COVER STORY, APRIL 2006

TITLE TRAPS FOR THE UNWARY
Title issues can be tricky from state to state.
Robert G. Soule, Esq.

Commercial real estate transactions continue to grow nationally in scope, as it becomes increasingly rare for a commercial transaction to have a local buyer, a local seller and a local lender. Buyers and developers are far more astute to the competitive nature of financing and have ventured far afield to locate the best sources of funds. Likewise, with continuing financial deregulation, many lenders operate nationally.

While the country is an open market for commercial real estate transactions, there are local issues that may impact your transaction. While the title aspect of most transactions is overlooked frequently or considered a minor formality, nothing brings a large transaction to a halt more quickly than when a document is rejected by a local registry or clerk’s office. So it is imperative that you have professional guidance throughout the closing process.

What follows are the nine most common traps to be avoided.

1. You’re not from around here, but thanks for leaving your money.

State budgets have exploded and new revenue sources are harder to find. But many state legislators have targeted an untapped group: out-of-state real estate investors who are liquidating their real estate holdings in the legislators’ jurisdiction. Maine and Vermont led this trend, and now many more states require a percentage of the sales price, or the capital gain, be turned over. Be sure to factor this into your closing calculations.

2. We stop for binders

All states make copies of title documents and place them in binders. Many states require a specific border width along the top, sides and bottom of each page. The most common requirement is for a 3-inch open space at the top of the first page. If you present a document with incorrect margins, it will not be accepted for recording.

3. Did you see that?

Several states still do not accept a notary public as adequate assurance that the proper party has executed a title document. These states require that a witness executes the documents to be recorded indicating that they have witnessed the signature of the party executing the document.

4. Now UCC it, now you don’t

Recent changes with Article 9 requirements for filing and tracking of UCC Financing Statements have placed municipal, state and county land record offices in a state of flux. Yet most can now determine whether or not they will accept UCC filings. Most jurisdictions now require UCC Financing Statements be filed only at the Secretary of State level. This process is still evolving.

5. Home field advantage

Some states require that documents be reviewed, drafted, or approved by an attorney admitted to their state bar. Since borrowers and lenders may not always have local counsel, potential problems can be avoided by utilizing the services of your title insurance company’s local counsel in a particular jurisdiction to attest that they have “supervised” the preparation of the document.

6. Home fee advantage

In this instance, a state does not attempt to generate local income for the bar, but rather attempts to generate local fee income for itself. A classic example is Massachusetts, where the Land Court only accepts long form Limited Liability Company or Limited Partnership Certificates from the Secretary of State. Foreign LLCs or LPs must register and pay the necessary fees with the Massachusetts Secretary of State’s office before filing any documentation with the Land Court.

7. The sun city

Many states require documents be printed in larger type. This began in Arizona, where all instruments to be recorded must use a 12-point type size or larger. Anything smaller will not be accepted. Many states are also shifting to a uniform and larger type size to facilitate electronic transmission and storage of documents. Avoid delays by making sure your documents are drafted in the correct type size the first time.

8. Don’t mess with Texas

Texas is a very tightly regulated state with respect to title insurance and documentation. The Texas Insurance Department has approved only a few endorsements, will not allow affirmative insurance in policies and does not allow the issuance of Pro-Forma or Specimen Policies. Texas also has no Transfer or Mortgage Taxes. There are other highly regulated states with similar prohibitions with respect to documents or coverages that the title insurance company can provide.

9. If you can think it, we can tax it

Always be cognizant of the local taxing requirements for deeds and mortgages. Several states, including New York and Maryland, tax leases. Florida even taxes easements if they are granted for monetary consideration. Due to sizable mortgage taxes, it’s not uncommon to see mortgages in Florida and New York constantly assigned, amended and restated. While it’s obvious that a new loan was made, using this structure can provide significant savings on mortgage and intangible taxes. Likewise, an Indemnity Deed of Trust structure in states like Georgia and Maryland may significantly reduce or even eliminate the mortgage tax in those jurisdictions.

Just remember: the simplest way to avoid title traps is to be prepared. There’s no substitute for knowledge, planning, and execution in real estate transactions.  Always enlist the services of qualified real estate counsel and an experienced and qualified title insurance company.

Robert G. Soule is a vice president in the LandAmerica family of title insurance companies (Lawyers Title, Commonwealth Land Title, and TransNation Title). He is manager and senior counsel of the LandAmerica Commercial Services Office in Boston, which specializes in underwriting and insuring large commercial transactions.

©2006 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.