What is a Guaranty of Title Form?
The guaranty of title form is a crucial part of every purchase and sale agreement used in the profession of real estate. It provides a guarantee by the seller to the buyer concerning the status of the title of the property being sold. This agreement assures the buyer that the title to the property is free and clear, with no restrictions, claims, or encumbrances on the title . This is important because it protects the buyer if any changes to the title occur after the sales contract is signed, but before settlement takes place. The guaranty of title form states that the seller will protect the buyer from any losses incurred due to changes to the title, by disclosing any actions that are needed to protect themselves against the loss. The guaranty of title form is legally binding, and in signing it, the seller is promising to uphold the terms of the contract.
Essential Components of a Guaranty of Title Form
To ensure the obligations are met, it is important that a guaranty of title form be constructed appropriately. These forms typically include:
- (1) The Guarantor: This is usually the individual or entity that has a financial or legal interest in the property involved. In some instances, it may be a third party that has an interest in guaranteeing the title.
- (2) The Context: The guaranty of title form should detail the context and nature of the transaction at hand. Clearly stating the context of the agreement is important in setting out the obligations of those involved in the transaction. There are many variables that can affect the terms of the agreement. The form should leave nothing to chance.
- (3) The Warranty: The main component of the guaranty of title form is the warranty component. The warranty must clearly state the obligations of the involved parties. It should clearly state the nature of the warranty. It can either be broad or limited, as long as both parties understand the nature of the warranty. Be specific in the statement.
- (4) Indemnity: Many guaranty of title forms include additional indemnity clauses for the benefit of the property developer or government authority. The parties should always be protected in case there is a third-party claim that affects their interests.
- (5) The Real Estate: The form should also clearly state the real estate that is involved in the transaction. For most forms, the legal description of the property will suffice.
The Distinction between Guaranty of Title and Title Insurance
The third section of the Guaranty of Title Form explores the difference between a guaranty of title and title insurance, stating that: Title insurance has become the norm in the purchase and sale of real estate. It is not unusual, however, for title insurance to be unavailable. But in both circumstances, a guaranty of title is available and a complainant may have a right to a guaranty of title. Therefore, while title insurance will be the default standard in many circumstances, this form provides certainty where title insurance is not appropriate or readily available. The advantages of a guaranty of title form are its application by reference and application without payment. The application by reference means that all the terms of a guaranty of title are contained within the form by reference to and incorporation of the particular transaction. And the application without payment is the fact that a guaranty of title can be provided upon a transfer of property free of charge. These advantages should not be underestimated. There are times when title insurance is not appropriate. A guaranty guarantees right and title to property as a result of fraud arising out of a policy governed by Alberta law: see R. (Kim) v. Krone, 2011 ABCA 208, at para 38; McNeal, supra, at para 45. A claim for title insurance, however, must prove some coverage under the title insurance policy and there is usually time and expense involved in arguing against the title insurance company with an eye to a settlement. Litigation is the rarest option. And even where it is, a litigant would have to show that the insurer was negligent in failing to discover the defect. Moreover, once title insurance is paid, specific coverage in regard to the loss must be asserted. If the claim is made quickly enough, it would force any statutory limitation periods applicable to a claim to be managed by the guarantor.
The Process Involved in Obtaining a Guaranty of Title
The process of obtaining a guaranty of title is similar to the process of obtaining a loan policy (unless the transaction contains an exception to standard coverage). The steps are outlined below:
An owner’s form will likely already be on record since it is signed in connection with the conveyance of real property. The language of the owner’s form or its method of execution may be in question now that a guaranty of title has been requested.
However, an endorsement to the owner’s policy may be asked for to remove any issues or exceptions currently listed in the subject’s owner’s policy. This endorsement may be issued without charge if the owner’s form and statute have been unaffected since the issuance of the original owner’s policy.
A customer must submit a signed application requesting the issuance of a guaranty of title. The application must include the following information:
An application is not typically required for an endorsement of an owner’s policy. The only requirements are that the application be signed and submitted with the statement of receipt. These documents must be received by the insurer prior to the closing of the transaction.
An owner’s statement must be signed by all owners of the subject property. This is also known as an affidavit of title. The owner’s statement is executed pursuant to the legal obligation of the existing owner(s) to disclose additional material exceptions not likely shown in record title documents upon request of a title insurer.
It is possible to issue a guaranty of title based on title reports and/or a recorded owner’s policy instead of an owner’s statement. However, to be able to rely on such documentation, the owner’s policy must have been issued pursuant to a consummated purchase transaction or the guaranty of title transaction must be one of a leasehold nature.
Another option is to record a partial release of the deed of trust under which the purchaser is the trustor. A partial release of a deed of trust pursuant to the applicable recording statute may be acceptable to the guarantor, but only when the caption of the release is exactly as described in the statute and the release states the statutory language.
Examinations are performed by an attorney and must be done pursuant to the title standards in the state’s Title Standards Manual. An attorney can rely on a title examination other than his or her own if that examination was properly performed.
While the application requires a description of the parties involved, it does not require that the parties be represented by an attorney. But, as stated previously, an examination cannot be conducted unless an attorney is retained to perform it.
Other steps to obtain a guaranty of title include:
The guaranty of title will be issued after the completion of the above steps. It is issued in a multi-transaction deal shortly after the issuance of the owner’s policy.
Costs to issue a guaranty of title generally consist of the attorney’s fees for the examination and the premium paid. The premium for a guaranty of title varies depending on its type. Title insurance premiums may be obtained through rating manuals or may be set by the individual title insurers themselves.
The cost of a guaranty of title may be split between the lender and the purchaser or may be payable by the lender alone or the purchaser alone. The insurer and/or settlement agent will discuss these options with the parties involved.
The final step to obtaining a guaranty of title involves the prospective owner having his or her title company or settlement agent deliver the owner’s statement, any referenced documents, and a copy of the guaranty to the guarantor in accordance with section C of the form.
The process of obtaining a guaranty of title may vary slightly from jurisdiction to jurisdiction.
The Legal Aspects of a Guaranty of Title
The legal effect of the guaranty is that the seller is responsible for any encumbrances on title of which the buyer was not aware when the transaction closed, and is obligated to pay the buyer for that exposure. The buyer has no exposure with regard to title. Should it turn out that there was such an issue with title, the guaranty provides the following remedies: As indicated, the guaranty covers defects in title that exist prior to the date of the policy. The guaranty provides coverage for defects in title, including any rights of the government, including easements existing prior to the date of the policy. A frequently litigated subject involves adverse possession. Since adverse possession is a right which takes place over time, it is possible that a closing occurs when the adverse possees have only laid 19 of the 20 years required to establish rights to adverse possession or to the twenty (20) years required for prescriptive rights. One case involved a closing before a judgment declaring adverse possessors’ fee simple title. The majority of the federal courts have held that where title is taken in fee simple subject to any evidence of possession , those who are in possession under color of title are protected in their interests. So, if title is taken subject to "all defects and superior titles" rather than "subject to all defects, liens, superior titles, and discrepancies," it would be arguable that the buyer’s rights were protected under the guaranty from the adverse possees. Other courts have held that the superior title would include the right of the government to evict the adverse possees, and that this right would be provided simply by the warranty of title. You could argue whether or not this is correct; however, the title company would take the position that it is. Additionally, the title company could very well argue that it had no ability to prevent the adverse possession and thus the insurer was not liable. It is important to note that in Oklahoma, a good faith purchaser for value, without notice of defects in title, is protected from all parties except the true owner even when the title company is actually or constructively aware of the defects. However, under Oklahoma law, title insurance is interpreted quite broadly. Simply stated, we guarantee clear title as of a point in time, otherwise, the risk is with the buyer.
When is a Guaranty of Title Required?
A guaranty of title is necessary in instances where there are multiple entities interested in a property or there are multiple owners of the property, which does not allow for sufficient permissions to be granted to allow closing to move forward. If, for example, there are five members of a company that owns a piece of real property and one of them is unresponsive to several attempts to allow them to ratify, approve and give their permission for a closing to move forward, oftentimes this is a situation where the parties to a purchase and sale agreement need to use a guaranty of title form. In this very instance, the single member who has not granted approval is the current owner and as the property is being sold, this needs to change. So what does everyone involved in the transaction do to allow it to move forward? They use the guaranty of title form.
On a normal purchase and sale agreement there are places on the form that require signatures and approvals from each entity that is selling the property. A guaranty of title form will generally not have those spaces. When five members of a company own a parcel and only one of them gives permission for the closing to proceed, the guaranty of title form is used because the owner who would ultimately sign the deed is guaranteeing that the title in the property is good and valid and free and clear, despite the fact that the other four members of the company have not given their permission for the sale to move forward. In this instance the guaranty of title form is used.
Professional Guidance for Dealing with a Guaranty of Title Form
A guaranty of title form is essentially a legal agreement, so it’s essential to ensure its accuracy and validity. Attorneys usually face the responsibility for preventing title issues in transactions that require such a document. The following tips outline what legal professionals should consider to make sure their forms don’t contain errors or omissions that could lead to problems in the future:
Review state-specific requirements: Some states have specific regulations regarding the content and structure of guaranty of title forms. Familiarize yourself with these rules to ensure compliance and protect your clients’ interests.
Utilize templates: Many attorneys and title professionals use standard templates for guaranty of title forms, which can help prevent common errors, such as missing information or outdated clauses. These forms often adhere to state and federal regulations and contain updated legal verbiage as laws and rules change.
Be transparent with clients: Transparency in communications about the contents of the guaranty of title form can help avoid future disputes or misunderstandings. When clients understand what the guaranty covers , they are less likely to have questions later on about what is covered by the warranty.
Keep clients informed: Share the finalized guaranty of title form with all parties involved in the transaction, including buyers, sellers, and lenders. It’s essential to keep everyone updated on any changes to the document or the transaction process as a whole.
Document your actions: Maintain well-organized records of all transactions involving the guaranty of title form. This documentation can help justify your actions if any issues arise during or after the closing process.
Consider insurance options: In some transactions, it may be beneficial to purchase title insurance to mitigate the risk of title issues. Discuss the pros and cons of title insurance with your clients to determine if it’s the right option for them.
By following these expert tips, legal professionals can help ensure that their clients’ guaranty of title forms are correct and legally binding, ultimately preventing any potential issues or disputes down the road.