Words to the Wise

by Andrew Mikell

A title issue stops a bulldozer:
a cautionary tale

It is uncommon for a major construction project to be suddenly halted due to a title issue. The following story is based on real events. Normally all title issues are resolved before the closing and before the bulldozer starts working. This story is unusual because of when the issue was discovered. It illustrates the importance of protecting your valuable real estate asset with proper title. Was the project saved?

The phone call to stop construction came in to the contractor’s site trailer at 3 o’clock on a sweltering July afternoon. As the foreman picked up the phone, he looked out the window and observed a bulldozer churning its way up a modest slope as the machine stripped away layers of soil upon which the professional office condominiums would be constructed in the week to come.

Just yesterday, the contractor had informed the future tenants of the condominium that site preparation work on the $3.5 million project was right on schedule. Thus, the foreman was unprepared to answer the phone and hear the project supervisor issue a stop work order.

“What’s wrong?” the foreman asked over the background noise of the dozer.

“Title problems,” said the supervisor. “It seems that there may be a problem with the title that would prohibit construction of commercial condominiums on the site. We’re working with the attorneys and we have notified the title insurance company. They are working to resolve any issues. I’ll be in touch.”

As the supervisor ended the call, work to resolve the potential title issue was already underway at the title insurance company.

Two title insurance policies had been issued for the project. The first was an owner policy for $3.5 million. The policy insured that the owner, a Vermont corporation, had good title to the property, subject only to matters disclosed in the policy. A review of the owner policy did not disclose the existence of any covenants. The second insurance policy was in favor of a local bank for $3 million. This policy protected the bank against title problems if it acquired title via foreclosure.

The lawyer at the title insurance company reviewed the ALTA/ACSM (American Land Title Association/ American Congress of Surveying and Mapping) survey for the project. The insurance company had issued endorsements to the policy insuring, among other things, the accuracy of the survey and compliance with zoning matters.

As she reviewed the survey, the lawyer remembered that prior to the closing, she had observed that an abutting property owner’s shed encroached onto the project. That matter, however, had been resolved by obtaining a signed agreement from the neighbor. Nothing else on the survey, or in any of the extensive survey notes, hinted at a title problem.

Next, the title insurance company lawyer began examining the deeds in the chain of title. A potential problem immediately sprang off the page of a deed executed in 1985. The property had been subdivided from a larger parcel, and the seller had inserted restrictive language into some, but not all of the subdivided parcels. The restrictive language, or covenants, appeared to prohibit commercial development.

Unfortunately, the language in the 1985 deed for the property upon which the condominium project was being built was ambiguous — it was simply not possible to determine the intentions of the parties to the deed.

Did they intend to prohibit commercial development on the construction parcel or did they simply intend to prohibit commercial development on adjacent parcels? With $3.5 million riding on the meaning of the covenants, one thing was certain: The matter had to be resolved before construction could continue.

Title insurance counsel determined that the next course of action was to contact the attorneys for the seller, the new owner and the lender. After consulting, all four agreed that the best solution was to contact the party who had originally subdivided the parcel to determine his intentions. Fortunately for all, the former owner was still alive.

After learning of the title issue, he confirmed that he had not intended to burden the property in question with restrictions prohibiting commercial development. To document this assertion, the former owner was asked to sign an affidavit confirming his intentions relative to the 1985 deed.

While this certainly helped the situation, there was still some risk that other adjacent property owners would not agree with this interpretation. After carefully reading the deeds of each of the adjacent owners and after doing extensive legal research on restrictive covenants, title counsel reached the conclusion that the insurance company was able to accept the additional risk associated with the project, even though that meant that a future challenge to the covenant would require the title insurance company to pay for costs associated with defending the title, including attorney’s fees. Further, if coverage were afforded under the policy, the company would compensate the owner or the lender for the reduction in value to the property due to the title problem.

Three days after the stop work order, the phone rang in the contractor’s trailer. The foreman answered and was excited to hear the supervisor say, “Start the bulldozer. The title company has resolved the issue.” •

Andrew Mikell is state manager/title counsel at Vermont Attorneys Title Corporation