Title Defect Claims in Commercial Real Estate Transactions

Commercial real estate buyers expect to acquire the ownership interest, access rights, development rights, and priority interests described in their purchase agreements and closing documents. When an undisclosed lien, competing ownership claim, easement, recording problem, boundary issue, or other title defect appears after closing, the problem can interfere with financing, redevelopment, leasing, sale of the property, or even the buyer’s ability to establish clear ownership.

Title defect disputes can involve several different legal relationships at the same time. A buyer may have claims against the seller under the purchase agreement or deed, rights under an owner’s title insurance policy, contractual remedies involving escrow, or grounds for a quiet title action against a third party asserting an adverse interest. Determining the appropriate remedy requires careful review of the transaction documents, preliminary title materials, recorded instruments, title insurance policy, survey, escrow file, and circumstances surrounding the acquisition.

What Is a Title Defect?

A title defect is generally a problem affecting ownership of real property or the rights associated with that ownership.

Commercial title defects can involve:

• Competing ownership claims;
• Previously conveyed interests;
• Unreleased deeds of trust;
• Judgment liens;
• Tax liens;
• Mechanics liens;
• Undisclosed easements;
• Restrictive covenants;
• Boundary disputes;
• Encroachments;
• Access problems;
• Errors in legal descriptions;
• Forged or unauthorized deeds;
• Missing signatures;
• Defective acknowledgments;
• Unrecorded interests;
• Unknown heirs or ownership interests; and
• Other defects affecting title or priority.

Not every title issue prevents ownership from passing entirely. Some defects instead reduce the practical value of the property or interfere with a particular intended use.

Commercial Title Defects Can Have Operational Consequences

A title problem that appears technical in the public records can create substantial business consequences.

For example, a previously undisclosed easement may interfere with:

• A planned building expansion;
• Parking;
• Loading operations;
• Utility installation;
• Driveway access;
• Outdoor storage;
• Signage;
• Stormwater facilities; or
• Future subdivision of the property.

An unresolved lien may prevent refinancing or sale. An ownership dispute may interfere with redevelopment. A defective legal description may create uncertainty concerning the property actually acquired.

For commercial buyers, the financial impact therefore depends not only on whether title is technically defective but also on how that defect affects the property’s intended business use.

The Purchase and Sale Agreement Usually Controls Pre-Closing Title Rights

A commercial purchase and sale agreement commonly establishes a procedure through which the buyer reviews title before closing.

The agreement may provide deadlines for:

• Delivery of a preliminary title report;
• Delivery of recorded exceptions;
• Buyer title objections;
• Seller responses;
• Cure of specified defects;
• Approval of permitted exceptions;
• Survey review;
• Extension of closing; and
• Termination if title conditions cannot be resolved.

A buyer that discovers a title defect during due diligence should review these provisions immediately. Failing to object within a contractual title-review period may cause certain exceptions to become accepted or permitted under the transaction documents.

Permitted Exceptions Can Limit a Buyer’s Post-Closing Claims

Commercial purchase agreements often define certain matters as permitted exceptions to title.

These may include:

• Specified easements;
• Recorded restrictions;
• Existing leases;
• Utility rights;
• Taxes not yet delinquent;
• Matters shown on an approved survey;
• CC&Rs;
• Other recorded instruments accepted during due diligence; and
• Items created by or through the buyer.

If a buyer expressly accepts an identified title exception, it may be difficult to later characterize that same condition as a breach by the seller.

The dispute may instead concern whether the actual burden on the property materially exceeds what was disclosed or whether the exception was inaccurately described.

Seller Cure Obligations Depend on the Contract

A buyer’s discovery of an objectionable title item does not always mean the seller must cure it.

Some purchase agreements require the seller to remove specified monetary liens but make cure of other title objections discretionary.

The agreement may distinguish between:

• Voluntary monetary liens created by the seller;
• Judgment liens;
• Existing financing;
• Mechanics liens;
• Property tax liens;
• Easements;
• Restrictions;
• Boundary matters; and
• Other exceptions.

If the seller declines to cure a nonmandatory title objection, the buyer’s remedy may be to terminate the transaction or waive the objection and proceed, depending on the agreement.

Title Objection Deadlines Can Become Litigation Issues

Commercial transactions often operate under compressed due diligence and financing schedules.

A dispute may develop over whether:

• The buyer objected on time;
• The title company delivered required documents on time;
• A newly recorded exception reopened the objection period;
• The seller agreed to cure the issue;
• The buyer waived the objection;
• The closing date was properly extended; or
• The alleged title defect was already disclosed.

Email communications, amendment documents, escrow instructions, and title correspondence can become important evidence concerning whether an objection was preserved.

Preliminary Title Reports Are Important but Are Not the Title Insurance Policy

Commercial buyers commonly receive a preliminary title report or title commitment before closing.

These materials identify the title company that may issue coverage, the proposed insured interest, and exceptions that the title company expects to exclude from coverage unless they are removed, modified, or insured over.

The preliminary report can help the buyer evaluate:

• Current record ownership;
• Existing deeds of trust;
• Liens;
• Easements;
• CC&Rs;
• Recorded leases;
• Restrictions;
• Tax matters; and
• Other recorded exceptions.

However, the final title insurance policy is the contractual document that determines the insurer’s actual coverage, exclusions, conditions, and endorsements.

Title Insurance Protects Against Specified Title Risks

Title insurance generally protects an insured owner or lender against loss caused by covered defects in title existing as of the policy’s effective date, subject to the policy’s terms, exclusions, exceptions, and limits.

Possible covered problems can include certain:

• Undisclosed liens;
• Ownership defects;
• Errors in public records;
• Unknown encumbrances;
• Invalid or defective instruments;
• Forgery-related title problems;
• Unknown easements;
• Priority disputes; and
• Other insured title risks.

The specific policy must always be reviewed because coverage is contractual. A condition that generally sounds like a title defect may nevertheless be expressly excepted or excluded from a particular policy.

Owner’s and Lender’s Title Policies Protect Different Interests

Commercial financing frequently results in issuance of both an owner’s title policy and a lender’s policy.

An owner’s policy protects the insured ownership interest, subject to the policy terms.

A lender’s policy generally protects the insured lender’s security interest and its priority against covered competing claims.

The lender’s policy does not automatically protect the property owner merely because the owner paid some or all of the premium.

A commercial purchaser seeking protection for its own equity should therefore confirm that the transaction includes an appropriate owner’s title policy rather than relying on the lender’s coverage.

Standard and Extended Coverage Can Differ

California title insurance products can provide different levels of protection.

Standard coverage generally focuses heavily on defects that can be identified through examination of public records, together with specified additional covered risks.

Extended coverage can provide broader protection concerning certain off-record matters, depending on the policy and endorsements.

Potential off-record risks may involve:

• Encroachments;
• Boundary conflicts;
• Certain unrecorded easements;
• Possessory claims;
• Survey matters; and
• Other conditions not apparent from a basic records search.

Commercial lenders and sophisticated buyers often require surveys or additional underwriting before broader coverage is issued.

Endorsements Can Be Important in Commercial Transactions

Commercial title policies may be supplemented with endorsements designed to address specific transaction risks.

Depending on underwriting requirements and property conditions, endorsements may address subjects such as:

• Access;
• Survey matters;
• Restrictions;
• Zoning-related risks;
• Contiguity;
• Tax parcels;
• Future advances;
• Leasehold interests;
• Environmental lien risks;
• Same-as-survey matters;
• Subdivision issues; and
• Other project-specific concerns.

The availability and scope of endorsements vary. Buyers should not assume that a particular risk is insured merely because the general title policy was issued.

Policy Exceptions Can Defeat an Otherwise Plausible Title Claim

A title insurer may deny a claim when the disputed matter was expressly listed as an exception in the policy.

Commercial policies may except:

• Specific easements;
• Deeds of trust;
• CC&Rs;
• Leases;
• Tax matters;
• Survey conditions;
• Known encroachments;
• Recorded development agreements;
• Water or mineral rights; and
• Other identified interests.

If the buyer accepted the exception during due diligence, the buyer may need to evaluate remedies against another party rather than assuming the title insurer bears the loss.

Policy Exclusions Are Different From Schedule Exceptions

Title policies also contain general exclusions from coverage.

These may address categories of risk such as matters:

• Created or agreed to by the insured;
• Known to the insured but not disclosed under circumstances described by the policy;
• Arising after the policy date;
• Excluded by governmental regulation provisions; or
• Otherwise outside the insured title risk.

The distinction between an exclusion and a specific exception can matter when analyzing a coverage denial.

Title Insurance May Include Defense of Covered Title Claims

When a third party asserts an adverse claim against insured title, the title policy may require the insurer to provide or fund a defense for covered claims according to the policy terms.

Potential disputes can involve:

• Whether the adverse claim is covered;
• Whether an exception applies;
• Whether the insured provided timely notice;
• Who controls the defense;
• Whether the insurer may cure the title defect instead;
• Whether the claim affects only part of the insured property; and
• What legal expenses are covered.

The insured should provide prompt written notice and preserve all communications concerning the adverse claim.

The Insurer May Have Options Other Than Paying the Claimed Loss Immediately

A title defect claim does not necessarily result in immediate payment equal to the property’s alleged lost value.

Depending on the policy, the title insurer may possess options to:

• Defend the insured title;
• Negotiate with an adverse claimant;
• Attempt to remove the defect;
• Obtain a release;
• Correct a recording problem;
• Acquire an outstanding interest;
• Pursue litigation; or
• Pay a covered loss subject to policy terms and limits.

Commercial owners should review the policy before taking independent action that could interfere with the insurer’s contractual rights concerning defense or cure.

Title Insurance Damages May Differ From the Buyer’s Business Losses

A commercial buyer may suffer consequences beyond the direct diminution in property value caused by a title defect.

For example, the buyer may contend that it lost:

• A redevelopment opportunity;
• A tenant;
• Refinancing;
• Business income;
• A planned sale;
• Construction expenditures;
• Financing costs; or
• Other consequential economic benefits.

The title policy may contain specific rules concerning the measure of insured loss and may not cover every economic consequence associated with the defect.

Contractual claims against the seller or another responsible party may therefore require separate analysis.

A Grant Deed Provides Limited Implied Covenants Under California Law

California Civil Code Section 1113 provides that use of the word “grant” in a conveyance of fee simple property generally implies specified covenants unless the conveyance expressly limits them.

The implied covenants generally provide that the grantor:

• Has not previously conveyed the same estate or interest to another person; and
• Has not created or suffered certain encumbrances affecting the estate.

These implied covenants are limited. A California grant deed should not be treated as an unlimited warranty against every title problem that may have existed before the seller acquired the property.

A Grant Deed Is Different From a Broad Warranty of Title

Commercial buyers sometimes assume that receiving a grant deed means the seller guarantees completely clear title.

California’s statutory implied grant deed covenants are narrower than that assumption.

A defect created by a prior owner may raise different issues from an encumbrance created or suffered by the immediate grantor.

Additional protection may instead come from:

• Express representations in the purchase agreement;
• Seller indemnity provisions;
• Specific title covenants;
• Closing conditions; and
• Title insurance.

The deed and purchase agreement should therefore be reviewed together.

Seller Representations Can Create Separate Contract Claims

A commercial seller may make express representations concerning title and property rights in the purchase agreement.

Representations may address:

• Ownership;
• Authority to sell;
• Existing leases;
• Pending litigation;
• Unrecorded agreements;
• Rights of first refusal;
• Options;
• Service contracts;
• Condemnation proceedings;
• Property-related claims; and
• Other matters affecting the buyer’s ownership.

If a representation proves false, the buyer may have a breach of contract claim separate from any title insurance claim.

Survival Provisions Can Determine Whether a Post-Closing Claim Remains Available

Commercial purchase agreements frequently limit how long seller representations and warranties survive closing.

The agreement may require claims to be asserted within:

• A stated number of months;
• A specified survival period;
• A contractual limitation period; or
• Another negotiated deadline.

The contract may also impose:

• Claim thresholds;
• Deductibles;
• Liability caps;
• Exclusive remedies;
• Notice requirements; and
• Limitations on consequential damages.

A buyer discovering a title problem should review these provisions immediately rather than assuming ordinary statutory limitation periods are the only deadlines that matter.

Fraud and Concealment Claims May Arise From Known Title Problems

A seller’s failure to disclose a known title issue can create claims beyond ordinary breach of contract in appropriate circumstances.

Potential allegations may involve concealment of:

• A competing ownership claim;
• An unrecorded easement;
• A boundary dispute;
• A tenant purchase right;
• An option;
• An adverse possession claim;
• Pending title litigation;
• An access dispute; or
• Another known interest materially affecting the transaction.

Fraud or concealment claims require proof of the applicable legal elements and should not be assumed merely because a title problem existed at closing.

As-Is Clauses Do Not Necessarily Resolve Every Title Dispute

Commercial purchase agreements often contain broad as-is provisions through which sophisticated buyers accept many physical and economic risks associated with the property.

Whether an as-is clause affects a particular title claim depends on the contract language and legal theory involved.

An as-is provision concerning physical condition does not necessarily eliminate express contractual representations concerning ownership or authority to convey.

Likewise, contractual disclaimers generally should be evaluated separately from allegations of intentional fraud or concealment.

Recording Priority Can Determine Competing Ownership and Lien Claims

California Civil Code Section 1214 establishes an important recording priority rule.

Under the statute, an unrecorded conveyance may be ineffective against a subsequent purchaser or mortgagee that:

• Acts in good faith;
• Provides valuable consideration; and
• Records its conveyance first.

This recording framework is frequently described as a race-notice system because both lack of notice and priority of recording can become important.

Disputes may therefore focus on when competing instruments were executed, delivered, recorded, and discovered by later parties.

Actual, Constructive, and Inquiry Notice Can Matter

A buyer seeking the protections associated with bona fide purchaser status generally must act without notice of the competing interest.

Notice disputes may involve:

• Recorded documents;
• Possession by another party;
• Visible easement use;
• Existing structures;
• Tenant occupancy;
• Survey conditions;
• Prior communications;
• Escrow documents; and
• Information that reasonably suggested additional investigation was necessary.

A party cannot necessarily disregard facts suggesting that another person holds an interest and later rely solely on the absence of a recorded instrument.

Unrecorded Leases Can Create Commercial Title Problems

A purchaser may acquire commercial property expecting possession only to discover a tenant or occupant asserting rights not clearly reflected in the title report.

Potential issues may involve:

• Unrecorded leases;
• Lease amendments;
• Extension options;
• Purchase options;
• Rights of first refusal;
• Exclusive use rights;
• Parking rights; and
• Other tenant agreements.

Estoppel certificates, lease reviews, tenant interviews, and physical property inspections can therefore be important components of commercial due diligence.

Options and Rights of First Refusal Can Affect Marketability

An existing option to purchase or right of first refusal can interfere with a proposed sale if the seller did not properly address the existing holder’s rights.

A dispute may involve:

• Whether the right remains effective;
• Whether it runs with the property;
• Whether it was triggered;
• Whether notice was properly given;
• Whether the holder timely exercised the right;
• Whether the buyer had notice; and
• Whether the right was recorded.

A buyer acquiring property despite an unresolved purchase right may face litigation from the holder of that interest.

Unreleased Deeds of Trust Are Common Closing Issues

A seller may have repaid prior financing without obtaining or recording a reconveyance of the deed of trust.

The old security instrument may continue appearing in the public record even though the underlying debt has been satisfied.

Resolving the issue may require:

• Locating the former lender;
• Obtaining payoff records;
• Obtaining a reconveyance;
• Using statutory procedures where available;
• Working with the title insurer; or
• Other evidence establishing that the lien should no longer burden the property.

These issues should ideally be resolved before closing because an old deed of trust can interfere with future financing and title insurance.

Judgment Liens Can Interfere With Commercial Transfers

Judgment creditors may obtain liens affecting real property interests when statutory recording requirements are satisfied.

A commercial title dispute may concern whether:

• The judgment debtor actually owned the property;
• The lien attached before transfer;
• The lien expired;
• The judgment was satisfied;
• The recorded information properly identifies the debtor;
• The buyer had priority; or
• The lien applies to the specific interest being transferred.

Title companies commonly require resolution of identified judgment liens before issuing coverage without exception.

Mechanics Liens Can Create Post-Closing Title Disputes

Commercial property that has recently undergone construction may be subject to mechanics lien claims.

A buyer can encounter problems when contractors, subcontractors, or suppliers claim they were not paid for improvements completed before the acquisition.

The transaction should consider:

• Pending construction;
• Recent work;
• Recorded mechanics liens;
• Preliminary notices;
• Stop payment notices;
• Lien releases;
• Construction contracts; and
• Potential claims not yet recorded at closing.

Escrow holdbacks, indemnities, lien waivers, and title coverage may be used to address some of these risks depending on the circumstances.

Property Tax and Assessment Issues Can Affect Title

Delinquent property taxes and certain assessments can create liens against commercial property.

Closing statements should carefully address:

• Current property taxes;
• Delinquent taxes;
• Supplemental assessments;
• Special assessments;
• Mello-Roos obligations where applicable;
• Other district charges; and
• Tax liens appearing in title records.

Disputes may arise when obligations that should have been paid or prorated through escrow remain attached to the property after closing.

Legal Description Errors Can Affect What Property Was Actually Conveyed

A deed may contain an incorrect legal description even though the parties intended to transfer a particular commercial parcel.

Potential errors include:

• Omitted parcels;
• Incorrect lot numbers;
• Incorrect metes and bounds descriptions;
• Transposed figures;
• Missing easement parcels;
• Incorrect assessor parcel references; and
• Descriptions inconsistent with the purchase agreement or survey.

The appropriate remedy may depend on whether the error was mutual, whether third-party rights have intervened, and whether corrective documents can be obtained voluntarily.

Reformation May Be Available When a Written Instrument Does Not Reflect the Agreement

In appropriate circumstances, a party may seek reformation of a deed or other written instrument when the document fails to express the parties’ actual agreement because of qualifying mistake or other recognized grounds.

Evidence may include:

• The purchase agreement;
• Escrow instructions;
• Draft deeds;
• Surveys;
• Emails;
• Negotiation documents;
• Closing statements; and
• Testimony concerning the intended conveyance.

Reformation should be distinguished from an attempt to create new contractual rights after closing. The remedy generally concerns correcting an instrument so that it reflects the agreement actually made.

Forgery and Unauthorized Transfers Can Create Serious Title Litigation

A forged deed or document executed without proper authority can create competing claims among property owners, buyers, lenders, and title insurers.

Commercial entities can also face authority disputes when an instrument was signed by a person who allegedly lacked authority to bind the LLC, corporation, partnership, trust, or other owner.

Relevant evidence may include:

• Operating agreements;
• Corporate resolutions;
• Partnership agreements;
• Trust instruments;
• Signature authorities;
• Notary records;
• Escrow communications;
• Bank records; and
• Recorded documents.

Because later purchasers and lenders may also assert rights, these cases can become complex priority disputes rather than simple disputes between the original parties.

Entity Authority Should Be Confirmed Before Commercial Closing

Commercial real estate is frequently owned by LLCs, corporations, partnerships, trusts, or investment entities.

Escrow and title underwriting may require evidence establishing that the person executing the transaction has authority to transfer the property.

Documents may include:

• Operating agreements;
• Member consents;
• Manager certificates;
• Corporate resolutions;
• Partnership authorizations;
• Certificates of trust;
• Incumbency certificates; and
• Other organizational documents.

Failure to verify authority can create substantial litigation if an owner later contends that the conveyance was unauthorized.

Boundary and Encroachment Problems Can Become Title Claims

A commercial buyer may discover that a neighboring structure crosses the boundary or that the acquired building itself encroaches onto neighboring property.

Potential problems can involve:

• Walls;
• Parking areas;
• Driveways;
• Loading docks;
• Roof overhangs;
• Utility equipment;
• Drainage facilities;
• Fences;
• Signage; and
• Other improvements.

Whether title insurance responds may depend on the policy, survey coverage, endorsements, and listed exceptions.

A survey obtained before closing can identify some issues before the buyer’s investment is completed.

Access Defects Can Significantly Reduce Commercial Property Value

A parcel may appear physically accessible while lacking sufficient legal rights to use the existing driveway or road.

An access defect can affect:

• Customer traffic;
• Tenant access;
• Truck deliveries;
• Emergency services;
• Development approvals;
• Financing;
• Property value; and
• Future sale.

Commercial buyers should verify both physical and legal access rather than assuming an existing road automatically establishes a permanent legal right.

Quiet Title Litigation Can Resolve Competing Property Claims

California Code of Civil Procedure Section 760.020 permits an action to establish title against adverse claims to real property or an interest in property.

A quiet title action may be appropriate when parties dispute:

• Ownership;
• Deed validity;
• Priority of interests;
• Easements;
• Boundary rights;
• Adverse possession;
• Prescriptive rights;
• Liens; or
• Other interests affecting title.

The purpose of the action is generally to obtain a judicial determination identifying the parties’ rights in the property.

Quiet Title Complaints Have Specific Pleading Requirements

California Code of Civil Procedure Section 761.020 requires a quiet title complaint to contain specific information.

The complaint generally must identify:

• The property involved;
• The plaintiff’s title or interest;
• The basis for that interest;
• The adverse claims being challenged;
• The date as of which the determination is requested; and
• A request that the court determine the plaintiff’s title against those adverse claims.

For real property, the complaint generally includes both the legal description and the property’s street address or common designation, if any.

A Lis Pendens May Affect Property During Title Litigation

When litigation asserts a real property claim, a party may in appropriate circumstances record a notice of pendency of action, commonly called a lis pendens.

A recorded lis pendens can place potential purchasers and lenders on notice that litigation may affect title to or possession of the property.

Its practical consequences can be substantial because it may interfere with:

• Sale of the property;
• Refinancing;
• Construction financing;
• Development transactions; and
• Other title-dependent transactions.

California imposes procedural requirements governing lis pendens, and an improperly recorded notice may be subject to expungement.

Declaratory Relief Can Resolve Contractual Title Questions

Not every title dispute requires a traditional quiet title claim.

Parties may seek declaratory relief concerning the meaning of contractual or recorded rights involving:

• Easements;
• Options;
• Purchase rights;
• CC&Rs;
• Access agreements;
• Development restrictions;
• Subordination agreements; or
• Other instruments affecting property rights.

The appropriate cause of action depends on the nature of the disputed interest and relief sought.

Slander of Title Claims Require More Than an Incorrect Property Claim

Some commercial title disputes include allegations of slander of title when a party allegedly publishes a false statement that disparages another party’s property interest and causes financial harm.

Potential allegations can arise from:

• Wrongfully recorded liens;
• False ownership claims;
• Improper notices affecting title;
• Invalid instruments; or
• Other communications concerning property interests.

However, slander of title has specific legal requirements, including issues involving falsity, privilege, malice, publication, and pecuniary loss. The existence of a disputed recording does not automatically establish the claim.

Escrow Errors Can Contribute to Title Defects

Escrow is intended to close the transaction according to the parties’ instructions, but disputes may arise when documents or funds are handled incorrectly.

Potential escrow issues include:

• Recording documents in the wrong order;
• Failing to obtain required releases;
• Disbursing funds before closing conditions are satisfied;
• Recording an incorrect deed;
• Failing to follow written escrow instructions;
• Incorrect payoff processing;
• Failure to obtain required signatures; and
• Closing despite an unresolved title condition.

Whether the escrow holder bears liability depends on the instructions, duties undertaken, transaction documents, and facts.

Recording Order Can Be Critical in Financed Transactions

Commercial acquisitions often require several documents to be recorded in a coordinated sequence.

These may include:

• The grant deed;
• The lender’s deed of trust;
• Subordination agreements;
• Easements;
• Memoranda of lease;
• CC&Rs;
• Assignment documents; and
• Other instruments.

An incorrect recording sequence can affect lien priority or the relationship among competing property interests.

The escrow instructions and title company’s recording plan can therefore become important evidence if a priority dispute develops.

Lender Title Claims Can Differ From Owner Claims

A lender’s concern is generally whether its mortgage or deed of trust constitutes a valid and properly prioritized lien on the collateral.

Potential lender title disputes may involve:

• Previously recorded deeds of trust;
• Mechanics lien priority;
• Ownership defects;
• Fraudulent conveyances;
• Recording problems;
• Invalid borrower authority;
• Legal description errors;
• Subordination issues; and
• Other competing liens.

A title defect that causes only limited loss to the property owner may have a materially different effect on the lender’s insured security interest.

Title Problems Can Trigger Loan Defaults

Commercial loan agreements commonly contain representations and covenants concerning ownership, liens, and title.

A serious title problem may therefore affect both the property transaction and the borrower’s financing.

Potential consequences may include:

• Default notices;
• Suspension of future loan advances;
• Requirements to cure the defect;
• Additional collateral demands where contractually authorized;
• Refinancing problems; and
• Enforcement of loan remedies.

A borrower should therefore consider lender notice requirements when a material title claim arises.

Commercial Leases Can Be Affected by Title Defects

Title problems may interfere with rights promised to commercial tenants.

A landlord may have agreed to provide:

• Parking;
• Access;
• Signage;
• Exclusive use areas;
• Loading rights;
• Expansion areas;
• Outdoor use areas; or
• Other property rights.

If the landlord lacks sufficient title or easement rights to provide them, the tenant may assert separate contractual remedies.

A title defect can therefore expand into multiple disputes involving the owner, tenant, seller, title insurer, and neighboring landowners.

Title Defects Can Affect Development Entitlements

A developer may acquire property intending to construct a commercial project only to discover that an easement, boundary issue, restrictive covenant, or ownership defect interferes with the approved plan.

Potential effects include:

• Reduced developable area;
• Loss of parking;
• Setback problems;
• Loss of access;
• Utility conflicts;
• Reduced density;
• Inability to satisfy conditions of approval;
• Financing delays; and
• Construction redesign.

The resulting damages analysis can become complex because the buyer must distinguish losses directly caused by the title defect from broader market or development risks.

Restrictive Covenants Can Create Unexpected Development Limitations

Recorded restrictions may limit the type, size, configuration, or use of commercial development.

Restrictions may concern:

• Permitted uses;
• Building height;
• Setbacks;
• Parking;
• Signage;
• Architectural control;
• Operating restrictions;
• Subdivision;
• Access; and
• Maintenance obligations.

A buyer should determine not only whether restrictions appear in title but also whether they remain enforceable, who may enforce them, and whether they conflict with the buyer’s proposed use.

Survey Review Can Reveal Problems That a Records Search Does Not

Commercial purchasers often obtain detailed surveys during due diligence because public records alone may not reveal actual conditions on the property.

A survey can help identify:

• Encroachments;
• Boundary discrepancies;
• Buildings crossing easement areas;
• Parking conditions;
• Access routes;
• Utility locations;
• Structures crossing property lines;
• Unrecorded physical uses; and
• Inconsistencies between occupation and legal descriptions.

Survey findings should be compared with the preliminary title report rather than reviewed separately.

Due Diligence Should Include Physical Inspection of Title-Related Conditions

A title search is only one part of commercial title due diligence.

Physical inspection may reveal facts suggesting rights that do not appear clearly in the recorded documents.

Examples include:

• A neighboring business using a driveway;
• Utility equipment serving another parcel;
• Shared parking;
• Buildings crossing apparent boundaries;
• Tenants not listed in seller records;
• Fences inconsistent with survey lines;
• Shared loading areas; and
• Access routes crossing neighboring property.

These conditions may require additional investigation before closing.

Title Claims Should Be Submitted Promptly

A commercial property owner discovering a potential covered title problem should review the policy’s notice requirements and consider submitting a written claim promptly.

The claim package may include:

• The title policy;
• Purchase agreement;
• Deed;
• Preliminary title report;
• Survey;
• Adverse claim or lawsuit;
• Recorded instruments;
• Correspondence;
• Property valuation information; and
• Evidence explaining the impact of the defect.

The insured should maintain a complete record of communications with the title insurer concerning coverage, defense, investigation, and proposed cure.

A Coverage Denial Should Be Compared With the Actual Policy

If a title insurer denies coverage, the insured should determine precisely which provision supports the denial.

Important questions may include:

• Does the disputed condition fall within an insured risk?
• Was the condition specifically excepted?
• Does a policy exclusion apply?
• Did an endorsement provide broader protection?
• Was the insurer given timely notice?
• Did the insured know of the defect before policy issuance?
• Did the insured create or agree to the condition?
• When did the defect arise?
• Does the adverse claim actually affect insured title?

A denial letter should be evaluated against the complete policy rather than only against the preliminary title report.

Multiple Parties May Be Responsible for the Same Title Loss

A commercial title problem can involve potential claims against several parties.

Depending on the circumstances, those parties may include:

• The seller;
• The title insurer;
• An escrow holder;
• A neighboring owner;
• A lien claimant;
• A prior owner;
• A broker;
• A surveyor;
• A lender;
• A fraudulent actor; or
• Another party claiming an interest in the property.

Each potential claim may involve different duties, damages, defenses, and limitation periods.

A buyer should therefore avoid assuming that a title insurance claim is necessarily the only available remedy.

Settlement Can Involve More Than Monetary Compensation

Commercial title disputes are often resolved by fixing the title problem rather than simply paying damages.

A negotiated resolution may involve:

• A deed correction;
• Release of a lien;
• Subordination;
• Reconveyance;
• A new easement;
• Modification of an existing easement;
• Boundary adjustment;
• Quitclaim deed;
• Release of an option;
• Termination of a purchase right;
• Indemnity;
• Title insurance endorsement; or
• Financial compensation.

For a business intending to continue operating or developing the property, a title cure may be more valuable than damages that leave the underlying defect unresolved.

Recorded Settlement Documents Must Be Accurate

A settlement intended to cure title should be implemented carefully.

The parties may need to prepare and record:

• Deeds;
• Releases;
• Reconveyances;
• Easement amendments;
• Boundary agreements;
• Subordination agreements;
• Termination instruments; or
• Other corrective documents.

The legal description should be verified before recording. A settlement that resolves the business disagreement but records an inaccurate property description can create a new title problem.

Document Preservation Is Important in Title Litigation

Title defect cases often depend on documents created years before litigation begins.

Businesses should preserve:

• Purchase agreements;
• Amendments;
• Deeds;
• Title policies;
• Preliminary title reports;
• Title exception documents;
• Surveys;
• Escrow instructions;
• Closing statements;
• Seller disclosures;
• Due diligence correspondence;
• Loan documents;
• Organizational authorizations;
• Appraisals;
• Emails; and
• Records concerning the adverse claim.

The buyer’s pre-closing knowledge can be highly significant, making the original due diligence file especially important.

Early Title Review Can Reduce Commercial Transaction Risk

Many title disputes can be reduced through careful investigation before closing.

Commercial buyers should consider coordinating:

• Title review;
• Survey review;
• Physical inspection;
• Lease review;
• Entity authority review;
• Zoning and entitlement due diligence;
• Financing requirements;
• Easement analysis;
• Seller representations; and
• Title insurance endorsements.

The review should focus on the buyer’s actual intended use of the property rather than merely determining whether a title company is willing to issue a policy.

Did You Know?

California Civil Code Section 1113 gives a grant deed only limited implied title covenants, including that the grantor has not previously conveyed the same interest and has not created or suffered specified encumbrances, so a grant deed should not be treated as an unlimited warranty against every preexisting title defect.

Resolving Commercial Real Estate Title Defects

Title defect claims can affect ownership, financing, access, redevelopment, leasing, and the future marketability of commercial property. Resolving these disputes may require analysis of the purchase agreement, deed, recording priority, title insurance policy, survey, escrow records, seller representations, and competing third-party property interests. When title problems emerge after closing, businesses should promptly identify whether the most effective remedy is a title insurance claim, contractual claim, negotiated cure, quiet title action, or a combination of those approaches.

Putterman Law represents commercial property owners, purchasers, sellers, developers, investors, and other businesses in disputes involving title defects, real estate contracts, ownership claims, easements, liens, escrow issues, and related commercial real estate litigation.

Learn more about real estate law services at Putterman Law

FAQs

What is considered a title defect in a commercial real estate transaction?

A title defect can include an undisclosed lien, competing ownership interest, easement, encroachment, recording problem, legal description error, unreleased deed of trust, forged instrument, boundary dispute, purchase right, or other condition that adversely affects ownership or another insured property interest.

Does title insurance cover every title defect?

No. Coverage depends on the actual title insurance policy, including its insured risks, exclusions, schedule exceptions, endorsements, conditions, and policy limits. A title problem can exist without being covered under a particular policy.

What is the difference between an owner’s title policy and a lender’s policy?

An owner’s policy generally protects the insured owner’s interest in the property, while a lender’s policy generally protects the insured lender’s security interest and lien priority. A lender’s policy does not automatically insure the property owner’s equity.

Can a buyer sue the seller for a title defect discovered after closing?

Potentially. The buyer may have contractual rights based on seller representations, deed covenants, indemnity provisions, or other obligations. The claim depends on the purchase agreement, deed, nature of the defect, what was disclosed before closing, contractual survival periods, and applicable law.

Does a California grant deed guarantee completely clear title?

No. California Civil Code Section 1113 implies specified limited covenants from use of the word “grant,” but those covenants are not an unlimited warranty against every title defect created by prior owners or other third parties.

Can an unrecorded property interest defeat a later commercial buyer’s title?

The answer depends on the circumstances. California’s recording law protects qualifying subsequent purchasers or mortgagees who acquire their interests in good faith for value and record first. Actual or other legally recognized notice of an earlier interest can affect that analysis.

What is a quiet title action?

A quiet title action is a California court proceeding used to determine ownership or other interests in property against adverse claims. It may be used in disputes involving ownership, liens, easements, boundary rights, deed validity, adverse possession, and other competing property interests.

Can a title defect affect commercial financing?

Yes. Title defects can affect lien priority, lender underwriting, future advances, refinancing, loan covenants, collateral value, and a lender’s ability to obtain required title insurance. Significant title problems can therefore create both property and financing disputes.

Should a buyer obtain a survey in addition to title insurance?

A survey can provide important information that a public records title search may not reveal, including encroachments, boundary discrepancies, physical access, and improvements located within easement areas. Whether a particular survey is appropriate depends on the property, transaction, lender requirements, and intended use.

What documents should be preserved when a commercial title dispute arises?

Important records may include the purchase agreement, deed, preliminary title report, final title policy, endorsements, survey, escrow instructions, closing statement, seller representations, loan documents, recorded instruments, due diligence correspondence, and all documents relating to the adverse claim.