Commercial real estate transactions can be very complex and oftentimes involve large sums of money, which makes title insurance vital for the protection of both the lender and the owner. In some circumstances, just the legal description for the commercial property can include dozens of pages; adding in building renovations, zoning changes, and multiple owners means that obtaining clear ownership can be challenging.
Like residential title insurance, commercial title insurance is evidence that the owner has the right to possess and use the land. Title insurance protects against things that have happened in the past, like unpaid taxes or liens against the property, that could impact the ownership. Also similar to residential title insurance, commercial title insurance includes two different types of policies:
- Loan Policy – Designed to protect the investment of the bank or other lender should a problem with the title surface at a later date.
- Owner’s Policy – Protects the buyer or owner of the property should title issues arise.
Residential and commercial title insurance differ, however, by the purpose and the nature of the property. In addition to protecting against title defects, commercial title insurance also protects from boundary mistakes, zoning conflicts, and environmental concerns. Based on the type of transaction, the underwriting and search requirements of commercial title insurance also may vary.
While there is an overlap in coverage with commercial and residential title insurance, there are also important differences. Misconceptions that they are the same can result in significant losses. Some of the biggest differences between commercial and residential title insurance coverage include:
Title Fraud
Commercial title insurance protects lenders and owners from fraudulent ownership transfers, discharges, or registrations of mortgages that happened before the date of policy and in the insured transaction. Fraud also is covered after the date of policy, up to $5 million. Residential title insurance protects both parties from title fraud that happened both before the date or after the date of the policy and in the insured transaction.
Taxes and Utilities
For both residential and commercial title insurance, lenders and owners are covered against losses due to taxes and/or utilities that were due and payable at the date of policy, but were unpaid, provided they form a lien. While residential coverage includes final meter readings, commercial coverage does not include final meter readings and supplemental billings issued after the date of policy.
Work Orders
Commercial title insurance provides coverage for lenders for outstanding work orders that existed at the date of policy for all loans up to $50 million. Owners have coverage for errors in responses from public officials related to governmental searches or inquiries made by legal professions. Residential title insurance provides coverage for both lenders and owners for outstanding work orders that existed at the date of the policy.
Building Permits
While commercial coverage protects lenders from structures and improvements that were built without permits for loans up to $50 million, owners do not have coverage for open permits or existing structures built without required permits. Residential coverage protects both lenders and owners from issues caused by structures or improvements made without proper permits.
Survey
Commercial title insurance protects lenders from defects that would have been revealed by an up-to-date survey, regardless of the property type or size of loan. Owners are covered for properties valued up to $25 million. For properties over $25 million, they may have coverage for any loss resulting from matters not disclosed on an existing survey. Under residential coverage, lenders are covered for those defects that would have been revealed by an up-to-date survey. Similarly, owners are covered if someone refuses to purchase of because of those adverse circumstances, or if they are forced to remedy the structure because it encroaches on neighboring properties or easements.
Ohio Real Title can provide information and guidance on the type of title insurance necessary for your investment, so contact us today.