When it comes to commercial real estate legal matters, it’s critical for a broker to have a solid title company. Jim Kelley discussed this topic on his Friday morning radio show, “Texas Money & Business,” (620 AM KEXB in the Dallas / Fort Worth area). Julia Barth of Barth Law Firm and Title joined Jim to discuss the topic on the show and for this podcast.
This is an excerpt from their conversation on commercial real estate legal matters…
Jim: It’s critical for us as brokers to have a solid title company and especially on commercial real estate legal matters because there’s a lot of pitfalls that can happen in a contract situation. Since you’re focused on title, let’s talk about title, because there’s a lot of folks out there that buy and sell commercial real estate that truly don’t understand the closing process and a title policy. Can you kind of enlighten us starting off about what a title policy is and the process?
Julia: Sometimes it’s surprising that even sophisticated purchasers or sellers don’t understand the process. And they’ll come to the closing table kind of blind, and that’s another reason it’s really important for them to partner up with people that are familiar with the process, because many of them they’re running businesses. Maybe they have a chain of stores, they own the real estate, too, and they aren’t real estate people. They’re convenience store owners or hotel owners. So it’s helpful when they have someone like you or someone at the title company level that’s familiar with this process.
But the title company serves a few different functions. The main function: At the end of the day, we want to sell people title policies, title insurance policies. And that’s kind of its own little segment, not segment for this purpose, but it’s kind of its own little discussion. And then there’s few other processes that are integral to the closing process. We just kind of go through, like, the basic steps. We have to receive a contract. So when the parties come to an agreement, someone in the transaction will send a contract over to my office. And at that time, we will review the contract for all of the agreements that the parties have made. A lot of them include work that my office has to conduct in order for this process to take place, for a closing to take place.
So we will review the contract, make sure it’s complete. That’s another reason it’s important to use a title company that is specializing in commercial real estate, because they’re complex. Some of them have multiple addendums, and some of them have multiple ways earnest money can be released throughout the process even before a closing date. And someone that is qualified to review that is definitely helpful. Without it, you can kill a deal, and that’s not what anybody wants to see happen.
So we’ll review the contract. We’ll look at what the requirements are for both parties. We will do title research, so we’ll send it to our title plant, which is a group of people that will then go through all the public records, and we research it. It depends on the property and the situation, but we’ll research many times just 25 years, and then we’ll rely on agreements we have with other title companies that have done prior work, or we’ll go back to the beginning of sovereignty and research who’s owned this property throughout the chain of title, the buyers, the sellers from the United States, the state of Texas, anyone else in between to the current, present owner.
And we also research all of the real property taxes, because those have to be paid, and sometimes and quite often you’ll see real property taxes that are past due. And if you’re looking at commercial real estate, that could be in the hundreds of thousands of dollars, which we’ve seen that. Sometimes commercial properties, just the current property taxes are in the $100,000 range or $200,000 range. So we’ll issue a tax certificate guaranteeing here’s what’s owed on this property regarding real property taxes.
Once we do the research, we accept and hold the earnest money, because most of you probably realize when someone enters into a contract, typically there’s a requirement to put money down to show good faith that they intend to purchase the property, also to help limit liability if there’s a problem and the contract breaks. One party or the other is entitled to that earnest money. Sometimes it’s the seller. So we will hold that earnest money. And we operate on the title company side as a third party that’s neutral. And our fiduciary duty is to all the parties in the contract, not anyone or the other despite you may have a relationship.
Like you might send me a title deal, but the underlying duties are to everyone involved despite my relationship with you. So we follow the letter of a contract, and we do what the contract requires. And so if, say, there’s a problem on the contract, and the contract is canceling, and now, maybe you have a dispute between the parties as to who is entitled to the $25,000 earnest money sitting there, we can help the parties understand what the contract says, but then the parties have to determine at the end of the day who’s going to get that money and instruct me in writing to release that money to whoever they’ve agreed it belongs to.
Listen to the entire conversation on commercial real estate legal matters in this podcast.