Reps & Warranties Insurance - A key tool in risk management and recoveries
Title Insurance is an appalling misnomer for a much more comprehensive protection that can often take off the table complicated technical issues that can cause deals to stutter or even abort, it can speed up transactions and result in better pricing of both assets and mortgage finance.
Title insurance is a relatively new concept, having come from the US (where it has existed for over 100 years) in the 1990s. It is now well established within the legal community, but has little resonance with other real estate professionals. Fortunately this is changing, as title insurance often plays a pivotal role in facilitating real estate transactions and managing risk, as the recent sale of the Dawnay Day portfolio illustrates perfectly.
In simple terms, title insurance offers real estate professionals, and their lenders, protection by insuring known risks to title, such as restrictive covenants, access issues, easements, right to light or village green issues (to name but a few), thereby transferring the risk from the owner and lender to the insurer.
But this typical UK approach is actually a very narrow version of a much more comprehensive insurance product which can provide much wider benefits in certain types of European real estate transaction. The policy can extend to protect against unknown risks too, such a forgery and fraud; a significant benefit in a deteriorating market, judicial review and consequential loss where the value of the actual real estate isn't really the issue. Wind farm and pipeline transactions are good examples where insurance can assist the transaction process.
In the current environment, where strength of security is all-important, title insurance also insures that a lender's charge is valid and enforceable, for both new mortgages, or existing ones where a restructure or refinance is required. As lenders are increasingly risk averse, wrapping a lending proposition with title insurance can improve security and sometimes reduce the cost of borrowing.
FAF International, operating as First Title Insurance plc in the United Kingdom (First Title), recently insured the Dawnay Day portfolio at the instruction of the administrator. This transaction highlights some of the key benefits of title insurance, for investors and administrators, in insolvency. The entire portfolio of 221 properties was insured, which significantly reduced the legal due diligence by removing the need to examine every title, and enabled the administrator to give title warranties to the purchaser and their lender.
The insurance policy was recognised as an allowable cost under an administration as it enhanced the value of the asset by giving to the buyer a comprehensive set of reps and warranties that a buyer would expect in an arm's length sale but would not usually get or expect when buying from an Insolvency practitioner. In this case, as the policy was arranged by the Administrator for the buyer and their lender's benefit, it substantially reduced the purchasers' legal fees, adding additional appeal to the marketability of the assets.
Use of insurance in a smaller Administrator transaction resulted in the buyer's lender reducing a 50 basis point loading on their interest rate, for the three year loan term, for a premium of 30 basis points that was a once-only payment on completion. The buyer there was quite comfortable with the assets pedigree and the size of the portfolio would not have given their lawyers due diligence headaches. The decision to use insurance simply an economic one, unconnected to speed or asset value enhancement.
This form of cover can extend to any real estate transaction, including sale and leaseback, refinance and restructure, even where property extends across large geographical boundaries or legal jurisdictions. The advantages of giving buyers and their lenders reps and warranties are not limited to large-scale portfolio acquisitions or refinancing but are easily recognisable for the same reasons in an auction context. First Title recently provided insurance for all of the auction sales made by REDC on their recent inaugural UK road show. To encourage first time buyers to be involved and give peace of mind that third party disputes, violations of planning or building control laws and other regular domestic ownership problems would be resolved or compensated for by First Title.
In summary, title insurance is often a faster, safer and more cost effective solution in real estate transactions than traditional due diligence. It does not remove the need for high quality legal advice, but instead complements it by allowing lawyers to focus on the more complex aspects of real estate transactions. It can be used to fix known or unknown risks, including forgery and fraud, and plays an important role in giving lenders, investors and administrators a powerful weapon in their risk management armoury.
At FAF International we are available to provide quotations and commitments to insure, enabling you to consider all of your options for your real estate transactions. Our senior underwriting team are legally qualified and available to provide free advice and consultation on risk management in any type of real estate related transaction.