Understanding How a Survey Enhances the Real Estate Closing Process

Underlying Tension in Real Estate Closings between Lenders, Borrowers and Title Insurance Carriers

Commercial real estate closings are generally a collaborative process; everyone is working toward a closing with great optimism for the future. Nonetheless, all of the parties involved are also looking at ways to protect their individual interests in the event the borrower’s business plan or something else does not work out as expected.  For example, both lenders and borrowers want the title to the property to be as “clean” as possible, meaning it has a low number of easements or other encumbrances, i.e. exceptions, so that it is more marketable in the event of a voluntary sale by the borrower or an involuntary foreclosure sale by the lender. Both parties rely almost entirely on a title insurance policy as protection for this.  But the title insurance carrier does not want to expose itself to any risk by insuring the title to a property which has issues, so in contrast to the lender and borrower, it is incentivized to list as many items as possible as exceptions to the title. Enter the surveyor who actually visits the property, and thus can help clarify whether a particular exception listed by the carrier is valid and applicable to the property or not.

The Title Commitment and Survey Complement Each Other

While recently looking for a surveyor outside my usual market, I read an interesting quote on one company’s website to the effect of the surveyor being “the eyes of the title insurance underwriter.”  The survey company continued by observing that while title companies could list easements and other encumbrances in the title commitment which lenders and their counsel review carefully, and even provide copies of the instruments cited as exceptions, it was extremely rare for a title examiner to visit a site to actually “see” how a listed encumbrance affected the property.  As counsel for commercial lenders and buyers, recalling the numerous times I have reviewed the encumbrance creating instrument on one computer monitor while comparing it with the survey on the other monitor, I endorse (pun intended) the above quoted surveyor’s opinion; the ALTA survey is invaluable in order to put eyes on all of the listed easements and other encumbrances so as to ascertain whether any of them present a problem for the property’s current or intended use.  Remember, the title commitment does not tell the reader anything about the location of any structures or improvements on the property, so you need to look at it closely in conjunction with a survey to ascertain if an improvement encroaches on an easement or other encumbrance. For example, the easement instrument may indicate that the easement is twenty feet on center with the adjacent property line, meaning there is ten feet of easement on the subject property. That may not be a problem at all, or you may see that part of an improvement may encroach into the area; only a survey can visually show where the two are in relation to one another. 

It is important to keep in mind that in addition to utility easements, encumbrances can include items like shared wells, shared access points and driveways, graveyards (and access to them), paper streets, and many other problematic items. Adding to the difficulty is that many of the instruments creating these sorts of encumbrances are quite old and often handwritten, making them quite difficult to decipher.  In those instances, the surveyor is like another set of set of eyes in addition to counsel’s; he or she must read and decipher the same paper and he or she will physically inspect the property to locate for example “the large gum tree at the rear of the property” which is the point of beginning for the encumbrance at issue.  Other than utility easements currently in use, almost all other encumbrances can be vacated or dealt with in some fashion, if necessary, but counsel must know where they are and whether the subject property is affected in order to give proper advice to the client.  Knowing what and where an encumbrance is located may also affect the timelines that are in the loan documents. No one is breaking ground in thirty days if there is a graveyard in the midst of the new building or addition footprint. 

Very often the surveyor will ascertain that an easement or encumbrance listed by the title company does not affect the subject property.  Sometimes this is because the encumbrance was created decades ago when the current subject property was just a small part of a parent tract.  Even after closely reading the instrument, it may remain unclear if it affects the current parcel or not. In that instance, in order to protect its interests, the title underwriter will list the item as an exception to title. The surveyor in the field, however, will locate that “large gum tree” and ascertain whether or not it is even located on the subject parcel or rather on a neighbor parcel (which also was part of the parent tract).  In those instances, counsel should not be hesitant to request that the exception for it be removed from the title commitment.

Building and Site Plans Round Out the Picture

Speaking of breaking ground, one additional critical item counsel should review as part of this process are any building plans and drawings, or better still a site plan, for any new construction to be built on the land or footprint changing renovation work to the existing improvements.  By reviewing the site plan, I can advise my client whether there is an encumbrance which is fine now because there is no encroachment, but which will be right in the path of where the developer wants to build. Remember, the surveyor’s job is to memorialize what he or she can locate on the land, but it is counsel’s responsibility to put all of the pieces together and advise the client whether a problem exists or will exist if construction proceeds.

Conclusion       

Although there are some divergent interests in this part of the closing process, these critical documents ultimately dictate the desired outcome - a title commitment followed by a title policy which fully and accurately states and insures title to the property which benefits all parties to the transaction.

Richard Biemiller is Pender & Coward shareholder focusing his practice in the areas of creditors’ rights, banking and financial institutions, commercial transactions and real estate.