Real Estate Tip – Standard Forms May Lead to Not-So-Standard Responsibilities

Standard affidavits and standard indemnities are potential traps for any borrower, even sophisticated commercial developers. Consider the experience of developers in West Virginia. At the closing for a $20 million apartment complex, the developers signed a title insurance company’s standard mechanics’ lien indemnity form. It’s a fair bet they did not read it.

When the developers ended up in a dispute with the building contractors, the developers said they’d relied on explanations of their financial exposure provided by the bank and the title insurance agent. The developers claimed they were told they’d only be responsible for liens for work done before the closing.

The standard indemnity they signed included the phrase “any lien…for services, labor or material heretofore or hereafter … furnished.” The court held that “hereafter” meant just that, and the borrowers’ indemnity was not limited to liens for pre-closing work. The difference between the meaning of “hereafter” and the borrowers’ understanding of their responsibility was $115,000 – the amount the title insurance company paid to defend the lender against lien claims. In addition, the developers had to pay their own legal fees in the dispute and pay the contractors for their work.

Here’s the lesson: Ask your own legal counsel (not the lender or title agent) what any standard affidavit or standard indemnity means, whether it involves mechanics’ liens, tenants or occupants in possession, boundary-line disagreements, your knowledge of title defects or other topics.

Be sure to discuss any assurances you receive from a title agent or loan officer that aren’t reflected in the standard form.

Today’s real estate tip is brought to you by Rick Smith, a LEED Accredited Professional and member of Bernstein Shur’s Real Estate Practice Group and Green Building Team. Stay tuned for more useful tips for real estate professionals.

For more information, contact Rick at rsmith@bernsteinshur.com or 603 623-8700 ext. 8829 or 207 774-1200.