You are under contract to sell a commercial or residential property and your attorney tells you two weeks prior to closing that the buyer’s title search has revealed a title defect. While there is a large array of issues that could affect the title, we will use the most common title defect of an “Unreleased Mortgage” as an example here.
In most circumstances, an Unreleased Mortgage simply means that a Release of Mortgage (also known as Discharge or Satisfaction of Mortgage) was never recorded with the Registry of Deeds to put the world on notice that a borrower’s obligations under the note secured by the mortgage have been satisfied and that the mortgage is no longer a lien on the property. In the rarer of circumstances, an Unreleased Mortgage will actually have a balance that needs to be paid prior to the lender recording a Release. In either circumstance, you a have a few options to keep your deal on track so that the buyer doesn’t walk away.
- File a Claim – if you have a title insurance policy, file a claim with your title insurance company. If your title defect is covered under the policy, the title company will issue a letter of indemnity to your purchaser’s title insurance company so that your sale can proceed. The letter of indemnity will indemnify the buyer’s title insurer from any losses incurred due to the title defect and will typically also contain an “undertaking clause” which means that your title insurance company will resolve the title defect after your closing.
- Hire a Curative Vendor – if you don’t have title insurance, ask your attorney to contact the lender directly to obtain a Release, or in the alternative, have your attorney hire a curative vendor who specializes in obtaining Mortgage Releases. Curative vendors typically have direct contacts at most lending institutions thus making the turnaround time a lot quicker than trying to obtain the Release on your own.
- Offer a Holdback – while this option is not always the most desirable, it may be one of your last options to keep the buyer in the deal. If the title defect cannot be resolved prior to closing but the resolution is nearing, you could agree to holdback a portion of the seller’s proceeds until the title defect is resolved. The release of the holdback funds will be conditioned upon you curing the title defect which will give the buyer some reassurance that you are not simply forgetting about them or the title defect the second you hand the keys over.
While these are not the only three options, they are certainly the most efficient options that can help keep your deal on track so that you close on time. It’s not uncommon for a title defect to hinder the sale of a property, and sometimes the resolution is not as simple as everyone hopes, but your willingness to work with the buyer can help keep the deal on track.