When purchasing commercial real estate, you always want to make sure you’re legally able to buy the property. One way to ensure this status is by confirming who actually owns the property, and you can find this information through a chain of title search.
What Is a Chain of Title?
A chain of title refers to a property’s history of ownership. The title of a property is a legal document that proves ownership over real estate, vehicles or other valuable personal property. With real estate, the title of a property is usually registered in the clerk’s office of the town or county where the property is located.
“The chain is every document related to the property’s ownership going back to the original owner,” said Reid Hogan, a Commercial Real Estate Advisor at LandCashin.
A chain of title shows everyone who has ever owned that piece of property, in timeline order from the first owner to its current owner. When a property is bought or sold, the title gets transferred to a new owner, and that owner is then added to the chain of title.
The chain “includes deeds that transfer ownership, liens on the property — both voluntary (mortgages) and involuntary (tax liens) — covenants and restrictions and easements,” Hogan explained.
In some states, however, “A chain of title is not a full title examination,” said Jo-Ann Marzullo, a commercial real estate attorney at the law firm, Ligris. Speaking on her own state of Massachusetts, Marzullo noted that a chain of title includes “a search of at least 50 years, continuing back until the first conveyance that is not between related parties.”
How Does a Title Company Establish a Chain of Title?
When buying commercial real estate, it’s always a good idea to hire a title company to trace the chain of title and make sure the seller has valid ownership of the property. Failure to do so could mean the seller doesn’t have legal means to sell the property, and therefore the buyer will be paying for something they have no right to buy. When this occurs, people often have to go to court to resolve chain of title discrepancies.
A title company will conduct title searches for all transactions involving that property. A title search is a search of public records for any discrepancies in the chain of title.
More specifically, a title company will enlist a title examiner to examine the public land records, Marzullo said, adding, “Most land records can be searched online for recent documents, but searching and printing documents may require payment. Searching for older documents still requires in-person examination.”
How to Do a Chain of Title Search
Chain of title documents are a matter of public record, Hogan said, and those documents can be found at your county’s Register of Deeds. Hogan recommended enlisting a title company or real estate attorney to perform the title search.
To do the actual search, the title examiner “can search the Grantor (seller) and Grantee (buyer) indexes and review the applicable recorded documents,” Marzullo said.
Nowadays, because most land records are electronic, Marzullo noted that it’s also possible to search by property address, given that the full property address is provided.
Do You Need Title Insurance for a Commercial Rental Property?
Generally, it’s a good idea to get title insurance for a commercial rental property to protect yourself from any title disputes or issues that may arise.
“Title insurance protects property owners and lenders from financial injury due to defects in the title or chain of ownership,” Hogan said.
Hogan recommended all CRE owners obtain title insurance. When borrowing funds for purchase, borrowers may have to purchase the lender’s title insurance coverage.
Marzullo noted, “A tenant who is making considerable leasehold improvements — such as with a ground lease where a tenant constructs the building — does need a leasehold title insurance policy. Other tenants can review the landlord’s title insurance policy, but cannot make a claim for any errors or missing exceptions, as it is not the insured party on that title insurance policy.”
Chain of Title Example
One example of a chain of title Hogan has come across was a title search conducted on a property under contract to develop a multi-tenant retail building. The result showed that an easement could not be built on or paved over. This restriction was due to a discovery in the chain of title search showing the easement belonged to another property owner.
“That prevented the buyer from using the property for their intended purpose, and the contract was terminated,” Hogan said.
Always Complete a Chain of Title Search
When purchasing a commercial real estate property, it’s always a good idea to complete a chain of title search as part of your due diligence. You don’t want to be stuck in a title dispute down the line.