TEXAS REAL ESTATE LAW 11E

1. TEXAS REAL ESTATE LAW 11E Charles J. Jacobus

2. Chapter 15Methods of Title Insurance

3. Evidence of Title • Apurchaser wants to be fully advised on the status of the title, and that there is no “cloud on title” which would adversely affect his interest. • The real estate licensee cannot give advice as to the quality of the title. • It is the real estate agent’s obligation to inform the purchaser, in writing, that he should have the abstract examined prior to closing or that he should obtain title insurance. • There are two things the purchaser should be concerned about: • (1) the solvency of the defendant should title fail; and • (2) the expertise of those investigating the status of title. • TREC One to Four Family Residential Contract – Paragraph 6:

4. TREC Form OP-C

5. Marketable Title vs. Merchantable Title Marketable Title vs. Merchantable Title Title that is “free of defects of record.” Title “that is free from reasonable doubt as to matters of law and fact, such title is such that a prudent man, advised of the facts and the legal significance, would willingly accept, although a title need not be absolutely free from every technical and possible suspicion in order to be marketable.”

6. Methods of Title Assurance • Torrens system • Personal warranty of the grantor • Lawyer’s title opinion • Abstractor’s certificate • Title insurance

7. Torrens System of Title Registration • Not utilized in Texas! • The title to the real estate is reflected by a registration certificate. • The registration certificate includes a legal description. • All adverse claims against the real estate would also be reflected. • When a lien is placed on the property, one turns in his title registration certificate and receives a new one reflecting the new lien. • The old registration certificate is then destroyed. Not in Texas!

8. Personal Warranty of the Grantor • The grantor usually gives warranties of the title in the deed. • If there is a defect in the title, the purchaser has the right to pursue a cause of action against the grantor. • The difficulty involves the quality of the grantor, who may not be alive, in existence (if a corporation), or financially solvent. • The personal warranty of the grantor can be a very good method of title assurance, especially when the grantor is large, solvent, and reputable. • A solvent grantor (Exxon Mobile) probably provides better assurance than some title companies (but remember Enron!).

9. Lawyer’s Title Opinion • At one time the most common method of title assurance. • Still frequently used in some of the rural areas of Texas. • It is also used in cases where the chain of title is very complicated. • Commonly thought that the attorney’s title opinion ensures “marketable title”.

10. Lawyer’s Title Opinion – Disadvantages • 1. Most lawyers find that reading the abstracts and writing opinions is a time-consuming process; and many purchasers find that it is too slow. • 2. The lawyer runs the risk that the abstract compiled may have been improperly prepared or may be missing some instruments. • 3. There is no guarantee in the event that title fails that the purchaser can have any recovery. • 4. There are always the problems of incompetence, errors in judgment, and mistakes.

11. Abstractor’s Certificate • An abstractor compiles abstracts that affect parcels of real estate. • Abstract reflects chain from the current date back to the origin of title. • But it gives the purchaser no protection in and of itself. • An abstract is furnished to an attorney as basis for the title opinion. • Abstractor has a high level of expertise, particularly in rural counties where there may be no title companies. • An abstractor is normally bonded in the event there is an error. • Bond may be insufficient and purchaser may need to prove negligence. • There is no malpractice insurance available for abstractors. • Abstract only lists the instruments affecting the property, • rather than the specific encumbrances.

12. Abstractor’s Certificate

13. Title Insurance • The most common method of title assurance used in Texas. • Insurance companies write their own policies or issue from others. • Allows for spreading of the risk in the event of a failure in title. • Solvency of title insurance companies is monitored by TDI. • Title companies have their own abstract plants and abstractors. • They also have their own lawyers for title opinions. • The title insurance industry is very tightly regulated by TDI. • All forms are the same, and all procedures and rates are the same.

14. Resource – Texas Department of Insurance www.tdi.texas.gov

15. Title Insurance A title insurance policy is a contract of indemnity. One-time premium charge. Indemnifies (protects) from loss in the event title fails for any defect that accrued prior to the effective date of the policy. Law creates an affirmative duty on the title company to investigate claims. Rates are set by the TDI so there is no advantage to “shopping around”.

16. Title Insurance Rates

17. Title Insurance Rates 1. For policies of $100,001 - $1,000,000 (1) Subtract $100,000 from policy amount. (2) Multiply result in 1.(1) by $.00534 (3) Add $843 to result in 1.(2). 2. For Policies of $1,000,001 - $5,000,000 (1) Subtract $1,000,000 from policy amount. (2) Multiply result in 2.(1) by $.00439 (3) Add $5,649 to result in 2.(2). 3. For policies of $5,000,001 - $15,000,000 (1) Subtract $5,000,000 from policy amount. (2) Multiply result in 3.(1) by $.00362 (3) Add $23,209 to result in 3.(2). 4. For policies of $15,000,001 - $25,000,000 (1) Subtract $15,000,000 from policy amount. (2) Multiply result in 4.(1) by $.00257 (3) Add $59,409 to result in 4.(2)

18. Title Insurance – The Solvency Issue • In bad economic times title insurance claims always increase. • To ensure solvencyTDI sets the premiums based on risk, losses, profits, and operating expenses. • If title fails, the underwriter will stand good for the loss. • If the title company becomes insolvent TDI places the company into receivership and provides a fund for claimants to pursue damages. • TDI further limits how much insurance any title company can write. • In large transactions, one may have to utilize the services of two or more title companies to either co-insure or reinsure.

19. Title Insurance – Preliminary Title Information • Usually includes obtaining a title commitment. • It is not an opinion or report of the status of title. • It obligates the insurer to issue a policy subject to its terms and requirements. • The commitments terminates after 90 days. • A representation by the title company as to who has good title. • One may require a nothing-further certificate which updates title for loans, peace of mind, or assurance that disputed liens are removed. • The nothing-further certificate is typically issued for a nominal charge by the same company that issued the original title policy.

20. TREC One to Four Family Residential Contract (Resale)

21. Title Insurance – Types of Title Insurance Policies • There are normally two policies issued: one issued for the benefit of the lender, and one issued for the benefit of the new owner. • The loan title policy is generally issued at a nominal cost and insures that the lender’s lien priority is good. • This policy has different title coverage than the owner’s title policy. • Both continue coverage for a period of time, even after resale. • Upon resale the owner’s policy converts to a warrantor’s policy. • In foreclosure the mortgagee’s policy continues in force. • The mortgagee can also assign the mortgage to another lender, and the policy stays effective for that new lender.

22. Title Insurance – Good and Indefeasible Title • The owner’s policy guarantees good and indefeasible title. • This is a higher duty of care to the owner than marketable title. • Marketable title means the title is reasonably free of defects of record. • Indefeasible title has been defined as a title that cannot be defeated, set aside, or made void. • Title insurance guarantees much more than just marketable title. • It guarantees against • forgeries in the chain of title, • incapacity of parties in the chain of title, • unrecorded interests that may affect the property, • and virtually any other defect of which the owner had no actual knowledge or constructive notice.

23. Title Insurance – Scope of Coverage • The basic duty of a title company is not to disclose defects of title, but to indemnify against any loss from defects in title. • It insures the real estate at the purchase price. • It does not increase in coverage as the value of the real estate increases, unless an additional premium is paid. • The duty to defend is generally set out in the terms of the policy. • Does ensure access to the parcel but not the quality of that access.

24. Covered Risks – Form T-1R: Owner Policy of Title Insurance This Policy covers the following title risks subject to the Exceptions (p.___) and Exclusions (p.___), if they affect your title to the land on the Policy Date. We do not promise that there are no covered risks. We do insure you if there are covered title risks. 1. Someone else owns an interest in your title. 2. A document is invalid because of improper signature, acknowledgment, delivery, or recording. 3. A document is invalid because of forgery, fraud, duress, incompetency, incapacity or impersonation. 4. Restrictive covenants apply to your title. 5. There is a lien on your title because of: · a mortgage or deed of trust, · a judgment, tax, or special assessment, or · charge by a homeowner's or condominium association. 6. There are liens on your title for labor and material which have their inception before the policy date. However, we will not cover liens for labor and material that you agreed to pay for. 7. Others have rights in your title arising out of leases, contracts or options. 8. Someone else has an easement on your land. 9. You do not have good and indefeasible title. 10. There are other defects in your title. 11. There are other liens or encumbrances on your title. This Policy also covers the following title risk: You do not have any legal right of access to and from the land.

25. Title Insurance– Obligation to Defend • The title company insures against loss or damage incurred as a result of the five items specified on the face of the policy. • The company is not required to defend any claims excluded from coverage under Schedule B of the standard form (the standard exceptions).

26. Title Insurance – Notice to Company • The insured party must, within a reasonable time, give the company written notice of the pendency and authority to defend. • The company is not liable for damages until it has reached the court of last resort and such adverse interest or claim has been established.

27. Title Insurance – Continuing Coverage If any title problems arise after the insured has sold the property, he still has title insurance coverage. The coverage extends into perpetuity. The company insures not exceeding the amount of insurance stated on the face of the policy.

28. Title Insurance – Standard Exceptions • There are certain standard title exceptions included in the title policy against which the title policy will not insure the purchaser, unless an additional premium is paid or special riders are attached to the policy. • These exceptions are listed under Schedule B of the policy. • They are as follows:

29. Title Insurance – Standard Exceptions 1. The following restrictive covenants of record itemized below (the Company must either insert specific recording data or delete this exception).

30. Title Insurance – Standard Exceptions • 2. Any discrepancies, conflicts, or shortages in area or boundary lines, or any encroachments or protrusions, or any overlapping of improvements. • This exception (except for “shortages-in-area”) can be deleted in residential policies for an additional premium of 5% of the basic rate. • This requires the title company to use an approved surveyor. • If the discrepancy is due to the surveyor’s error, the title company has no liability.

31. Title Insurance – Standard Exceptions 3. Homestead or community property or survivorship rights, if any, of any spouse of any insured.

32. Title Insurance – Standard Exceptions 4. Any titles or rights asserted by anyone including, but not limited to, persons, corporations, governments, or other entities, to tidelands, or lands comprising the shores or beds of navigable or perennial rivers and streams, lakes, bays, gulfs, or oceans, or to any land extending from the line of mean low tide to the line of vegetation, or to lands beyond the line of the harbor or bulkhead lines as established or changed by any government, or to filled-in lands, or artificial islands, or to riparian rights or other statutory water rights, or the rights or interests of the State of Texas, or the public generally in the area extending from the line of mean low tide to the line of vegetation or the right of access thereto, or right of easement along and across the same.

33. Title Insurance – Standard Exceptions • 5. Standby fees and taxes for the year 20__ and subsequent years, and subsequent assessments for prior years due to change in land usage or ownership. • Everyone is considered by law to be on notice of taxes and tax liens. • Taxes arise at the first of every year and stay with the property until paid. • The policy does insure that all taxes prior to the current year have been paid and that the only taxes that the purchaser will be liable for are those for the current year and subsequent years.

34. Title Insurance – Standard Exceptions 6. All liens and instruments creating any evidence of said liens in the property, and whatever might still be of record at the time the title search is performed.

35. Title Insurance – Standard Exceptions • An additional exception is the rights of parties in possession. • Title company may add this exception where the purchaser waives the inspection of the land by the title company. • Title company may charge an additional fee for personal on-site inspection of the property. • Schedule B also indicates that the policy is subject to the conditions and stipulations of any leases or easements shown in Schedule A. • Courts have held that a purchaser has a duty of inspection because the right of parties in possession is equivalent to constructive notice. • This exception also applies to easements or any other obvious encumbrance.

36. TREC One to Four Family Residential Contract (Resale)

37. Schedule B Exceptions – Form T-1R We do not cover loss, costs, attorneys' fees and expenses resulting from:1. The following restrictive covenants of record itemized below:2. Any discrepancies, conflicts, or shortages in area or boundary lines, or any encroachments or protrusions, or any overlapping of improvements.3. Homestead or community property or survivorship rights, if any, of any spouse of any insured. (Applies to the Owner's Policy only.)4. Any titles or rights asserted by anyone, including, but not limited to, persons, the public, corporations, governments or other entities a. to tidelands, or lands comprising the shores or beds of navigable or perennial rivers and streams, lakes, bays, gulfs or oceans, or b. to lands beyond the line of the harbor or bulkhead lines as established or changed by any government, or c. to filled-in lands, or artificial islands, or d. to statutory water rights, including riparian rights, or e. to the area extending from the line of mean low tide to the line of vegetation, or the rights of access to that area or easement along and across that area.5. Standby fees, taxes and assessments by any taxing authority for the year _____, and subsequent years; and subsequent taxes and assessments by any taxing authority for prior years due to change in land usage or ownership, but not those taxes or assessments for prior years because of an exemption granted to a previous owner of the property under Section 11.13, Tax Code, or because of improvements not assessed for a previous tax year.6. The following matters and all terms of the documents creating or offering evidence of the matters (We must insert matters or delete this exception.)

38. Schedule B Exclusions – Form T-1R 1. We do not cover loss caused by the exercise of governmental police power or the enforcement or violation of any law or government regulation. This includes building and zoning ordinances and laws and regulations concerning: a. Land use b. Improvements on the land c. Land division d. Environmental protection 2. We do not cover the right to take the land by condemning it, unless: a. a notice of exercise of the right appears in the public records on the Policy Date, or b. the taking happened before the Policy Date and you bought without knowing. 3. We do not cover title risks: a. that are created, allowed, or agreed to by you, b. that are known to you, but not to us unless they appeared in the public records, c. that result in no loss to you, or d. that first affect your title after the Policy Date. 4. We do not cover the effect of failure to pay value for your title. 5. We do not cover lack of a right: a. to any land outside the area specifically described in item 3 of Schedule A, b. in streets, alleys, or waterways that touch your land. 6. We do not cover any claim based upon allegations that your purchase of title: a. was a fraudulent conveyance, transfer, voidable distribution, or voidable dividend; b. should be subordinated or recharacterized as a result of equitable subordination; c. was a preferential transfer unless. 7. We do not cover the refusal of any person to buy, lease or lend money on your land because of unmarketability of the title. 8. We do not cover claims concerning the physical condition of your land or of the access to your land.

39. Title Insurance – Disadvantages • Insuring a property, the value of which may exceed the value of the title insurance company’s assets. • A similar exception would be the purchase of land because it would not cover the cost of the subsequent improvements erected on that property, unless the title policy has specific provisions for renewal in the event of construction of the specified improvements. • The same applies to normal inflationary increases in real estate values, unless an additional premium is paid to increase coverage. • Another major exception is one in which the grantor of a piece of property is probably more solvent than the title company.

40. Questions for Discussion 1. What is the real estate agent’s job with regard to evidence of title? 2. What is marketable title? 3. What is good and indefeasible title? 4. What are the three most common methods of title assurance used in Texas? 5. What are the two most important issues when a purchaser is considering title assurance?