Editor’s Note: The Edge is serializing an as yet unpublished book by Great Barrington attorney David M. Lazan. Here is the third of eight installments: Title, Title Insurance, Plot Plans and Surveys. Previous installments were Introduction and Chapter One: Real Estate Agents and Lawyers and The Purchase and Sales Agreement. Future installments will cover Financing Real Estate; The Closing; Condominiums; Buying Land and Building a Home; The Massachusetts Homestead Act; Nominee Trusts; and Short Sales.
Chapter Three: Title, Title Insurance, Plot Plans and Surveys
One of the important and valuable services a real estate lawyer provides is to determine the condition of the title to a property you contemplate buying or selling. Despite its prevalence, title insurance and the necessity of obtaining a title insurance policy still remain a mystery to many people. Also, clients are often understandably confused about the difference between a survey and a plot plan and the purpose of obtaining one or the other. This chapter will enable you to have a basic understanding of these important subjects.
In our Commonwealth, once a Purchase and Sale Agreement is signed, it is the Buyer’s obligation to determine whether the Seller’s title meets the requirements set forth in the Purchase and Sale Agreement. This determination is made by the Buyer’s lawyer, who also frequently acts as an underwriter and agent for the title insurer insuring a Buyer’s and lender’s title.
Lawyers examine title by reviewing the history of a property based on an analysis of copies of deeds, plans, easements and other documents found in the public records or obtained from third parties. This collection of documents is what we call an “abstract of title.” Reviewing a title may also require legal research or examination of original documents.
Until the condition of the Seller’s title has been determined, a Buyer should not make unnecessary financial commitments, other than those required to satisfy contingencies in the Purchase and Sale Agreement or to have their lawyer determine the status of Seller’s title. Also, Buyers should recognize that until they know the status of the Seller’s title, there is a small but measurable chance that the purchase may not happen. Unfortunately, the Purchase and Sale Agreement which we typically use in our county does not require that the Buyer make a claim of a title defect until closing. This can create obvious problems. When possible, it is a good idea, at least from a Seller’s standpoint, to include a provision in the Purchase and Sale Agreement requiring a Buyer to identify any title objections within a certain period of time but substantially before the contemplated closing of the transaction.
The fact that a title to a particular piece of real estate has changed hands many times or been subjected to mortgages on many occasions does not eliminate the potential of a title problem. Lawyers who examine titles and who handle the conveyancing and financing of real estate are human and mistakes can be made. Unfortunately, I have on more than a few occasions found titles containing problems which have been overlooked – sometimes minor and easily cured and sometimes critical– and which had to be cured by a Seller or borrower before closing. Unfortunately, in the worst cases, title defects have prevented a purchase and sale or the ability to finance a property.
B. Title Insurance
Unlike most insurance, which insures you in the event something happens in the future, a title insurance policy insures you for something that has happened in the past of which you and your lawyer were unaware. A title insurance policy is not a guarantee that title to a particular property is good. Rather, it is an agreement by a title insurance company to defend the insured in a court action if there is a claim of a title defect, and/or to indemnify the insured for actual loss or damage sustained due to a covered title defect. If you are obtaining a mortgage, you will normally be required to purchase a title policy for the lender. This policy does not protect your interest in the property; all it protects is the money owed to the lender. In order to protect your own interest, you must purchase an owner’s title policy.
Title insurance insures against defects in a title, which defects a title examiner either fails to identify or could not discover. These defects include documents which may have been undiscovered because they were misfiled in a registry, fraudulent documents, liens for unpaid estate tax, income tax, inheritance or gift taxes, or documents executed by incompetents. In fact, I have a list of some sixty different defects that can occur against which a title insurance policy may insure. There are certain types of title problems that title insurance does not cover, which your attorney can describe to you.
Critics of title insurance point to the relative infrequency of later-discovered title problems. However, the frequency of title problems varies from time to time and from jurisdiction to jurisdiction. If the risk insured against does in fact occur, the consequences can be devastating to the property owner.
Finally, when deciding whether or not to buy title insurance, you should consider the fact that, in Massachusetts, lawyers are only expected to examine title going back 50 years unless there is something in the last 50 years that suggests an earlier title question. If there are problems with a title that occurred prior to the lawyer’s search, those problems still exist and can, on occasion, cause an owner problems in the future. It is for these reasons that I always recommend that Buyers and lenders obtain title insurance. The cost of the insurance is almost always a fraction of the Buyer’s investment in the property.
C. Plot Plans
The primary purpose of a plot plan is to show the location of structures on a property, such as a home, garage, sheds, barns, swimming pools, tennis courts and driveways. A plot plan may also show fence locations and easements. A plot plan should show whether a neighbor has placed buildings or other structures including fences on the property being purchased (called “encroachments”). It may show whether a building has been built a proper distance from the boundary lines of a property as required by applicable law.
After the execution of a Purchase and Sale Agreement, most Buyers applying for a mortgage find that their lender will require a plot plan of the property. Even if there is no lender involved, I earnestly suggest that my clients retain a surveyor to prepare a plot plan.
Typically, a plot plan in Berkshire County will cost between $150 and $400. However, you should also know that not all plot plans are the same; some are more reliable and more detailed than others.
Plot plans should not be confused with surveys. Indeed, although surveyors prepare plot plans, they place language in a plot plan limiting their use and the surveyor’s liability for errors. Most state that the plot plan may not be used to erect fences or other boundary structures, to construct pools or to plant shrubs. Frequently, they will state that they do not show structures without foundations and sometimes even exclude driveways from the plan. Care should be used in selecting the surveyor who will prepare the plot plan.
A survey should document the actual, on-the-ground boundaries of a property, based on title and historic information and on a physical survey. A surveyor researches the property’s chain of ownership through deeds and past surveys and the surveyor goes into the field to find or place markers at parcel boundary corners and measure the lines and curves that connect the corners. The markers are often iron pins or cement bounds, although in old surveys they are sometimes piles of stones or even old trees. Sometimes, a property is described as bounded by a river or stream. It is important to be aware that these water-based property lines can change over time.
Surveys are not only more expensive than plot plans, they contain considerably more detail and are much more reliable with respect to the information they contain.
Names of abutting owners are shown on a survey and all evidence of possession along the boundary lines of the property such as, fences, walls, buildings, monuments, blazed trees, or otherwise, should be located as well as the character and location of all buildings. Easements of all kinds, roads, brooks, drains, utility lines, etc., on or across the property, should also be shown. Buildings and fences on abutting land within four feet of the property being surveyed should be shown, as well as all encroachments of eaves, cornices, blinds, etc. Surveys should show the nature, character and location of all building walls, independent, party or otherwise, at or near a boundary line.