In residential real estate transactions, there are two basic forms of policies:
- The Owner’s Policy. This is the standard policy of title insurance that buyers obtain upon closing. In Oregon, customary practice is that sellers pay for this policy.
- The Lender’s Policy. This is the policy required by lenders when they make a residential purchase money loan to a buyer. In Oregon, buyers customarily pay for this policy. It covers more risks than those in the Owner’s Policy.
If a buyer wants additional coverage over that provided in their Owner’s Policy, it can be purchased from the title company before closing. In Oregon, buyers customarily pay for this added coverage.
EXCEPTIONS IN TITLE INSURANCE POLICIES – GENERALLY
An “exception” in your preliminary title report, which is issued before closing, or in your final policy of title insurance, issued shortly after closing, refers to those matters your title company will be excluding from insurance coverage in the event of a claim.
In other words, if you incur a loss as the result of a matter negatively affecting your title (also known as a “cloud” or “encumbrance”) and that matter is listed in your title insurance policy as an “exception” – it will not be covered by insurance and the claim will be denied.
Some people might ask: What good is a policy of title insurance if it excludes every recorded cloud or encumbrance on my title? The answer is that this is what the “preliminary” title report is for, since the buyer gets to see it before closing. Most preliminary reports not only identify the exceptions, but also provide a live link to the actual document as it appears on the public record. So if a buyer sees an exception in the preliminary title report that negatively impacts their title, they are expected to timely object, and have the seller remove it or otherwise deal with it.
The standard statewide Oregon form Sale Agreement has several buyer contingencies in it, and one of them is for title review. That way, if something shows up on the preliminary report that negatively affects title, buyer will have a chance to object before closing. If the parties cannot resolve the matter, the buyer may withdraw from the transaction and obtain a refund of their earnest money deposit.
EXCEPTIONS IN TITLE INSURANCE POLICIES – SPECIFICALLY
There are two major types of title exceptions:
- Standard (or General) Exceptions in Your Homeowner’ Policy. These relate to those matters the title company excludes from coverage in all owner’s policies. It makes no difference what property you are purchasing; there is no insurance coverage if a loss results from one of these standard exceptions. The easiest explanations for several of these exceptions is that the title company: (a) Does not visit the property, inspect it, or perform a survey, so claims related to those matters are excluded from coverage; and (b) Only checks the public records available in the county where the property is located. These standard exceptions relate to:
- Unrecorded Taxes or Assessments. If they do not appear as existing liens on the records of any taxing authority that levies taxes or assessments on real property or by the public records; proceedings by a public agency which may result in taxes or assessments, or notices of such proceedings, whether or not shown by the records of such agency or by the public records.
- Matters That a Correct Survey Would Disclose. Encroach-ments and other boundary matters are excluded from coverage as they would have been revealed by a correct survey. If boundaries, dimensions, acreage, etc. is a concern, buyers should condition their purchase on an acceptable survey.
- Parties in Possession. Rights, interest, or claims not shown on the public record that could be ascertained by an inspection of the property or making inquiring of persons in possession. These could include adverse possessors, squatters, trespassers, or tenants under an unrecorded lease.
- Matters not Appearing on the Public Record. Easements, rights of way, liens, or other encumbrances against land that do not appear on the public record.
- Matters Known to the Insured. E.g. if, prior to closing, the buyer becomes aware of a dispute regarding a recorded easement or certain adverse claims against the title, etc., a claim regarding it after clsoing would likely be denied, since the insured was already aware of it.
- Zoning Laws. Laws, ordinances or governmental regulations (including building and zoning laws, ordinances or regulations) restricting, regulating, prohibiting or relating to the occupancy, use or enjoyment on the property, etc. except to the extent that a violation or alleged violation been recorded on the public records prior to issuance of the policy.
- Unrecorded Construction Liens. Most unrecorded lien rights do not negatively impact title to real property, since they must be recorded to be enforceable. However, construction liens in Oregon can be recorded up to 75 days after the labor or materials were provided to a property. There is always a risk of an unrecorded lien occurring following the construction of a new home, or completion of a remodeling to an existing home. Thus, if the title company performed a title search during the 75-day period following completion of construction, the preliminary title report might not show the existence of a lien, since it had not yet been recorded. If title transferred to a new owner before expiration of that 75-day period, the construction lien could still be recorded after closing for the duration of that period. Once the lien is recorded after closing, it would potentially force the new buyer to pay it in order to avoid foreclosure. The Homeowner Protection Act (ORS 87.007) is designed to protect buyers from the risk of construction liens being recorded after closing.
- Miscellaneous. (i) Unpatented mining claims; (ii) reservations or exceptions in land patents, (iii) water rights or claims or title to water.
2. Special Exceptions. These are the exceptions listed in the preliminary title report that specifically relate to the property you are purchasing. They normally pertain to such things as recorded utility easements and deed restrictions (also known as “Conditions, Covenants, & Restrictions”, or “CC&Rs”) common in most subdivisions, platted townhome developments, and condominiums. Since these are recorded against the property and are generally standard in nature, they are not something that can be removed from title.
The special exceptions may also show the existence of your seller’s mortgage(s) or other liens which will have to be removed before closing. In most instances the money necessary to remove these liens and charges will come from the seller’s gross sale proceeds. It is usually only when the cost to remove the liens and charges exceed the seller’s proceeds that a problem arise, since it means the seller will have to bring money to closing. If the seller is incapable of doing so, the only way the sale can proceed is if the person or entity holding the lien is willing to release it for less than the full amount due. (This was commonly the case during the Great Recession when many sellers engaged in “short sales”.)
BUYER’S RIGHT TO OBJECT TO EXCEPTIONS IN THEIR REPORT
Under the terms of your Sale Agreement you have a limited amount of time to review your preliminary title report. This is one of several buyer “contingencies” that exist in that document. If timely exercised before the end of the specific contingency period, you have a right to negotiate with the seller to have a specific exception removed, and if not, to terminate the transaction.
However, the failure to timely object to matters in the preliminary title report can mean those objections are waived. [Note: mortgages, tax, judgment, spousal and child support liens, etc., showing up in the preliminary report do not normally need to be “objected to” by the buyer, since under the Sale Agreement, the failure to object does not mean the exception can remain after closing, since that would prevent title from being marketable – and the seller promised the buyer to convey “marketable title” at closing.]
Occasionally, the preliminary report may disclose one or more exceptions from coverage that may negatively impact title.[1] Since your title company is not responsible to advise you about the content of the exceptions – just their existence – you are expected to obtain advice and guidance from some other source. And since real estate agents are not title experts, you cannot expect them to provide such information to you. They have no legal duty or responsibility to do so.
What about attorneys? Can they read the preliminary title report and give buyers reliable advice? Maybe….
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Phil Querin has practiced law in Oregon since 1972. He was a partner with the international law firm Davis Wright Tremaine for 25 years where he chaired the Real Estate Practice Group at their Portland office for many years. In 2010 he opened his solo real estate legal practice, Querin Law, LLC, with offices in Portland and Bend, Oregon.
Phil’s law practice is limited exclusively to commercial and residential real estate transactions, and real estate disputes. He has served 25+ years as legal counsel for the Portland Metropolitan Association of Realtors® (“PMAR”) and its predecessor organizations. He was legal counsel to the OREF Forms Committee from 1997 to 2017, which was responsible for drafting of all statewide legal forms used by Realtors throughout Oregon.
Phil has been consistently nominated by his peers to the national rating service Real Estate Super Lawyers from 2007 to the present. He is a frequent speaker and writer on real estate matters and has authored articles and presented for the Real Estate Land Use Section of the Oregon State Bar.
And Yes, he routinely advises clients about the exceptions disclosed in their preliminary title reports.
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[1] For example: (a) There may be a private access easement across your property that was given to a neighbor years ago; or (b) A shared sewer easement with a neighbor; (c) A shared well located upon your neighbor’s land; or (d) There may be tax or judgment liens disclosed on the preliminary title report – which will have to be paid off from the seller’s proceeds before closing and could result in delay or – depending on the amount – may mean the transaction may not be able to close at all, since the seller cannot or will not pay for its removal.
