From the February, 2003 issue of The Title Insurance Law Newsletter
The title insurance policy does not protect against violation of the local building and safety code, according to a California court, although a notice was recorded warning potential buyers that a garage had been converted to living space without a permit and the work did not meet the building code.
Facts
Elysian Investment Group, LLC bought a house in Los Angeles from Countrywide Home Loans after foreclosure. Countrywide sold the property "as is," but was aware that the former garage had been converted to an apartment without permits.
Stewart Title issued to Elysian a CLTA standard coverage title insurance policy to Elysian (an ALTA 1992 form with standard exceptions not removed). The policy did not except a recorded "substandard" notice, which advised:
If the owner or any other party having or acquiring any right, title or interest in the property fails or refuses to comply with the Notice as ordered, the Department may initiate procedures that can result in the work being done under City contract. The costs, plus administrative fees, would be assessed as a lien against the property.
The unrecorded "substandard order" said that no permit had been issued for the conversion work, the conversion was illegal, and that the unit contained hazardous wiring and plumbing. The order required the owner to stop using the garage as a dwelling, and remove all unapproved wiring and plumbing.
When Elysian discovered the issue, it submitted a claim to Stewart Title. It later sued Stewart and Countrywide for breach of contract and tortious breach of the implied covenant of good faith and fair dealing.
Stewart won summary judgment on the grounds that the policy notice does not affect title to the property. The court of appeals affirmed.
Not an Encumbrance
The appeals court began by noting the cases distinguishing between a physical condition on the real estate and its title, especially Lick Mill Creek Apartments v. Chicago Title Ins. Co., 231 Cal.App.3d 1654, 283 Cal.Rptr. 231 (1991). California law defines an encumbrance as "any right to, or interest in, land which may subsist in another to the diminution of its value, but consistent with the passing of the fee." In turn, the statutes say the term encumbrance "includes taxes, assessments, and all liens upon real property." 1119 Delaware v. Continental Land Title Co. (1993) 16 Cal.App.4th 992, 999, 20 Cal.Rptr.2d 438, fn. 4; Civ.Code, § 1114.
Within this context, the court found that a notice of a violation of a building code is not an encumbrance on title.
The Notice did not affect Elysian's title to the property. It therefore is not a "defect in or lien or encumbrance on the title." The Notice, instead, warns that there are physical defects at the property.
Governmental Regulation Exclusion
Elysian's main thrust was that the notice was a recorded notice of enforcement of the building code, and that coverage was implied because of the exception to the governmental regulation exclusion for recorded notices of enforcement. The exclusion says:
Any law, ordinance or governmental regulation (including but not limited to building or zoning laws, ordinances, or regulations) ... or the effect of any violation of these laws, ordinances or governmental regulations, except to the extent that a notice of the enforcement thereof or a notice of a defect, lien or encumbrance resulting from a violation or alleged violation affecting the land has been recorded in the public records at Date of Policy." (Italics added.)
Elysian relied on 1119 Delaware, which said that a recorded conditional use permit that required that one occupant of each apartment be at least 62 years old was an encumbrance and fell within the exception to the exclusion. The court distinguished 1119 Delaware:
Unlike the Notice at issue in the present case, the CUP amounted to a governmentally imposed encumbrance on title because it limited the right of the owner to convey the property. In addition, the CUP applied only to that specific property, whereas the restrictions at issue here governed all similar property.
The court refused to find a duty to recite the notice simply because the exception to the exclusion refers to notices in the real estate records:
Elysian cannot rely upon an exclusion to coverage to extend coverage.
Unlike an assessment lien, for example, the Notice of substandard dwelling did not affect title. It therefore did not give rise to coverage under the basic insuring provisions of the policy, and the exclusion does not expand that coverage to include the Notice. Even if the exclusion could be understood as granting coverage based upon the reasonable expectation of the insured, the Notice of substandard dwelling arguably does not fall within the exception to the exclusion.
The court also found that the notice was a warning, not "enforcement."
As discussed above, the Notice was not a notice of enforcement under municipal procedures. The Notice was instead a warning, preliminary to any formal enforcement action.
Enforcement
required further action on the part of the city.
Had the Department repaired the property and assessed the costs against the homeowner, the Board of Public Works could ultimately have recorded the assessment as a lien.
Title insurance does not insure against future events.
It insures against defects in title existing at the time when the policy is issued.
It is not enough that subsequent events might result in enforcement ultimately affecting title. (See Ward v. Superior Court (1997) 55 Cal.App.4th 60, 65, 63 Cal.Rptr.2d 731 [a homeowners' association's notice of noncompliance has no legal effect on title, but "simply creates uncertainty" about whether the homeowners' association will be able to force petitioners or their successors to comply].)
Marketability of Title
Having decided that the notice did not affect title, the court refused to label it a cloud that would make title unmarketable:
Elysian's contention that the Notice affected the marketability of its title also lacks merit. Citing Mellinger v. Ticor Title Ins. Co. of California (2001) 93 Cal.App.4th 691, 113 Cal.Rptr.2d 357 (Mellinger), Elysian contends that whether title is rendered unmarketable is a question of fact for the jury. We disagree. In Mellinger, a city street encroached on property purchased by the plaintiff, representing a possible third party interest in the land on a theory of implied dedication of private property.
The court held that the encroachment was neither so trivial nor so substantial as to present a question of law. The Notice recorded in the present case, by contrast, provides notice of the physical condition of the property, for which there is no coverage.
It does not raise any doubts about title. "One can hold perfect title to land that is valueless; one can have marketable title to land while the land itself is unmarketable."
Like the plaintiff in Hocking v. Title Ins. & Trust Co., Elysian may have incurred unexpected expenses in order to use the property in the manner it envisioned at the time of purchase. The fact that Elysian was required to bring the property up to code does not cast doubt on who owns the property.
Elysian Investment Group, LLC v. Stewart Title Guar. Co., ___ Cal.App.4th ___, 2002 WL 31873625 (Cal.App. 2 Dist.).
