitment, the standard Colorado contract gives the buyer the right to object to these problems and to let the contract terminate if the seller cannot address them to the buyer’s satisfaction before closing. If there are subdivision covenants that the buyer is uncomfortable with, the seller will generally not be able to do much about that. In other situations, however, there may be things that the seller can do to address a problem. They may be able to purchase additional insurance coverage through the title company that will make the buyer comfortable. They may even be able to convince neighbors to give up easements that the buyer is worried about.
While surveys are not produced by the title company, the information reflected in the survey overlaps substantially with the information in the title commitment. For example, easements described in the title commitment, at least the most common easements that provide a right to use a limited portion of the property, should be reflected on the survey. Similarly, if the survey shows that fences or decks extended beyond the property lines, the title company will list this “encroachment” as an exception in Schedule B-2. This means that they will not cover you if you suffer damages as the owner because these structures extend onto your neighbors property.
The title company should also provide the buyer with a copy of the tax certificate indicating the tax levy on the property, the taxing districts to which taxes are due, and a statement indicating if there are any unpaid taxes or assessments on the property. The standard Colorado contract gives the buyer the right to review tax levies within “special taxing districts” and to terminate the contract if they are unsatisfied. To exercise this right, however, you need to obtain the information and object by the title objection deadline. It should also be noted that the clause as written is somewhat ambiguous, given that there is no clear definition of what a “special taxing district” is.
At the same time that you’re receiving the title documents, you’ll be receiving documents from the Home Owners Association if you’re property is governed by one. If you do this right, you’ll have the option of reviewing all the rules and regulations of the HOA, their financial status, and the minutes of recent meetings of the owners and the HOA board of directors. If you find things in these documents that you’re not satisfied with, a properly drafted contract will give you the right to terminate the contract.