This article examines the usefulness of a preliminary title report.
Know the condition of title
An EP investor enters into an agreement with a financially distressed homeowner to purchase his one-to-four unit residential property in foreclosure at a “rock bottom” cash price for the equity.
Performance of the purchase agreement is contingent on the EP investor’s receipt and review of a preliminary title report to confirm that the property is subject only to the loans and other liens disclosed by the seller-in-foreclosure. Any taxes or liens of record which are not disclosed in the purchase agreement are to remain of record. However, the amount of any such undisclosed lien will be deducted from the cash down payment. [See first tuesday Form 165 §6]
Escrow is opened with instructions to close when, among other conditions, the preliminary title report (prelim) prepared by the title insurance company is approved by the EP investor. To confirm the condition of title and keep acquisition costs to a minimum, the EP investor instructs escrow to order the prelim, and then cancel it on closing and pay charges for it without obtaining a policy of title insurance.
The prelim received by escrow indicates the title is clear of all liens, except those disclosed by the seller-in-foreclosure. Convinced the title condition is as represented by the seller, the EP investor waives the further-approval contingency regarding the prelim. Escrow closes on receiving a “date-down” on the prelim from the title company – without the issuance of a policy of title insurance. The escrow company hands the EP investor a mandated disclosure statement regarding the need for a policy of title insurance.
However, the preliminary title report fails to disclose a recorded abstract of judgment against the seller-in-foreclosure has attached to his title as a judgment lien.
Later, the judgment creditor enforces the judgment lien by commencing a foreclosure on the property.
The EP investor clears title of the lien and makes a demand on the title company that prepared the preliminary title report for the amount of the payoff. The EP investor claims the title company is liable for his losses since it failed to disclose the judgment lien on the preliminary title report.
Can a buyer rely on a prelim to assure himself of the current condition of the seller-in-foreclosure’s title?
No! A preliminary title report is not a representation of the condition of title and cannot be relied upon by the buyer or anyone else. A title insurer has no duty to accurately report title defects and encumbrances (as exceptions) on the preliminary title report. [Siegel v. Fidelity National Title Insurance Company (1996) 46 CA4th 1181]
A preliminary title report is no more than an offer to issue a title insurance policy based on the contents of the prelim. [Calif. Insurance Code §12340.11]
Use of the prelim
A preliminary title report typically discloses the current vesting, as well as the general and special taxes, assessments and bonds, covenants, conditions, and restrictions (CC&Rs), easements, rights of way, encumbrances, liens and any interests of others which may be reflected on the public record as affecting title.
The enforcement of many purchase agreements is conditioned on the buyer’s approval of the prelim. The buyer, his broker and escrow check the report for undisclosed defects and encumbrances on title.
A prudent broker handling a transaction for the buyer checks the prelim prior to closing for title conditions. The broker is looking for title conditions which might interfere with any intended change in the use of the property by the buyer. Interferences could be in the form of an unusual easement or use restriction which obstructs the buyer’s announced plans to make improvements.
Finally, escrow relies on the preliminary report to carry out its instructions to record the grant deeds, trust deeds, leaseholds or options which will be insured.
Typically, escrow instructions call for closing when the deed can be recorded and insured, subject only to specified taxes, CC&Rs, encumbrances, etc.
Ultimately, it is the escrow officer who, on review of the prelim, must advise the seller of the need to eliminate defects or encumbrances on title which interfere with closing as called for in the escrow instructions.
The prelim and a last-minute date-down of title conditions are used by escrow to reveal any title problems to be eliminated before closing – and, as instructed, to obtain title insurance for the documents being recorded.
Should the date-down of the prelim reveal defects or liens not reported in the prelim, either by error or by later recording, the title company can withdraw its offer under the prelim and issue a new prelim – and a different offer to issue a policy.
Title companies have long been aware of the public’s reliance on the prelim. This reliance was consistently reinforced by the California courts, which held title companies liable for erroneous reports, until legislation induced by the title insurance industry was enacted in 1981 to eliminate liability for faulty preliminary title reports.
Abstract of title
Prelims were once compared to abstracts of title. An abstract of title is a written statement intended to be relied on by those who order them as an accurate representation of title to the property being acquired, encumbered or leased. [Ins C §12340.10]
An abstract of title issued by a title company is a statement of facts collected from the public records, not an insurance policy with a limit on liability set by the policy.
In an effort to shield title companies from an abstractor’s liability on the issuance of a defectively prepared prelim, the legislature in 1981 redefined the prelim as being neither an abstract of title nor a representation of the condition of title. [Ins C §12340.11]
The prelim is now statutorily defined as a report furnished in connection with an application for title insurance. [Ins C §12340.11]
The prelim is now simply an offer by a title company to issue title insurance, and a statement of terms on which the title company preparing the policy is willing to issue a policy – subject to a last minute change.
