New Title Policy Exceptions Due to Covid-19 Closures
Covid-19 has wreaked havoc on the global economy and multiple industries. The real estate industry has not been spared. Multiple jurisdictions have announced moratoriums on evictions and foreclosures. Rent abatements can be expected for various commercial tenants affected by the epidemic, as well. With the mandatory closures of many non-essential government offices, real estate closings have now been acutely affected.
Title insurance companies have begun notifying clients that they can expect new exceptions to appear on title policies, these exceptions implicate the key functions of title insurance.
For Owner’s policies this new exception contemplates being rewritten to includes “any defect, lien, encumbrance, adverse claim, or other matter created by or arising out of the inaccessibility of the [applicable recording office], including, but not limited to, (i) an inability to search the Public Records, or (ii) any delay in recordation of [the documents vesting Title] in the Public Records.” For Lender’s policies the exceptions are the same but also include an additional exception for “any claim based on an assertion that the recording of the Insured Mortgage failed to be timely.”
These new exceptions raise significant issues when considered in the context of New York’s “race-notice” statutory scheme. New York’s race-notice statutory scheme allows for a recording purchaser or mortgagee without notice of any other prior mortgages or conveyances to gain priority (§RPL 291, Alliance Funding v. Tabouda, 39 AD3d 784 (2nd Dep’t 2007)). Thus, to gain priority, a purchaser or mortgagee must have no actual knowledge of a prior conveyance or outstanding lien and then must win the race to record the document at the county clerk’s office (Goldstein v. Gold, 106AD2d 100 (2nd Dep’t 1984)). Knowledge is objectively defined based on what a reasonable inquiry concerning a title defect would have uncovered (Id.).
The proposed new exceptions directly implicate the two prongs of New York’s “race-notice” scheme.
A search of public records is a key component of any reasonable inquiry. While the courts will be the ultimate authority in determining reasonableness, a change in the standard based on (what we hope is) a short-term phenomenon should not be expected or encouraged, as it could cause additional disorder and confusion.
The “race” element of the “race-notice” is concrete. Any delay in recording introduces substantial risk to a purchaser or mortgagee that their interest could be subordinated.
The new exceptions should therefore be avoided, and attorneys should work with their title company to enable them to issue a title policy that adequately protects their client’s interest.
In the long term, the lessons we take away from the current crisis should include a push for further progress in the conversion of title records to electronic form easily accessible online. This would allow a potential shift in the reasonableness standard of “knowledge” to be based on searches conducted online, rather than requiring in person record searches. Similarly, a carefully constructed automated online recording system, for all counties within New York State, would allow for the uninterrupted prioritization of real property interests even when exigent circumstances do not allow a brick and mortar facility to operate.
DISCLAIMER: This summary is not legal advice and does not create any attorney-client relationship. This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.