Author: Kyle Niewoehner, Esq, Geraci Law
We’ve all been there. You are clear to close and ready to fund, and at the last-minute title tells you there are additional exception items to add to your policy. Or, maybe they suddenly can’t remove an exception item they had previously cleared. This can be stressful and unexpected, and sometimes feels overwhelming, especially on tight timelines. Fortunately, there is usually a solution or workaround. In this article, I will discuss some of the more common problems and solutions for tricky title exception items.
If there is an existing lien discovered on title, you will definitely want to deal with it (assuming you aren’t going on as a junior lien). A lien could be from another loan, or it could be a tax lien, mechanic’s lien, or another category of lien. The simplest way to deal with a lien is to pay it off, either with loan funds or by requiring the borrower to pay with their own funds. However, if that is not possible, then there may be another solution. You can get the exception removed if the lienholder agrees to subordinate to your lien. This is a good option to explore, particularly if the existing lien is a loan and there is plenty of equity in the property. Alternately, you can offer some type of inducement to that lender. For other types of liens, particularly mechanic’s liens, title will usually allow the borrower to provide a bond to remove the exception.
Mechanic’s Lien General Exception
Title is often reluctant to remove the general exception for mechanic’s liens. When this comes up, you should ask title what they need to remove it, as there is usually an option. Sometimes they may require the borrower to submit an indemnity package and/or require an affidavit from the borrower or current owner. Sometimes title may need to conduct an inspection of the property to confirm that there is no ongoing work. Or, you may be able to deal with the exception item by getting an endorsement, typically the ALTA 32, (this varies depending on the state), in order to negate the exception item. For post-closing mechanic’s lien coverage, you may want to have some ALTA 33s prepaid at closing so that you can request them during post-closing construction disbursements.
Survey Exception Items
Title may want to include a general survey endorsement, or, if a survey is available, title may list specific exception items based on the survey. If there is a survey available, then you have an easy solution. In some states, you can get a survey exception removed without providing a survey by just pushing back or even switching to another title company. You should get in contact with the title officer to figure out what your options are. If the exception items are based on an existing survey, then there is not usually a way to remove the items; however, those exception items are usually not problematic from a lender standpoint. If there is a genuinely problematic exception item based on an existing survey you may need to seriously re-evaluate the transaction.
Another common issue is finding a lease on title, either because the lease was recorded or because a subordination agreement relating to the lease was previously recorded. If the lease is still in force, then the only way to remove the exception is to get a subordination agreement for that lease. If an old lease is still on title, but is no longer in force, then you will need to talk to title and determine what they would require in order to remove that lease. Often, if you are confident that this lease is no longer in effect, then it may not even be worth the effort to get the item removed as it poses no threat to your lien.
There are many potential title exception issues that lenders will see, but also many potential solutions. In addition to the specific situations discussed in this article, there can be innumerable other problems and solutions. The best advice I can give is that when title tells you there is something they can’t remove, don’t take no for an answer. Call the title officer and ask them what the options are for dealing with this exception. See if you can find a different title company that will insure over this item. Being persistent and creative is usually rewarded in these situations.