Kick the Tires and Check under the Hood: Due Diligence Provisions in Pennsylvania Agreements of Sale; Posting 2 of 3

Title review, like the negotiation of representations and warranties discussed in my earlier post, is an invaluable tool in determining whether to purchase a property. Analysis of the encumbrances recorded against the parcel is akin to reviewing a vehicle history report on a used car before you buy it. Both will tell you whether the item is a lemon.

At a recent presentation with co-panelists Michael Moyer of Land Services USA, Inc. and Aileen Schwartz of Hill International, entitled “Real Estate For In-House Counsel: An Examination of Title Issues, Contracts and Negotiations in Real Estate Deals” at the Association of Corporate Counsel (Delaware Valley Chapter)’s 2nd Annual In-House Counsel Conference in Philadelphia, Pennsylvania, many of my remarks focused on title review.

Typically there are two times when title will become a issue in the context of the Agreement of Sale:

  • During the negotiation of the title provision; and
  • During the review of title within the due diligence period

When drafting the title provision in the Agreement, consider the following:

  • Buyer should require that Seller provide “good and marketable title.”
  • Marketable title is “one that is free from liens and encumbrances and ‘which a reasonable purchaser, well informed as to the facts and their legal bearings, willing and ready to perform his contract, would, in the exercise of that prudence which businessmen ordinarily bring to bear upon such transactions, be willing to accept and ought to accept.’” Barter v. Palmerton Area School District, 18 Pa Super 16, 20 (1990).
  • Buyer should never agree to take title “subject to encumbrances and other matters of record” because there will invariably be something recorded against the property, and until the Buyer obtains a title commitment, reads the exceptions and reviews those exceptions against the survey, the Buyer will not understand how those encumbrances impact the property or the Buyer’s intended use.
  • As a compromise, Buyer could agree to take title subject to encumbrances of record which do not materially adversely affect the Buyer’s intended use of the property.

What title documents should a Buyer review? All of them.

  • Review the vesting deed.
  • Review the title exceptions in the commitment, both on Schedule B-1 and Schedule B-2.
  • Understand what information Buyer will need to provide to the title company in order for it to insure title.
  • Read ALL of the title back-up documents.
  • Understand how the recorded encumbrances will affect the permitted use and development of the property.
  • Buyer should send a title objection letter requiring the Seller to cure title issues to the extent curable.

A complete review of title cannot occur without also reviewing a current survey of the property.

  • ALWAYS get a survey.
  • The survey will allow you to confirm that the title exceptions do (or don’t) encumber the property.
  • The survey will locate the encumbrances on the property.
  • The survey will show encroachments onto both the property and the adjoining properties.
  • A new survey is always preferable, but sometimes having the surveyor recertify a recent survey which he prepared will be sufficient.
  • • The survey should contain a certification from the surveyor in favor of the Buyer, title company and Buyer’s lender, permitting them to rely on the accuracy of the survey. This certification will permit the title company to remove the standard survey exception from the policy.
  • Surveys could be a long lead time item so set the length of the Agreement’s due diligence period accordingly.

There are a multitude of issues to consider when it comes to title review, and this post only scratches the surface. Above all, it is imperative to remember that the title history of each property, like the history of every car, is unique. Careful attention must be paid during title review to ensure that the Buyer is not getting a clunker when he thinks he is buying a coupe.

The last post in this series will deal with the actual property investigation.