Key Takeaways
- Review every Schedule B-2 exception in the title commitment—determine if each is acceptable, removable, or requires coverage.
- ALTA surveys reveal encroachments, easements, and flood zones that directly affect development potential and insurance.
- Legally non-conforming properties face restrictions on rebuilding and expansion—understand the limitations before purchasing.
- Court record searches and code violation reviews protect against inheriting undisclosed legal liabilities.
Legal due diligence protects your ownership rights and uncovers hidden legal encumbrances that could restrict your use of the property. This lesson covers the title review process, survey interpretation, zoning verification, and the assessment of pending legal issues that could affect the acquisition.
Title Commitment Review
The title commitment is issued by the title company after a comprehensive search of public records. It has three key sections. Schedule A identifies the current owner, the proposed insured (you), and the property description. Schedule B-1 lists requirements that must be met before the policy will be issued (e.g., existing liens must be paid, documents must be recorded). Schedule B-2 lists standard and special exceptions—items the title policy will NOT cover. Standard exceptions include survey matters, taxes not yet due, and mechanics' liens. Special exceptions are property-specific: easements, restrictive covenants, CC&Rs, and recorded agreements. Your attorney should review every exception and determine whether it is acceptable, needs to be removed, or requires affirmative coverage. Common title issues include: unpaid tax liens, judgment liens, improperly discharged mortgages, and boundary disputes.
ALTA Survey Interpretation
An ALTA/NSPS survey provides a detailed map of the property boundaries, improvements, easements, and encroachments. Key items to review: do improvements (buildings, parking lots, fences) encroach on setback lines or neighboring properties? Do neighboring improvements encroach on the subject property? Are there utility easements that restrict where you can build or modify structures? Is the property in a FEMA flood zone (Zones A or V require flood insurance and restrict construction)? Does the survey match the legal description in the title commitment? For development or expansion plans, confirm adequate buildable area after accounting for setbacks, easements, and flood zones. ALTA surveys cost $3,000-$10,000 depending on property size and complexity.
Zoning Verification and Legal Issue Assessment
Verify zoning by obtaining a zoning verification letter from the local planning department confirming: the property's current zoning designation, permitted uses under that designation, whether the current use is conforming or legally non-conforming (grandfathered), applicable density limits, parking requirements, and any pending zoning changes. If the property is legally non-conforming, understand the restrictions: can you rebuild if damaged beyond a threshold (typically 50%)? Can you expand the non-conforming use? For legal issues, search court records for pending litigation involving the seller, the property, or any tenants. Review any notice of code violations or orders to correct. Check for any pending government actions (eminent domain, condemnation, special assessments).
Case Study: Title Issue Discovery on a Commercial Acquisition
During legal DD on a 12-unit mixed-use property (retail ground floor, apartments above), your attorney discovers multiple title issues.
- 1Title commitment reveals an unreleased mortgage from 2015—the previous owner refinanced but the old lender never recorded the satisfaction. The title company requires a satisfaction piece from the old lender.
- 2Schedule B-2 lists a utility easement running diagonally across the rear parking lot, preventing construction of the carport structure you planned.
- 3ALTA survey shows the building's fire escape encroaches 18 inches onto the neighboring property. A historical encroachment agreement exists but was never recorded.
- 4Zoning verification reveals the residential units above the retail are legally non-conforming—current zoning allows retail only. If destroyed beyond 60%, residential cannot be rebuilt.
- 5Your attorney files objection letters: (a) seller must obtain mortgage satisfaction before closing, (b) request recording of encroachment agreement, (c) request title endorsement covering the non-conforming use.
- 6Resolution: seller obtains mortgage satisfaction, encroachment agreement is recorded, and title company issues a non-conforming use endorsement. The carport plan is abandoned, reducing projected other income by $600/month.
Legal DD prevented three potential title problems: an unreleased mortgage that could have clouded title, an unrecorded encroachment agreement that left you vulnerable to a neighbor's claim, and the discovery that the residential use cannot survive a major casualty. The carport issue reduces projected revenue, and the non-conforming status is now factored into insurance and risk analysis.
Key Takeaways
- ✓Review every Schedule B-2 exception in the title commitment—determine if each is acceptable, removable, or requires coverage.
- ✓ALTA surveys reveal encroachments, easements, and flood zones that directly affect development potential and insurance.
- ✓Legally non-conforming properties face restrictions on rebuilding and expansion—understand the limitations before purchasing.
- ✓Court record searches and code violation reviews protect against inheriting undisclosed legal liabilities.
Sources
Common Mistakes to Avoid
Skipping the ALTA survey to save $3,000-$5,000 in DD costs
Consequence: Missing encroachments, easement conflicts, or setback violations that could cost tens of thousands to resolve
Correction: Always obtain an ALTA survey for commercial acquisitions—the cost is negligible relative to the risks it identifies
Not verifying zoning compliance and legal conforming status with the local planning department
Consequence: Purchasing a legally nonconforming property without understanding reconstruction limitations after casualty loss
Correction: Obtain a zoning verification letter from the municipality confirming permitted use, density, and conforming/nonconforming status
Test Your Knowledge
1.What is the most important document to review in legal due diligence?
2.What does an ALTA survey reveal that a title search alone cannot?
3.What zoning issue can kill a multifamily deal?