What is a title commitment?

This article regards the title commitment. I will discuss its structure and function. This writing is crafted for the non-title professional. Real estate professionals often have a hard time differentiating between a title commitment, a title policy, and a title search. I hope this article offers you some clarity.

First of all, what is a title commitment? A title commitment is a document created by a title examiner, which document sets forth requirements that must be satisfied by a customer before an underwriter will insure that particular transaction. The commitment also discloses exceptions to title that will be included in the final policy, unless these exceptions are properly satisfied and removed. The title commitment consists of Schedule A, Schedule B-I, and Schedule B-II. I will discuss each of these Schedules in some detail. From this point forward I will refer to the title commitment as a commitment.

First, a discussion of Schedule A:

As most of us know, commitments can come in many forms and styles, but the guts and purpose of the commitment are the same among all title companies in Michigan. I will discuss the commitment using a very traditional model. In your practice, you will encounter many creative and often overwritten and cumbersome commitments. But there is good news: When you understand the structure and function of the commitment, you will have little trouble in weeding out the relevant issues.

Schedule A is the first page of the commitment. At the very top of this Schedule you will see the title company's file number. It is very important to keep track of the file number, as you may need to reference it many times throughout the transaction. Next, you will see a date and time, such as June 1, 2004 at 8:00 a.m. This date is known as the effective date. I will not use the acronym ED for obvious reasons! The effective date is disclosed by the register of deeds (ROD) office located in the county where the property is located. For clarity, when the ROD receives an instrument for recording, it will assign the instrument a liber and page number. The date the instrument is recorded will be displayed directly beneath the liber and page number. When this process is completed, the instrument is said to be recorded and indexed.

The ROD receives a tremendous number of documents for recording on a daily basis. As a result, they simply can't record all instruments on the same day they are submitted. So, for example, on July 1 the ROD may have an effective date of June 1. That particular ROD is indexed through June 1 only. The effective date, in almost all counties, is prior to the current date. The effective date is very simple to understand and it should be explained to all parties.

Next, there is a section for listing the proposed insured parties. This section discloses the purchasing party and the amount of the purchase price, as well as the lending party and the amount of the loan. The parties to a transaction, as well as the purchase price and loan amount, frequently change throughout the negotiation process. As these changes occur, the examiner will simply revise the commitment to reflect the particular change. This is where the file number becomes important, because you may be requesting the revised commitment.

The next section of Schedule A is quite possibly the most important section in the entire commitment. This section discloses who the owner of the property is. This may seem an overstatement on my part, but consider this for example: Let's say the commitment recites the owner of the property as Bob Jones and Mary Jones, husband wife, when, in fact, Bob Jones and Mary Jones are not married. Let's further assume that the examiner erred in reading the deed. The deed recites the grantees as Bob Jones and Mary Jones, as tenants in common. If the property is conveyed without the signature of the real spouse of Bob Jones, the new owner's title will be subject to the inchoate dower interest of the spouse of Bob Jones. Disclosing the proper state of title is, in my opinion, the most important function of the title examiner.

The last section of Schedule A consists of the legal description of the land which is the subject of the transaction. I will not go into detail about legal descriptions in this writing. It is enough to say that the examiner must confirm that the proper legal description is set forth. And remember, the title policy insures the legal description, not the address of the property.

In summary, Schedule A is the informative schedule. It discloses the current effective date; the parties to the transaction; what the transaction is; the amount of the transaction; who owns the property; and the property which is the subject of the transaction. Indeed, it discloses the overall structure of the transaction.

Next, a discussion of Schedule B; in particular Schedule B-I:

Schedule B-I immediately follows Schedule A. In this Schedule, the title examiner discloses particular requirements that must be satisfied before the underwriter will issue its policy. Now I would like to pose a question: Why do we have title examiners? Is it so we can create new jobs and keep people off the streets? The obvious answer is no. The responsibility of the examiner is twofold: First, it is to protect his title agency and, by definition, the agency's underwriter, from liability. Second, it is to establish marketable title in the subject property, thereby properly serving the property owner or lender.

For the sake of clarity, I will bifurcate Schedule B-I. These segments will be labeled Schedule B-Ia and Schedule B-Ib, respectively. In Schedule B-Ia, the examiner will set forth the basic requirements that the owner or lender must fulfill. The basic requirements consist of deed and mortgage execution. For example, in a purchase transaction, the first requirement may call for the execution of a deed from the seller to the buyer. The next requirement may call for the execution of the purchase money mortgage from the buyer.

Property transactions can have unbelievable dimensions, but for the purpose of this discussion, the two most common transactions are (1) the sale with a corresponding purchase money mortgage transaction, and (2) the refinance transaction. Schedule B-Ia disposes of the easy requirements first. These requirements will be expected and understood by all parties.

Schedule B-Ib is where the examiner cleans up the title. Common problems include federal tax liens, tax forfeitures, foreclosure proceedings, and divorce proceedings, just to name some. These problems fall within the gambit of Schedule B-Ib, because they are not formality requirements, such as the execution of a deed or mortgage; they are complex requirements that must be drafted with skill. Schedule B-Ib is where the talented examiner can display his or her skill.

My goal, as an examiner, is to create marketable title relative to the particular transaction. I create marketable title through the drafting of the commitment. The commitment is my instrument of communication. It is important for the reader to understand that a good title examiner is essential to a property transaction. Disclosing title problems and correcting these problems, prior to closing, will enable all parties of a transaction to get a good night sleep. The parties will not have to fear being named a defendant in a lawsuit. Now, I understand that perfect title to property can never be guaranteed. That is because there are many circumstances, such as nondisclosure, that may cause problems subsequent to the date of closing. That being said, an expert examiner will greatly reduce the element of surprise for the new home owner or lender. After all the requirements of Schedule B-I have been complied with, the parties may schedule a closing.

Finally, a discussion of Schedule B-II:

Schedule B-II sets forth the list of exceptions to coverage that will appear on the final policy. Schedule B-II is broken down into two sections: (1) the general exceptions section, and (2) the specific exceptions section.

The general exceptions section is a list of exceptions based on industry standards and practice. These exceptions include, among others, the parties in possession exception and the matters of survey exception, just to name two. A well created template, created by an underwriter, will display an actual general exceptions section.

The specific exceptions are the exceptions that are particular to the subject parcel. These exceptions may include, as an example, recorded easements, recorded building and use restrictions, platted easements, and recorded leasehold interests. Indeed, the list of specific exceptions may total greater than 100 in certain commercial settings.

At the end of the day, if the purchaser and/or lender are content with the list of general and specific exceptions, as shown on the commitment, the closing may be scheduled. If, however, the purchaser or lender, or an attorney representing a particular party, object to one or more of the specific exceptions, and you can expect an objection, the closing will have to be postponed until these issues can be resolved. Challenges to Schedule B-II are common, and this makes good sense. The client, or attorney will desire as few exceptions as possible. This is common sense: The fewer the exceptions, the greater the coverage afforded by the policy.

Specific exceptions can only be removed by agency counsel or the underwriter, as these decisions require expertise and experience. If a customer can produce satisfactory evidence supporting the removal of an exception, the underwriter may remove the exception entirely, or it may insure over the existing exception. Insuring over the exception simply means that the policy will continue to show the exception, with a statement attached to the exception disclosing that the underwriter will cover the insured in any attempted enforcement of the relevant exception.

It is important for the reader to understand that Schedule B-II exceptions are not written in stone. There are a variety of reasons why a specific exception may not apply, but unless and until the insurer receives adequate evidence supporting the removal of the exception, the exception will stand.

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