I remember one of my first difficult title reviews as a lawyer in an international law firm. It was the year 2002; Romania had many unclear rules, and many state-owned companies and many properties had been confiscated by the state during communism. The review was engaging and provocative; however, after producing the legal review report (and sending it via facsimile to client, since it was before the era of e-mail), the client learned that the fantastically located site had many title issues and little or no easily available remedies.
Sixteen years later, this experience still sounds familiar, but the legal framework has changed, investors’ carefulness has increased (and even more so after the 2007-2010 crisis), and some of the misconceptions about the Romanian title problems have disappeared. Now the initially lower appetite for title insurance of some risk-takers is seen as a symptom of the past, and increasingly more remedies are available to both investors and banks.
One such remedy is title insurance. Not perfect, not always available or cheap, but it is a big plus, if you can check the gravity of potential due diligence issues and discover that you may receive cover or at least affirmative assurance (with or without the payment of court costs). If you read the last sentence and find it quite technical, allow me to explain briefly some facts and concepts.
Title insurance has become a key element in real estate transactions and in financing. Although 10 years ago this was an unknown concept to some players (particularly those who did not see themselves as institutional investors), title insurance is now common language and a must have in almost all major deals involving real estate in Romania.
Your policy is the result of your negotiations
Proper cover depends on how you negotiate the terms and conditions of the policy. It requires some basic understanding on how title insurance works. We suggest having it negotiated with assistance from qualified lawyers with experience in this field.
How title insurance works and some basic concepts
Ponder the position of the buyer of real estate. A buyer will expect to receive a high level of comfort about the acquired property. However, even if the seller has both high income and reputation, the protection under the transfer agreement may be limited, as the seller may be reluctant to get stuck with a sold property or may offer warranties with limited facts or knowledge.
In some instances, a buyer may be reluctant to bring a claim against the seller, for various reasons, including if the seller is a business partner in another jurisdiction, or if it is difficult to check if the seller has access to a large amount of money, or if the seller is just a special purpose vehicle that will be liquidated by its shareholders immediately following the successful sale of the property.
In this context, title insurance may be of great help and it may cover:
- A buyer (thus being an “owner’s policy”)
- A lender/bank (thus being a “lender’s policy”)
- “All risks” (with some customary exclusions)
- One or more “specific risks”
- Costs of defending title, part of such (lawyers’ fees) or none of them
Title insurance benefits different players:
- It benefits buyers, as buyers may be more persuaded to get the deal done or access financing with less trouble.
- It benefits lenders, as the existence of a title insurance policy provides comfort and streamlines the negotiation of a lender’s policy.
The negativity instinct
By nature, our instinct is to notice the bad things. But you should not rely on your negative instinct when dealing with Romanian title issues. The premium located site may hide cascades of title issues, such as restitution claims, title defects and absolute nullities. Lawyers are happy to flag them for you. And pragmatic lawyers are happy to get them solved or at least mitigated.
Therefore, never underestimate the value of the due diligence of Romanian real properties and the benefits that come with having the real issues revealed.
It is important to understand the general role that title insurance can play. Without over estimating its role, it may be the pin code to unlock a successful transaction.
The title policy may be a good product, if you are able to get proper cover. To ensure this, it is better to spend some money on lawyers than to lose a much greater amount through not seeking proper expert advice.
Instead of a conclusion
And if you are curious and want to learn more, you are welcome to attend our event where we bring experts from Dual and Howden to discuss interesting title insurance and warranty insurance topics in a relaxed and friendly environment.
The event is called “Brexit! Its Impact on Transactional Insurance, Warranty and Indemnity Insurance, Title Insurance and Share Title Insurance in Real Estate M&A” and it will be held on December 6, 2018, starting at 2 p.m. (GMT+2), at the Radisson BLU Hotel.
By Bogdan Papandopol, Partner and head of Global Real Estate Group Dentons