Joseph McNabb is an associate in the real estate practice of Bingham Dana in Boston.
Property owners buy title insurance to protect themselves from losses related to title problems on their property. Some owners may be surprised to learn, then, that a number of real estate problems – even some that render property virtually useless to its owner – are not covered under the standard form title insurance policy of the American Land Title Association.
Look for Tracks
The ability to build on a piece of property is a basic right of ownership, but what recourse do owners have when they’re denied this right? Take the example of the developer that purchased land on the North Shore of Boston to construct a condominium complex. He bought a title insurance policy at the time of purchase, obtained building permits from the city and began construction – when the Attorney General ordered a halt. It turns out the property in question had been owned by the Boston & Maine Railroad in 1926. So what? A Massachusetts statute (MGL ch. 40 Section 54A) prohibits property owners from building on land formerly used as a railroad right-of-way without first obtaining the written consent of the secretary of the Executive Office of Transportation and Construction. The purpose of the statute is to keep people from constructing expensive improvements in places where there are plans to restore or expand train service. The resulting takings would be frustrating for property owners and expensive for taxpayers.
So we have a frustrated property owner (and later a foreclosing lender) who did not have the consent of the Secretary of EOTC to his development plans, and therefore he could not build on his land. Good thing he bought that title insurance policy, so he could collect some measure of damages and move on to the next project. Right?
Wrong.
Title insurance policies insure legal ownership or title to land, not that the owned land will be economically useful. As was the case with the North Shore developer, an individual can hold clear title to a parcel of land, although the same parcel is economically valueless because of some restriction or regulation on its use. Title insurance provides no coverage for governmentally imposed impediments on the use of the land or for impairments in the value of the land. It is the same exception from coverage which keeps title insurance companies from having to pay claims for environmental cleanups or violations of building laws. The result is that the property owner is left with a piece of property that he can’t use for building and he can’t recover under his title insurance policy either – although he may have a claim against his counsel or surveyor if he was not properly advised of the risks of his proposed development.
It is clear that the above developer should have investigated the railroad right-of-way issue and resolved it one way or the other prior to purchasing the property, or at the very least prior to committing to a particular location and type of construction on the property. Typically, a prospective purchaser will be put on notice of a potential railroad right-of-way issue by the title examiner who will reference the issue in the title report, noting that it is being done for informational purposes only. A purchasing developer with any questions or doubts about its ability to develop property should contact EOTC. EOTC’s response could run the gamut from a decision that the statute doesn’t apply to the requirement that the property owner go through a public hearing.
Provide Access
As with the right to build on property, access is fundamental to ownership. ALTA title policies insure a right of access to and from the insured land, but property owners may be surprised at exactly what this insured “right of access” gets them.
Title policies insure a legal right of access to the insured property. They do not insure against defects in the physical condition of the legal access to the property. What’s the difference? Take the example of the property owners who bought a piece of oceanfront property abutting a public right-of-way. After taking possession, the unfortunate owners discovered that their property was only three feet above the mean high water mark, so at certain times of the year the right-of-way was underwater at high tide. A property owner might consider this a denial of access, but this is not a denial of access within the meaning of a title insurance policy. The property owner had a legal right of access via the public right-of-way, and physical infirmities with this legal right do not invalidate it.
Time for a quiz: Assume you bought 480 acres of property which you accessed by car over a road abutting the property. Six months after you bought the property, you found out that the road belonged to your neighbor and he would no longer let you use it. Now the only way you can reach your property is over a goat path, accessible only on foot, which is twice as long as the road you used to take. Have you been denied access allowing you to collect under a standard ALTA title insurance policy? Not on your life. You have a legal right of access to the property, even if it is difficult and of limited usefulness. Standard ALTA title insurance policies insure access that is legal, not necessarily reasonable and practicable, or usable by motor vehicles.
What could these purchasers have done differently? In the first example, once again it boils down to using due diligence prior to acquiring the property. Determining whether property is in a flood zone is always a good idea, and further investigation is warranted when purchasing property directly on a body of water. If this purchaser had doubts about seasonal access, he could have tried to delay the closing, obtain an indemnity from the seller, secure an alternate means of access (such as by an easement over a neighbor’s property) or not go forward with the sale.
In the second example, the purchaser could have requested an access endorsement to his title policy insuring that access to the property was via the road in question which was an open public way. This would have flushed out the fact that it was not an open public way and the parties could have responded accordingly by negotiating (and insuring with the title company) an access easement with the owner of the road, adjusting the purchase price, or not going forward with the sale.
Though title insurance is a valuable product, it is not meant to be a substitute for using due diligence in inspecting property and the record. A careful conveyancer knows that the universe of insured title problems does not include those mentioned above, so if any of these problems are uncovered during the due diligence process, he will resolve them or negotiate with the title insurance company in advance for additional coverage. In this way, the property owner is fully informed and protected to the extent possible from costly and uninsured problems.
