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Title and Due Diligence: What You MUST Look for Before and After Transactions
Presented to National Business Institute on Feb. 12, 2024
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Title and Due Diligence: What You MUST Look for Before and After Transactions
- 1. Title and DueDiligence: What You MUST Look for Before and After Transactions
- 2. ABOUT ME Jazmynn Pok •Associate at Parsons, Behle & Latimer • Practice land use and real estate transactions, primarily in Montana and Utah, also licensed in Wyoming • Experience in commercial and mixed-use, renewable energy, and resort development; leasing; entitlements • Email: jpok@parsonsbehle.com
- 3. ABOUT THE FIRM ParsonsBehle & Latimer • Full-service law firm with more than 200 attorneys • 11 offices across Montana, Wyoming, Utah, Nevada, Idaho • Practice areas include all aspects of real estate and development, including purchase and sale, land use, environmental and water diligence, development and entitlement, financing, leasing, construction, and tax. • Website: Parsons Behle & Latimer - A Different Legal Perspective
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- 6. What does diligencetypically include? Seller’s disclosures Title commitment Inspections Appraisal Survey Environmental Water Leases or contracts Zoning; intended use or development Site plans, engineering, feasibility Financing Utilities
- 7. What are welooking for? • Value • Use • Risks • Liability
- 8. "Congratulations, you justmade the worst land deal since my people sold Manhattan"
- 9. • Buyer mightalso assume liability based on the actions of a previous owner • Or, if buying a downstream property, identify irregularities with the waterway
- 10. $1,700 per night $1,400per night
- 11. “On our land,it’s our river, This isn’t California, gentlemen. This is Montana. We can do whatever we want.”
- 13. Evaluate and MitigateRisk Deed • Legal Description • Buyer • Together With • Subject To • Covenants Title Insurance Product • Standard • Extended • Endorsements • Lender Shift Liability • Estoppels • Subordination • Assignment Feasibility For Intended Use • Land Use & Zoning • Restrictions & CCRs • Finances • Inspections
- 14. Appraisal • Determine fairmarket value • Contingency; often related to financing and investors • Structure of the transaction and development plans
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- 17. Title Commitment • CoveredRisks • Exclusions from Coverage • Schedule A
- 18. Title Commitment “Entity”: Acorporation, partnership, trust, limited liability company, or other entity authorized by law to own title to real property in the State where the Land is located. “Insured”: The Insured named in Item 1 of Schedule A; (b) the successor to the Title of an Insured by operation of law as distinguished from purchase, including heirs, devisees, survivors, personal representatives, or next of kin; (c) the successor to the Title of an Insured resulting from dissolution, merger, consolidation, distribution, or reorganization; (d) the successor to the Title of an Insured resulting from its conversion to another kind of Entity; or (e) the grantee of an Insured under a deed or other instrument transferring the Title, if the grantee is: (b) an Affiliate; (c) a trustee or beneficiary of a trust created by a written instrument established for estate planning purposes by an Insured; (d) a spouse who receives the Title because of a dissolution of marriage; (e) a transferee by a transfer effective on the death of an Insured as authorized by law; or (f) another Insured named in Item 1 of Schedule A. • Conditions
- 19. Title Commitment • ScheduleB, Part I - requirements • Schedule B, Part II -exceptions to insurance • Standard • Recorded against property • Judgment and lien search • Informational notes
- 20. Title Commitment • Extendedtitle insurance coverage • Requires ALTA/NSPS Survey, certain affidavits from Seller • Removal of standard exceptions • Additional coverage
- 21. Title Commitment Review Object &revise request PRO FORMA • Subject to requirements being met • Includes endorsements in the form the underwriter will issue • Shows removed or modified exceptions
- 22. What is importanton a survey? • Corresponds with title commitment • Meets national requirements / provides required information • Certified to the correct parties • Evaluate site plans
- 23. Land Use Zoning, entitlements,land use plans Intended use Site plan and survey Access Utilities
- 24. Environmental • AVOID CERCLAliability • MEET Lender requirement • AVOID Future liability • Remediation and cleanup expenses • injury to occupants or the land • Decrease in property value • government restrictions on future uses of the property • Initial desktop review • Environmental Site Assessment • Phase I • Phase II
- 25. Water • Any totransfer ? • Any subject to adjudication? • Does the property use water (irrigation, well, pond, river) without a secured water right?
- 26. Closing • Closing instructionletter • closing requirements • order of recording • deed • Prepare post-closing packet for client
- 27. New reporting obligation •FinCEN rule effective December 1, 2025 • Requires certain non-financed residential real estate transactions to be reported.
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Editor's Notes
- #5 Diligence – why is it important? Protects both parties Reveals issues related to the condition of the property Reveals chain of title issues; ensures bona fide purchaser status Provides opportunity to address, correct, or negotiate around issues Diligence - process Understand your timeline Get started early Collect information Make objections and revisions Collaborate with seller & title (surveyor, land use authority, and other parties) Correct, waive, negotiate, terminate
- #6 Purpose Seller’s Protection Buyer’s knowledge
- #7 Conditions that might result in diminished value, inhibit ability to use the property as intended, or impose risk or liability on purchaser Easements and restrictions that burden and benefit the property Verify access to the property Verify appraisal value Review chain of title to confirm the property you are actually purchasing, verify any reserved interests, potential claims of right to the Property Determine whether additional diligence is appropriate, for example, additional inspections or information. Should purchase price be negotiated? Do you need more time for diligence? Do you need to purchase additional title insurance product?
- #8 Dutton Ranch .. Some of the issues we might find during diligence: Development rights limited Burdened by land trust / conservation easement Buried bodies – disclosed and not disclosed Existing violation(s) of local ordinances
- #9 Buyer might also assume liability based on actions of a previous owner No right to divert waterways Diligence could identify irregularities with waterway, erosion issues, downstream problems for the subject land, whether ranch has appropriate rights for diversion and use of water If buying a downstream property, diligence would identify irregularities with the diverted waterway from the ranch
- #10 Diligence, such as ordering a zoning report or preparing a land use audit, would determine whether additional structures could be built, or whether you could rent cabins on the ranch (long term or short term)
- #11 NOT SO. Proper diligence will determine whether you can use the land as you intend.
- #12 Look for Red flags; do your own diligence
- #13 Obtain verification, amend agreements, process and analyze data We can draft protections into our deed No statutory form of deed; Warranty deed is commonly used, as well as quitclaim and special warranty Legal Description Confirm buyer is correct (and comprehensive) Together With, Subject To, Covenants, permitted exceptions Purchase appropriate title insurance products Standard, Extended, Endorsements Shift liability to other parties Estoppels, Subordination, Assignment, Affidavits
- #15 Inspections Understand the condition of the structures, fixtures, appliances, HVAC, roof, concrete, foundation, utility infrastructure. Understand, or find evidence of, environmental or hazardous substance history or conditions, for example, existence of old poly drums, carcasses, mysterious pools of discolored water, might indicate that further environmental diligence is appropriate. Look for evidence claims of right, use or access that are not recorded. Look for evidence of issues not disclosed.
- #17 Title Commitment - starting from the beginning: Covered Risks - describes what is included in your title insurance product Exclusions from Coverage – describes what is not included in your title insurance product Schedule A – provides essential terms and parties (buyer, seller, insured amount, effective date, legal description) Legal description – consider whether you need to insure any easements interests benefitting the property or leasehold interests.
- #18 Conditions Draw attention to definition of “Insured” and verify that if you intend for any transfers to family members, affiliates, LLC, trust, that you fit precisely within the definition. Montana courts have historically interpreted this narrowly, so it’s best practice to confirm with the underwriter and if there is any ambiguity or doubt, purchase the endorsement as a safeguard
- #19 Schedule B, Part I - requirements Describes what must be provided to the title company at or before closing to issue the insurance described in the commitment. Typically includes: Authorization documents for entities, Money owed, Payoff statements for loans Instruments required to remove or edit exceptions, or issue endorsements Schedule B, Part II - exceptions to insurance Standard exceptions Special exceptions recorded against property Judgment and lien search Informational notes
- #20 Title Insurance - Extended title insurance coverage Requires ALTA/NSPS Survey and certain affidavits from Seller Removes standard exceptions, typically Provides additional coverage including against defects, liens, easements, encroachments, and conflicts in boundary lines that aren't in public record, and rights or claims of parties in possession, unfiled mechanics' and materialmen's liens, and matters that would be disclosed by a complete and accurate survey.
- #22 National standards; should include specific things including: zoning statement, setbacks, flood plain information, access points, structures, boundaries, easements, encroachments, utilities Use the survey in tandem with the title commitment. The title commitment should be updated based on the survey, and vice versa. ALTA survey used to obtain extended title insurance and certain endorsements. Review any potential easements, structures, utilities, that are not on the title commitment, figure out who they benefit, if there is any written agreement, are there restrictions imposed on your use of the property? Confirm that all easements or agreements affecting the property are plotted on the survey. Verify that the survey is certified to the correct parties, including the owner entity and lender. Review how existing easements affect the property and whether they impact the planned use or development. Verify sufficient access. Site Plan - Prepare a site plan and confirm that the survey does not reveal any problems Do you have infrastructure, access, and rights necessary for all utilities serving the property? (if you are increasing density, do you have sufficient infrastructure to scale up?) Will you be able to obtain the permits and entitlements you need? Are there existing violations of any law or ordinance? Are there any concerns related to water, flooding, environmental conditions? Are there any encroachments, do you need any land use agreements with adjacent parcels?
- #23 Land Use - Confirm zoning and any other land use plans that apply 2023 Montana Land Use Planning Act requires certain municipalities to create or revise a comprehensive land use growth plan within three years Zoning – whether use is permitted, conditional, or whether you will need a variance, development agreement, subdivision, etc.; review zoning district requirements and conformity with site plans Review any restrictions that might apply to your property.
- #24 Environmental Diligence Initial “desktop” review to understand current use, history, use of surrounding properties. Consider whether you need an Environmental Site Assessment (Phase I, Phase II) Current and past uses (e.g. dry cleaning, fuel station) Known contamination on the property or surroundings (e.g. mining, dumping) Compliance with or violations of applicable laws and regulations The buyer's planned use of the land in the future Why is an ESA important? May be required by lender Prevents future liability, for example: CERCLA, Remediation and cleanup expenses, Liability against future injury to occupants or the land Decrease in property value government restrictions on future uses of the property Consider other risk mitigating factors (e.g. indemnification or insurance)
- #25 confirm whether there are any water rights to transfer. Review on DNRC Water Rights Query System. Use basic search if the geocode and ownership are straight forward. The advance search works well if you have multiple legal descriptions, or parcels that have changed geocodes or boundaries over time. Confirm whether any water rights subject to adjudication? All pre-1972 water rights have to be adjudicated. Water rights transfers require a DNRC transfer form 640 in conjunction with the Realty Transfer Certificate. If the property uses any water such as irrigation, well, pond, or river, confirm that there is a secured water right.
- #26 Prepare a closing instruction letter for the title company. Describe closing requirements, especially if required for title insurance. Specify order of recording, especially if there are any agreements being executed in conjunction with the sale such as easements, licenses, development agreements. Provide any special instructions, especially related to 1031 exchange, qualified opportunity zones, or other non-traditional transactions structures. Provide a form of deed or closely review the deed provided by the title company or other party. Post-closing - Prepare closing packet for client with the settlement statement, recorded copies of all documents, final title policy, and other applicable documents in final form.