2014 October Title searches should not be delayed

By James L. Goldsmith, Esq.

Here's a case that illustrates the need to promptly engage the services of a title abstractor upon the execution of an agreement of sale. The facts, simply stated, are as follows. A group of doctors sought to buy a building they could convert to medical facilities that included rooms where minor procedures could be performed. By moving their practice out of the local hospital, they stood to capture more than a million dollars in additional revenue annually.

Their buyer agent located an ideal building though it was tenant occupied. The tenant's lease ran an additional six months after which the tenant would vacate and the doctor's could settle and begin their work on the interior of the building.

Anticipating their move, the doctors incurred about $80,000 in architectural fees and an additional $100,000 in the purchase of cabinets, sinks, tables and other items appurtenant to the clinical facilities they were to construct.

The buyer agent was given a copy of the last recorded deed, but held it until about a month before settlement. She then gave the deed to the title company to set in motion the procurement of a title binder that would be necessary for settlement.

Unfortunately, the abstract company uncovered a right-of-first refusal that the seller had granted to his predecessor-in-interest. The seller could not convey the property to the doctors unless that former owner released his right-of-first refusal. He did not do so! The doctors were unable to go through with their purchase and were left holding the architect's tab as well as the cost of all of the items purchased in anticipation of the move.

As you can imagine, the doctors were not planning to accept these losses and turned to the seller. Unfortunately for the buyer, the seller benefitted from a limitation of damages clause in the title provision of the agreement of sale (a PAR form) that provides that if the seller is unable to give marketable title, then buyer may terminate the agreement and get their deposit money back as well as sums for other expenses incurred. Those expenses include costs of abstract fees, flood insurance and other such items. The list of reimburseables did not include the bulk of the doctors' expenses for the architect and furniture/equipment.

In the absence of this limitation of liability provision, seller would have been on the hook for the reasonable damages incurred by buyer resulting from the seller's inability to convey marketable title as promised in the agreement. There are, however, reasons for such a limitation. Generally, sellers are unaware of conditions that affect the marketability of title. Sellers don't set out to sell property they know will violate the title provision. To do so would be a futile exercise. Title and the conditions that affect are illusive creatures and it is rare that a seller is aware of their impact, hence the limitation of liability clause.

Because the seller benefitted from such a provision, the buyer almost got stuck with about $200,000 in useless services and purchased items. I say "almost" because buyer had another source for these losses: the buyer agent. Why did the buyer agent hold the deed and not order the title abstract immediately upon execution of the agreement. True, a bring-down search would have to be conducted to cover the period between the original abstract and settlement, but that is hardly a heavy price to pay.

In commercial transactions it is the practice to obtain a title abstract immediately upon execution of the agreement. In commercial transactions buyers frequently invest substantial sums in due diligence and other matters well before settlement. Why spend the money exploring the various facets of the property if title cannot convey?

In residential transactions, the norm has been to assure that the title abstract is performed and that a title binder is in place for settlement purposes, rarely before. It is time for the trend to change. I encourage all buyers to obtain their title reports as soon as reasonably possible. In a residential transaction if the title search is performed in the first 10 days (or the period reserved for inspections) the buyers will be able to walk away from the transaction even if title is marketable but unsatisfactory to buyers (e.g., the title is marketable but burdened by restrictive covenants that preclude the buyers from using the property as they desire).

The downside of ordering the title abstract on day one is that the cost of the abstract is lost if the buyer terminates the agreement for other purposes, such as might occur if a home inspection reveals defects. Most abstracts come in around $150, so the loss is not extreme. Also, why would we spend $300-$400 on a home inspection when the title abstract may be the reason the agreement is terminated?

Copyright © James L. Goldsmith, Esquire, CALDWELL & KEARNS, P.C., 2014 All Rights Reserved

Jim Goldsmith is an attorney with Caldwell & Kearns and serves as general counsel to PAR. A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees. He and his firm represent and defend real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. Jim also defends REALTORS® in disciplinary hearings conducted by the Real Estate Commission. He routinely counsels employers on employee relations issues and is one of the voices of the PAR Legal Hotline. He may be reached at www.caldwellkearns.com