Title Insurance: A risk mitigation tool
5 April 2008
Property investment in the Baltic states and Central and Eastern Europe (CEE) has attracted substantial interest from investors and developers, large and small. The ascension of many of these countries into the EU in 2004, with others following suit in 2007, has only served to increase the pool of investors and developers entering these markets. The result has been a property boom across the region, both for commercial and residential real estate.
The Baltic states and CEE regions had and still have some interesting and sometimes challenging issues with registering a "clean" title to real property. Some of the issues or risks that arise in these markets include:
- Restitution Claims
- Non-compliance with statutory provisions regarding the disposal of land, ie on privatisation or by sale by auction or lender
- Gap periods to register interests within the land and mortgage registers
- Mistakes in recording legal documents
- Adverse possession matters
- Defective construction permits
- Instruments executed under invalid or expired power of attorney
- Deeds by persons supposedly single, but in fact married
- Fraud and forgery
- Missing documentation which casts doubt on title ownership
Most of these risks in transferring property apply directly to Latvia, though restitution issues seem mostly to be resolved. In Lithuania, registration of a property sale is not mandatory (though registration of a mortgage, to be binding, is) which can make it difficult to track a property's history.
In the CEE region, most uses of title insurance have been for known risks. This is a situation where the due diligence, typically by the investor's attorney, identified a specific risk. First Title, with its experience in the region, could evaluate the risk and offer a title insurance policy for a one-off premium that would mitigate the risk for the investor and allow a project to go forward. As title insurance is relatively new in Latvia, and the region as a whole, some further explanation of what it is and how it can be used for both known and unknown risks is warranted.
Title insurance is a form of insurance that covers risks related to the transfer of property. Having title insurance does not mean the title is 'clean'. What it does mean is that the title insurer would have the obligation, typically through the legal system, to defend the rights of the property owners and in the case of unsuccessful defence, pay the insured property owner for the amount of their insured loss. In practical terms, this means First Title pays the legal fees to defend the challenge to the title. And, if the defence is unsuccessful, and a settlement cannot be reached, pays the diminution in value up to the insured amount. Title insurance differs from other types of insurance, such as property or casualty insurance, in one major way; while both types of insurance policies protect the value of the property, by insuring different risks, title insurance protects against defects and risks that originated in the past, while property and casualty insurance protects against future events.
Title insurance is typically issued as either an Owner's Policy - that insures the owner or the borrower - or a Lender's Policy which insures the party holding security over the property. These policies can be issued separately or jointly depending on the needs of the parties. Title insurance is also issued for known risks, as briefly described above, and for standard 'good title' which covers a wide range of potential title defects that could arise.
Title insurance acts as a risk mitigation tool for commercial property transactions whether it is issued for a known risk or as 'good title' policy. Title insurance is used to make the acquisition, sale and refinancing processes quicker, easier and more cost-effective which can help businesses operate more profitably by improving their cash-flow. This saves time and money and prevents third party claims and financial penalties. Title insurance can be used to compliment the attorney's due diligence to cover hidden defects that would not be revealed by the usual due diligence process, and can be used by lenders to provide additional security, and by investors and developers to allow projects to go forward on a timely basis even if specific risks are identified.
For example in one case in Poland, a large international developer was seeking to acquire a shopping centre. Due to an invalid lease for the parking lot, the project was stopped as the developer was unwilling to take the risk of the lease being invalidated. While the invalidity of the leased car parking was confirmed, First Title used a 'practical' approach and agreed to insure against the invalidity of the parking lot allowing the project to proceed.
Title insurance has been used for more than 100 years in the United States and for more than 20 years in the UK. In the Baltic States and CEE region, the focus is now on commercial real estate, although in the future it is likely that the availability would extend to residential property as well, since First Title in the UK does a large amount of residential insurance business.