You found yourself the perfect house to invest in. Your goal is to hold on to it, rent it out, and then sell when you are ready to retire to a Caribbean beach. The Seller doesn’t have and never obtained a Real Property Report with evidence of municipal compliance (RPR) when she purchased the property. And she now wants you to accept a policy of Title Insurance in lieu of the RPR like she did. Is that ok? Are you covered? Can you forward it on to the next buyer? Is the Seller wise to do this? What do lawyers recommend?
Minimum Legal Requirements:
Most standard form real estate purchase contracts have a clause that requires the Seller to provide the Buyer with a “Real Property Report showing the current state of the property with evidence of municipal compliance”. Of course this is still a relatively free country and the parties are at liberty to negotiate an alternative – usually the Seller agrees to pay the cost for the Buyer to obtain a policy of title Insurance.
On the surface, the two primary purposes of an RPR are met: First, virtually every mortgage lender requires either an RPR or title insurance to fund. So mortgage financing is addressed by this approach. The second purpose of an RPR is to ensure there are no permit, by-law or zoning issues relating to the property. Again, most title insurers will represent that their policies will cover such matters if discovered post-closing by the Buyer. So good on that front too. Thus, as long as the relevant sections in the contract referring to the RPR are deleted and initialed, and an appropriate amendment is added that stipulates that the Seller ‘shall credit the Buyer with the cost of obtaining a policy of title insurance with both lender and borrower coverage and the Buyer shall obtain such policy of title insurance prior to the Completion Date’, the bare minimum legal requirements are met. The Seller has generally absolved herself of her contractual obligations and the Buyer is getting something with similar benefits to an RPR.
But are the benefits and coverage of title insurance equivalent to those of an RPR? Not necessarily. Here are a few of the draw-backs:
1. Duration: As long as an RPR still shows the current state of the property with evidence of municipal compliance, the Buyer (and Buyer’s lender) can and will rely on that. So even if the RPR is 5 or even 10 years old, it would still be acceptable and can be passed along to next Buyer to fulfil the Seller’s obligations under the real estate purchase contract. Coverage under a policy of title insurance ends when the insured sells the property.
2. Certainty: an RPR creates certainty. At a specific point in time, the parties can ascertain the property met all requirements of the relevant municipality. Permits were issued for the structures noted, no encroachments exist (or were properly addressed), set-backs from property lines were maintained, decks were properly constructed, etc. While a policy of title insurance purports to cover some of these issues if discovered by the policy holder, there is no certainty in that regard. Like all insurance, coverage and extent of compensation if covered, are unknown until claimed. A system that consistently and over long periods of time incorporates title insurance in lieu of an RPR will by definition hide greater and greater defects until discovered. Some will be covered to be sure. Some may not. Some may be remedied to the owner’s satisfaction; some cannot be (even if covered).
3. Risk Allocation: Not many people address their minds to this, but it’s a significant legal issue. The Seller may not completely absolve herself of liability even if title insurance is offered. First, the Seller can’t get a policy and then pass it along to the Buyer. So the best that can be done is to give the Buyer a credit for the cost. In effect, the Seller would then be (a) relying on the Buyer to obtain a policy and (b) relying on the Buyer to obtain a policy that is fully sufficient to cover the items the Seller may be held liable for - in particular, the representations and warranties of the Seller noted in the typical real estate purchase contract. Relying on the actions of a third party, and one who could pursue an action against you, is not the best risk management strategy. Second, most addendums that substitute title insurance for an RPR do not address the Seller’s representations and warranties (perhaps by deleting them) nor do they identify and list with any specificity (nor perhaps can they) the type and extent of coverage the Buyer is obligated to obtain.
Next blog post we will look at some specific real-life examples and see how the competition between the two plays out and where title insurance can be an advantage. And we will address some of the contract pitfalls, some alluded to already, that can easily be avoided if you know the issues.