If you have recently been a party to a commercial real estate purchase transaction in California, you may have been asked whether you prefer to have your title policy issued on the 1970 or 1992 ALTA forms or on the new title policy forms adopted by the American Land Title Association in 2006. We generally advise our clients to make the switch to the new forms for two principal reasons.
First, the 2006 Policy is more user friendly. It is drafted in "plain English" with more clarity and less "legalese."
Second, the 2006 Policy contains a new provision entitled "Covered Risks." This section specifically enumerates the risks that are covered. This addition results in greater protection for the insured in at least two instances: encroachments and the creditor's rights exclusion.
Encroachments from the insured's property onto adjoining property generally are not covered under the definition of "land" in any ALTA title policy. As a result, coverage disputes would often arise under the prior policies where improvements on the insured's land encroached onto adjoining land, but where the title policy did not contain a survey exception. The 2006 Policy disposes of this issue by adding as a covered risk any loss or damage due to an encroachment from the insured property onto the adjoining property or from the adjoining property onto the insured property that would be disclosed by a survey. As a result, encroachments are now covered under the 2006 Policy unless (be careful!) the title policy contains a survey exception.
The creditor's rights exclusion excludes from coverage claims arising out of federal bankruptcy, state insolvency or other laws affecting creditor's rights based on (i) the transaction creating the insured's interest being deemed a fraudulent conveyance or fraudulent transfer or (ii) the transaction creating the insured's interest being deemed a preferential transfer except where the preferential transfer results from the failure (a) to timely record the instrument of transfer or (b) of such recordation to impart notice to a purchaser for value or a judgment or lien creditor. In response to routine requests from insured's counsel to remove the creditor's rights exclusion, title companies would issue an endorsement to the title policy deleting the exclusion. Disputes arose, however, because the typical endorsement did not affirmatively state that the transactions referenced in the deleted exclusion were now in fact covered by the policy. The 2006 Policy eliminates this ambiguity by specifically insuring against loss arising due to (1) any transfer prior to the transaction creating the insured's interest being deemed a fraudulent transfer and (2) the transaction creating the insured's interest being deemed a preferential transfer as a result of the failure (a) to timely record the instrument of transfer or (b) of such recordation to impart notice to a purchaser for value or a judgment or lien creditor. Although any claim arising out of a fraudulent transfer for any other reason continues to be excluded from coverage under the 2006 Policy, the ALTA Endorsement Form 21 is available to specifically cover losses resulting from fraudulent transfers.
In other words, it's time to make the switch.
If you have any questions regarding any real estate legal matter, in San Diego please contact Brian Frasch (litigation) at bfrasch@gordonrees.com or Eric Young (transactions) at eyoung@gordonrees.com or call us at (619) 696-6700. In San Francisco, please contact Phil Wang at pwang@gordonrees.com or call us at (415) 986-5900. This Real Estate Update was prepared by James Ryan of the firm's San Diego Office. He can be reached at jryan@gordonrees.com or (619) 230-7798.
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