What do you mean by title exceptions?
If I buy a parcel of land, aren’t I the owner, plain and simple?
Well, not exactly.
When you buy real estate, you aren’t just buying a physical asset, but rather the bundle of legal rights associated with that asset (right of use, right of possession, etc).
It turns out that sometimes this whole bundle of rights is not transferred when you purchase a property.
For this reason, property buyers will often purchase title insurance – so their rights as owner are insured.
As you can imagine, title insurance is an important part of the buying process.
But title insurance is not a complete guarantee that all is well.
This is where title exceptions – a must-know for property owners – come in.
Keep reading to find out more.
1. What is a title exception?
Title insurance protects against financial loss caused by defects in title to real estate.
If you have a claim that attacks the title or experience a covered loss, your title company will defend, cover, reimburse, or insure your property up to the policy limit.
This is also where title exceptions apply.
Every title insurance policy lists certain exceptions that are excluded from coverage.
While this is nothing unusual, it is essential that you (as the property owner) are aware of the policy.
Here is a list of standard exceptions:
2. What does accepting a title exception mean?
Accepting a title exception means accepting whatever encumbrance, burden, or restriction comes with it.
This may not be what you want to hear as a property owner.
A buyer that accepts an exception to the title accepts whatever rights have been withdrawn or limited.
They also accept whatever burden may come with the subject property.
For example, if there is a title exception for an existing access easement, you are accepting that easement and the easement holder’s right to use your property for access.
Purchasing a piece of land with a title exception means that the buyer cannot challenge the seller on that matter in the future.
3. What can you learn from the title commitment?
Unfortunately, just reading the title commitment may not tell you everything you need to know about the title exceptions.
When you open escrow on a property, you’ll receive a commitment for title insurance.
A title commitment includes items like the owner’s name, property legal description, exceptions to the title policy, and requirements that must be completed before a title policy can be issued.
After you read the title commitment, you may need to do follow-up research on any special title exceptions to fully understand them.
You or your attorney may also request a copy of the recorded documents from the title company in order to review the details.
In this case, a list of special exceptions may contain the recording information for each item as well as a general description.
Doing additional research can help inform your next steps about what to do.
4. Are title exceptions common with large tracts of land?
The short answer is yes.
A seller may advertise a large tract of land, yet they’re selling it with a deed that says the property has “exceptions to the title.”
What does this mean?
Should you continue to move forward?
Is it cause for concern?
An exception can mean a variety of things from a buyer’s perspective.
We’ll break it down into three categories: encumbrance, reservation, and encroachment.
An encumbrance is a burden on the seller’s property.
This often comes in the following forms:
This is a monetary claim against the property, including mortgages, federal income-tax liens, property tax liens, etc.
Either way, it’s something that affects the owner’s use of the physical property, such as limiting development or allowing another party to use a portion of your property for a specific purpose.
This is usually a limitation on the use of your property and could come in a variety of forms.
It could be anything from the square-foot minimum for new construction to a restriction on removing existing trees.
Restrictions most commonly come into play when an HOA is involved.
A reservation is a reservation of interest or profit.
It is usually some right in the property that the seller wants to keep.
Some common reservations that you may encounter as a buyer are retaining the right to cut timber for several years or having hunting rights to lease the property at a specified rate for a certain number of years.
Mineral rights also fall under reservation, and you should keep this in mind as a buyer.
Sometimes, these rights have been severed, and you’re only being sold the surface rights.
This can be a title exception.
A seller may own the mineral rights to the property and want to retain them and only sell the surface rights.
The seller could also lease the mineral rights that go along with the land.
Because this may mean someone else can use your land to extract any minerals beneath it, you’ll want to be aware of this.
An encroachment is defined as an illegal extension of Party A’s property onto the property of Party B.
This could be a big extension (road, building, underground mine) or a small encroachment (antenna or fence line).
Encroachments are most often found by deed-mappers drawing the boundaries on a topographical map or a surveyor working in the field.
Encroachments can be both accidental and deliberate.
Even if an encroachment is an accident, you (as the buyer) don’t want to accept it by implicitly acknowledging it.
You could do this by accepting all the exceptions in the title.
Encroachments should always be disclosed in a listing agreement and sales contract.
However, if a seller is not aware of an encroachment (i.e. a fence line that encloses on his property), then it may not be disclosed.
For this reason, it is a good idea to have a land surveyor come out to walk the boundaries.
You can also learn more at our blog post on encroachments.
5. Should there be a survey of the property when there are title exceptions?
If there is no recent survey for the property for you to review, you might want to order one.
Pay a professional surveyor to come out and get you the detailed information you may be struggling to find.
While you may have a plat map from the seller, this will generally only tell you the general location of the property.
The property survey will contain more detailed information.
Any of the following could be included in the survey.
6. Will title insurance cover you for unpaid property taxes?
Title insurance will not cover you for unpaid property taxes that are not known at the time of closing.
This insurance will also not cover unpaid municipal or IRS liens as well as unpaid gas, electric, or water bills.
Be sure to check for these so you can be prepared and get this handled if it may impact your property ownership.
The title company will search for all of these liens for you, but you can also do your own research using a software like DataTree.
7. What is the difference between a title commitment and a title policy?
A title commitment comes before the closing while the title policy is issued after the closing.
The title commitment states that a title company is willing to issue title insurance under certain conditions.
Often, these conditions revolve around whether the seller fixes certain problems.
After that, they will provide coverage for the title property.
The title commitment will list out any potential issues, exclusions, or exceptions that appear on the title record as of the effective date of the commitment.
This way, you’ll know what issues exist or what other problems may come up in the future.
However, you should know that this isn’t necessarily an inclusive list.
If no issues are listed, it doesn’t mean there are no current issues (or that there won’t be future issues).
You can discuss the best course of action with a title agent.
It is also wise to review the title commitment with a lawyer.
Alternatively, the title policy is the actual insurance against events that occurred in the past.
There are two types of policies issued.
One is the owner’s policy and the other is the loan policy.
The owner’s policy protects against losses from ownership problems that arose before you bought the property (but weren’t known at the time of purchase).
The loan policy is issued to the mortgage lender.
It protects the lender’s interest in the property until the buyer pays off the mortgage.
Most lenders will require this.
In the event that a claim against your property voids your title, the policy will repay the balance of your mortgage.
The loan policy will last until you repay your loan.
If you choose to refinance your home, then you’ll need to buy a new loan policy.
Always buy a title policy from a licensed company.
8. Is there a way to obtain “extended coverage”?
You may be able to pay an additional fee for “extended coverage.”
This helps you obtain additional protection regarding some title exceptions by buying endorsements.
Doing this will insure you against certain exceptions – you’ll just have to pay a higher premium amount at closing.
Your title company can advise you on additional coverage and endorsements available.
Your attorney is also a helpful individual to consult during this process.
9. What are deed restrictions?
A deed restriction (also known as a restrictive covenant, protective covenant, covenant of record, restriction of record, or title condition) are private agreements that the seller or a previous owner entered into that run with the land.
Certain deed restrictions have time limits and renewal options.
Restrictions should be a matter of record and noted in the deed of conveyance.
10. How do you deal with conditions that led to exceptions?
Assuming you have an objection clause in your purchase contract, you can address the concerns you find during the title review with the seller.
At this point, you (or your attorney) will notify them of the item that you find unacceptable.
You’ll then require that the seller remedy it prior to closing.
Here are two scenarios where you may consider addressing conditions with the seller…
If you find that you and the seller cannot agree during this stage in the process, you may find that terminating the property purchase altogether is a better move (depending on the risk you would take on by moving forward).
11. Can you remove, modify, or insure over exceptions?
The title commitment that you read will list a variety of exceptions (both general and special).
However, these exceptions are not written in stone.
Keep in mind that you (and your attorney) can request that the title company or seller remove, modify, or provide coverage for certain exceptions.
Sometimes a title company will remove or modify the general exception relating to matters that a survey would show.
All you have to do is send a recent survey of the property – yet another reason why it pays to have a survey done of the property.
You can also have exceptions removed for liens as long as you send evidence that the liens have been paid off.
12. How do you dispute a title exception?
To dispute or resolve title exceptions, first review the title commitment to understand the exceptions listed.
Engage a real estate attorney to assess the validity and impact of these exceptions on your property rights.
Then, negotiate with the seller or the title insurance company to remove, modify, or insure over specific exceptions.
If needed, conduct a more detailed search of public records for additional clarity.
Finally, continue legal negotiation or mediation to reach an agreement that protects your interests and resolves the exceptions before proceeding with the property transaction.
If you’ve found a great property, you may be ready to rush the process and just get that purchase agreement signed.
Yet, you’ll want to make sure you thoroughly examine the title commitment and exceptions to ensure you’re getting a fair deal.
Because title exceptions can be complicated, be sure to enlist the help of a title agent and attorney.
Their recommendations can help guide you through a complex process and advise you against any hasty action.
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Disclaimer: we are not lawyers, accountants or financial advisors and the information in this article is for informational purposes only. This article is based on our own research and experience and we do our best to keep it accurate and up-to-date, but it may contain errors. Please be sure to consult a legal or financial professional before making any investment decisions.