FEATURE ARTICLE, APRIL 2005

GLOBAL TITLE INSURANCE AND ASSESSMENT
Real estate professionals and lenders can mitigate risks of foreign transactions and investments with title insurance.
Joel S. Peck

Joel S. Peck Senior Vice President, International LandAmerica Financial Group

Until recently, American institutions investing in or financing properties abroad had to rely exclusively on local experts to satisfy their legal and property assessment requirements. Now, American title insurance and assessment services are becoming available to meet the global needs of real estate institutions, as they have been doing in the United States for more than 100 years.

In virtually every property transaction in the United States, both the owner and the lender are protected against the legal risks of acquisition and finance through title insurance. And, in commercial real estate markets, investors and lenders look to standardized assessment reports to address engineering and environmental due-diligence requirements.

In going abroad, investors and lenders find that legal and engineering issues vary from country to country, and often within countries as well. This is true whether the property is in the superficially familiar environment of Canada, where property titles in fact vary in law and language between, for example, Ontario and Quebec, or the more exotic environment of, say, India or Japan.

The cultural, legal and language differences that the American institutions encounter in foreign investing and lending may be substantial, but their due-diligence requirements remain the same as at home. They need to know that, in acquiring property, they are getting good title, free of liens and encumbrances. And, they need to know that the property is in compliance with relevant zoning, has the necessary land-use permits and building certifications, and otherwise is approved for the intended use. In addition, they need to get expert environmental reports on the ground, and engineering and property condition reports on the structure.

Tradition: Title Opinions

Title insurance has been a uniquely American approach to addressing the legal risks of real estate investment and finance. Outside the United States, investors and lenders traditionally retain counsel to search title and render opinions. Note the nomenclature: these documents are opinions. Particularly in larger, more complex commercial transactions, they are essentially disclosure documents, setting out the conditions of title, identifying exceptions or uncertainties, and disclaiming responsibility for a variety of matters, including fraud and forgery.

In some jurisdictions, such as France and the Spanish-speaking world, the official deeds are executed by notaries, who may be personally responsible for their actions within the limitations of their various indemnification programs

The owner, and by extension, the mortgage lender, is exposed to claims, which would require them to retain counsel and bear the cost of defense and the risk of ultimate loss. Their only recourse, in the event they believe that counsel or the notary was negligent in rendering their opinion or executing the deed, would be to litigate against their own counsel or notary, in what may be an expensive and difficult process in a less-than-hospitable foreign court. Further, attorneys’ errors and omissions policies and notaries’ self-insurance schemes, intended to provide indemnity in the event of negligence or misconduct, often are inadequate to cover the potential losses in today’s larger commercial transactions.

Globalization of Title Insurance

To address these issues, American title insurance underwriters are now offering title insurance outside their home market. Not surprisingly, title insurance has made the greatest inroads in Canada, where indeed title insurance has been available for many years, initially to meet the occasional requirements of cross-border American investors. Today, title insurance is taking on an important role in domestic Canadian real estate transactions, both residential and commercial. In addition, there now is significant activity in Mexico, as well as throughout Latin America and the Caribbean. More recently, title insurance has been offered in Europe, including Central and Eastern Europe, and in Asia and Australia. Again not surprisingly, the United Kingdom, with its investment, language and legal ties to the United States, has the most advanced title insurance business, both residential and commercial, outside the Americas.

As in the United States, title insurance in foreign jurisdictions underwrites the risks, based on those same opinions of local counsel and notarial deeds, and thus provides assurance to the beneficiaries that they are protected against both the costs of defending against claims, however frivolous, as well as the risk of loss. The underwriter assumes the risks inherent in the process and stands ready to respond to any challenges to title.

Title insurance is particularly important today, as property owners and lenders typically are financial institutions or corporations, managed by professionals with fiduciary obligations to protect investors against legal risks inherent in real estate transactions.

Engineering and Environmental Due Diligence

Although title insurance is new to global real estate markets, assessment services have been available since the time of the pyramids. Traditionally, assessment services were provided locally. A developer investing in, say, London, Paris and Milan, would identify environmental and structural engineers in each location, negotiate the coverage of the various reports, arrange for translations of the reports, and try to satisfy the concerns of the investors’ and lenders’ credit committees. Now, standardized American-style assessment reports are available in many countries, covering a wide range of subjects:

• Environmental and technical due diligence
• Property condition assessments
• Phase I and II environmental site assessments
• Third-party reviews and data room reviews
• Pre-acquisition property assessments
• Construction and permanent loan progress monitoring and inspections
• Construction payment monitoring
• Construction cost consulting

Liquidity: Enhancing the Securitization and REIT Markets

In the United States, the largest source of real estate capital is Wall Street, on the debt side through the securitization of mortgages and on the equity side through REITs. With the globalization of real estate capital, U.S. financial institutions have been exporting securitization and REIT expertise, and increasingly, European and Asian markets are embracing these new forms of liquidity in real estate finance.

With the development of these markets, real estate professionals increasingly are aware of the role that title insurance and standardized assessment services can play in making securitization and REIT markets safer and more efficient. Title insurance and assessments help mortgage-backed securities achieve satisfactory credit ratings and attract buyers of junior-level tranches. In the European Union, title insurance provides a private solution to harmonizing legal due diligence across different countries with different regulations and languages and becomes especially critical in multi-country transactions. Further, title insurance allows REIT managers to respond to investor demands for safety and common standards for legal due diligence and helps fulfill their fiduciary requirements.

Property Portfolios and Corporate Finance

Often, institutions are confronted with real estate legal and due diligence risks where there is no purchase, sale or even financing of any particular property. It is increasingly common, for example, for real estate to be held in special purpose corporations, with liquidity achieved through a sale of shares in the company or through a corporate borrowing. Further, in mergers and acquisitions, property portfolios can be transferred with no transaction taking place on the underlying assets. Title insurance can mitigate the legal risks associated with these transactions, as assessment reports can mitigate the property due diligence risks associated with them.

Similarly, a portfolio transaction involving multiple sites, and particularly one involving multiple jurisdictions, presents significant legal and technical due diligence challenges. Traditionally, buyers would assemble data rooms, with legal opinions and assessment reports, addressing the legal and technical issues in different languages and based on different legal and engineering regimes. Today, these complex due diligence issues can be dramatically simplified, and the risks mitigated, with standardized title insurance cover and assessment reports.

With American title insurance and assessment services increasingly available on a global basis with one telephone call or e-mail, customers can mitigate both legal and technical risks and fulfill their due diligence requirements — whether on the purchase or financing of a single property or on multiple sites in multiple jurisdictions — thus making real estate transactions safer, easier and more liquid.

Joel S. Peck is a senior vice president in the international division of LandAmerica Financial Group Inc.

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