FEATURE ARTICLE, MAY 2007

FINDING THE RIGHT TITLE
Title insurance can be used to clear unusual issues but it also can cloud previously complicated deals.
Justin S. Daniels

Daniels

Title insurance is purchased as part of any commercial real estate transaction. Simply relying on it to insure over a title problem instead of fixing the problem typically results in a cloud on title and a fight with the title insurance company later. There are circumstances, however, where it is difficult or impossible to resolve a title problem prior to closing and title insurance can be an overlooked mechanism for solving unusual problems in commercial real estate transactions.

Distressed property acquisitions typically entail paying off outstanding state, county and city real estate taxes and penalties from prior years and personal property taxes as well if assets are acquired along with the real estate. The buyer will typically require that the seller satisfy these past due taxes but sometimes the buyer will agree to pay all or a portion of such past due taxes.

In a recent unique case, two separate taxing authorities took the position that the seller owed no personal property taxes from 2 prior years in a transaction involving the sale of a manufacturing facility along with the personal property located onsite. The taxing authorities, however, could not produce any tax bills stating that no taxes were owed. The taxing authorities, however, did state in writing that they believed no taxes were owed for those 2 years. If such taxes were owed, the amount due would have been significant and altered the buyer’s willingness to pay the purchase price previously negotiated by the parties. The buyer refused to rely on the written assurances of the taxing authority and wanted seller and its owners to sign an indemnity agreement to protect buyer if the back taxes became an issue. Naturally, seller and its owners did not want to sign the indemnity resulting in a major hurdle to completing the transaction.

The title insurance company, with the parties now at an impasse, took center stage and eliminated the problem. The buyer notified the title insurance company of the issue and provided them with the written documentation from the taxing authority that no personal taxes were owed. Based on this information, the title insurance company granted special coverage for the personal property taxes for the 2 prior years. This was unusual in that title insurance companies usually just insure for real estate taxes and do not typically insure for personal property taxes. The lesson here was that title insurance could be used effectively to eliminate a non real estate tax issue that threatened the closing of the real estate transaction.

The proposed use of title insurance to resolve chain of title issues, however, can result in a potential cloud on title and a fight with the title insurance company later. General partnerships still exist and they can own real estate. In a particular transaction a California general partnership owned property in Georgia. California has no requirement that the general partnership file any certificate in the public records to evidence that it is a general partnership. The partnership also had no written general partnership agreement. Georgia, like other states in the Southeast, does not recognize the general partnership as the property owner and instead recognizes each individual general partner as the owner of the property.

The buyer requested that the seller cure the title defect by having each general partner along with the general partnership execute deeds in favor of the buyer. Each general partner refused to do so as they did not want to have state income tax withheld and were concerned about the individual tax consequences of the transaction. Instead, the seller said its handpicked closing attorney, who was a title agent, would have title insurance eliminate this title problem. If there was a problem later the buyer could just make a claim against the title insurance company. It appeared to be a tidy solution to the problem.

Upon closer inspection, however, the title insurance, in this case, was merely a band aid on a gaping wound of a title problem. Unlike personal property tax situation where the taxing authorities had given written assurances that no taxes were owed or a payment could simply be made to satisfy the past due taxes, chain of title problems create a cloud over title that is not easily fixed with a monetary payment. When the buyer goes to sell the property the new buyer will likely object to this title problem and it will be more difficult to fix since getting new deeds from prior owners can be very difficult and time consuming. Making a claim against the title insurance company, moreover, even if successful, will require time, effort and attorneys fees that may deter a willing buyer from closing the transaction. In other words, using title insurance to cover known significant chain of title issues not easily remedied by a monetary payment does not make good business sense. In the example above, each general partner ultimately executed a deed in favor of the buyer and Georgia state income tax was also withheld as buyer’s lender refused to fund the transaction without the deed execution and state income tax withholding.

Depending on the circumstances, title insurance can help seal the deal or merely hide a title problem that only gets worse with time. It is important to understand what title problems title insurance can or cannot solve. The improper reliance on title insurance may only reveal itself many years later when a cloud on title and the ensuing fight with the title insurance company sabotages the sale of the property.

Justin S. Daniels is a shareholder with Atlanta-based Wagner, Johnston & Rosenthal P.C.


©2007 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.