Written by James W. Tarlton, Regional Underwriting Counsel Southeast
AmTrust Title Insurance Company Title insurance plays a critical role in real estate transactions, especially when dealing with properties impacted by Alien Land Transfer restrictions, which can affect foreign buyers' rights to own land in certain jurisdictions. This article explores key aspects of title insurance that may be influenced by these laws, including Closing Protection Letters (CPLs), covered risks, exclusions, requirements, exceptions, and endorsements.
1. Closing Protection Letters (CPLs)
A CPL is a letter issued by a closing agent on behalf of the title insurance company, providing protection to lenders against misconduct or errors by the closing agent. While the CPL does not constitute insurance, it functions as a contract ensuring that lenders are compensated for actual losses due to fraudulent actions or failure to follow instructions. Importantly, CPLs could become relevant when lenders require confirmation that a buyer is not a prohibited party under Alien Land Transfer restrictions.
2. Covered Risks
Title insurance policies define covered risks, which may include the possibility of governmental forfeiture of property under certain statutes. In most states, forfeiture laws related to prohibited parties protect bona fide liens such as mortgages. This ensures that while the buyer's ownership may be at risk due to their citizenship or residency status, the lender’s lien remains intact.
Under the ALTA 2021 policies Covered Risk # 6 expressly covers the enforcement of a forfeiture proceeding, which would include forfeitures under Alien Land Transfer laws, but these actions are covered only to the extent of enforcement as described in an Enforcement Notice in the public records as of the policy date. This underscores the importance of updating title exams prior to closing.
3. Exclusions from Coverage
Policies exclude risks known to the insured but not disclosed to the insurer. This exclusion is vital when a lender is aware of a borrower’s prohibited status under Alien Land Transfer laws. If a lender fails to verify this information, any resulting loss is excluded from coverage. In such cases, the lender’s negligence prevents recovery under the title policy.
4. Requirements for Title Commitment
In states where land ownership is restricted based on nationality or citizenship, title agents must ensure that the buyer provides a sworn statement confirming their legal status. Additionally, the use of state-regulated forms may be required to document compliance with these statutes.
5. Exceptions
Alien Land Transfer laws typically do not affect the title itself but may lead to forfeiture of the buyer's interest in the property. Title agents may include exceptions in policies, specifically when the state does not protect the status of bona fide liens. However, in most cases, no additional exceptions are needed for the owner’s policy, as the buyer’s status is already an excluded risk.
6. Endorsements
Title insurance endorsements provide additional protection in specific scenarios. For loan policies, endorsements such as ALTA 34 and 34.1 may be issued in states where bona fide liens are protected during forfeiture. However, in states lacking such protection, no endorsements can be issued without underwriter approval, and higher premiums may apply.
7. Conclusion
Alien Land Transfer laws generally do not directly impact title or title insurance. However, they may introduce liabilities under title policies. Closing agents must perform due diligence but should resist lender demands to verify buyer status, as this responsibility lies with the lender. Attempts to shift this burden to the closing agent could result in unintended liabilities under CPLs or other title policy provisions.
In conclusion, while these laws do not affect the issuance of title insurance, they complicate the liability landscape, particularly for lenders and closing agents. Title agents need to be vigilant about their responsibilities and push back against attempts by lenders to shift due diligence onto them.
This article outlines essential considerations for professionals involved in real estate transactions governed by Alien Land Transfer restrictions.