San Diego Mergers and Acquisitions: Real Estate and Title Insurance Issues
If real estate is a component of a San Diego merger and/or acquisition, then special and careful attention must be paid to title insurance issues. Retaining an experienced San Diego corporate attorney is essential. As most know, title insurance is purchased as part of a real estate closing and protects the new owner if there are any defects in title. Maybe the previous owner really did not have proper title or there is some other encumbrance on title, like a mechanic’s lien. If these are discovered after the closing, then assuming the problem is covered by the title insurance, the insurance company then defends any lawsuit and also pays for any loss (generally up to the value of the purchase price for the property).
Since the title insurance companies are “on the hook” if there is a defect in the title, the title companies are careful to search the public and non-public records before issuing the policies. This is where the phrase “title examiner” originates; there is an insurance underwriter actually examining old titles and other public records with respect to potential title defects and other claims. The title insurance is paid for at the closing — a one-time charge which is generally a function of the purchase price. In San Diego and in California, there are two common types of title insurance — policies offered under the California Land Title Association (“CLTA policies”) and those offered under the American Land Title Association (“ALTA policies”). See ALTA information here. For CLTA information, see here
There are two crucial aspects of the title policy that must be examined during a M&A: whether there are any exceptions to the title policy and who are the “insureds” under the policy. Many CLTA and ALTA policies are “without exception.” That is, the title examiner has determined that there are no defects with respect to title — no liens, encumbrances, encroachments over the property lines, etc. Often a title policy will be issued that does contain exceptions. As part of the M&A due diligence, it is important to have your trusted and experienced attorney review the title policy and determine what the exceptions are and to provide advice and counsel as to the legal effect of the exceptions. Obviously, a major exception can dramatically impact value and the ability to sell the real estate. Even something “minor” like a fence that is one inch over onto the neighbor’s property can be expensive to correct if the correction is required.
The second issue is making sure that the acquiring business entity is going to be covered by the title policy currently issued. Generally, title insurance expires when the property is sold. The new owner must get a new title insurance policy. However, with M&As, things are not quite as simple since the acquiring entity is not actually buying the real estate, but rather is buying the company or entity that owns the real estate. There is no actual transfer of title, so technically there has been no “sale” of the real estate. Nonetheless, it is important to verify that the title policy will still cover the owner after the M&A. This is a concern with title insurance policies issued before 2006. In 2006, ALTA clarified its policies by changing the definition of “insured.” In general, an “insured” under a title policy is the new owner specifically listed on the policy as the insured — such as the “ABC Corporation.” The newer ALTA policies also make it clear than an “insured” is a successor to the original “insured” by virtue of a merger or reorganization. Pre-2006 title policies were not as clear with respect to who was defined as the “insured.” Either way, this is not a matter that should be left to chance (or the interpretation of a judge). In general, a call to the title company will clarify any questions and, if necessary, part of the M&A transaction should include purchase of a new or updated title insurance policies (often called an additional insured endorsement).
Contact San Diego Corporate Law Today
If you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters, and he proudly provides legal services to business owners in San Diego and the surrounding communities. Like us on Facebook.