When estate property is sold, a critical step in the closing process is clearing the title of exceptions. A title exception is anything that affects the property's ownership or a buyer's rights — such as liens, mortgages, easements, covenants, or unpaid taxes. Before a buyer will close on the property, the seller (the estate) must clear or resolve these exceptions so the buyer receives clear title. Understanding what exceptions exist, which ones are problematic, and how to resolve them is essential to a successful estate property closing.
In Brooklyn, Queens, Staten Island, and throughout New York, clearing title is the responsibility of the estate's executor and their team. If title exceptions aren't addressed before closing, the sale could fail, the buyer could refuse to close, or the buyer could later sue the estate for receiving defective title. Understanding the title clearing process will help you navigate the closing successfully.
What Are Title Exceptions and Where Do They Come From?
A title exception is anything that affects the property's ownership, use, or marketability. When a title company performs a title search, they prepare an abstract of title showing the property's ownership history and any claims or restrictions against it. Items that appear on the abstract and might "except" clear title include:
- Mortgages and other liens
- Judgment liens filed by creditors
- Property tax liens or assessments
- Code violations or code enforcement liens
- Easements (rights granted to others to use part of the property for utilities, roads, or other purposes)
- Restrictive covenants (limitations on how the property can be used)
- Mechanic's liens filed by contractors or suppliers
- Homeowners association dues or claims
- Condominium or cooperative assessments
Not all exceptions are equally problematic. Some are easily resolved; others may require negotiation or court action. The title company will list exceptions on the title report and note which ones must be cleared before closing and which ones can be "insured over" — meaning the title company will issue a title policy acknowledging those exceptions but agreeing to protect the buyer if the exceptions later become a problem.
Obtaining the Title Report and Identifying Exceptions
The first step in clearing title is ordering a title search and abstract from a title company. The executor or their team requests this from a title company that operates in the jurisdiction where the property is located. The title company conducts a search of public records and prepares a preliminary title report listing all exceptions.
Reviewing the preliminary title report is crucial. The executor and their advisor should carefully examine each exception and determine whether it's a problem for the sale. For example, a first mortgage on the property will be paid off at closing from sale proceeds, so it's expected and unproblematic. However, a judgment lien filed by a creditor is problematic if there aren't sufficient sale proceeds to satisfy it after paying the mortgage and other obligations.
Once exceptions are identified, a plan to address each one must be developed. Some exceptions can be discharged immediately; others require coordination with other parties; and some may require court action to resolve.
Clearing Different Types of Title Exceptions
Mortgages and Liens: Mortgages will be paid off at closing from the sale proceeds. The executor directs the title company or escrow agent to use some of the closing proceeds to satisfy the mortgage, and the lender releases the lien. If there are multiple mortgages (a first mortgage and a second mortgage or home equity line of credit), each must be paid off in order of priority. If sale proceeds aren't sufficient to pay all liens, junior lienholders must agree to accept a reduced amount or the sale will be stalled.
Judgment Liens and Tax Liens: If a creditor has filed a judgment lien, or if the IRS or New York State has filed a tax lien, those liens must be satisfied from sale proceeds. The executor should contact the lienholder and request a satisfaction statement showing the amount needed to discharge the lien. At closing, those funds are paid to the lienholder and the lien is discharged. If there aren't sufficient funds, negotiation with the lienholder becomes necessary.
Code Violations and Housing Court Judgments: If the property has code violations or outstanding housing court judgments, the executor must either correct the violations before closing or arrange for the buyer to take responsibility for correcting them (in which case the buyer typically withholds a portion of the purchase price to cover correction costs). The title company won't insure over uncorrected violations, and the buyer won't close if they're required to fix the property's defects.
Easements and Restrictions: Many properties have easements (utility companies have rights to run power lines, for example) or restrictive covenants (deed restrictions limiting use of the property). These are often acceptable to buyers and can be insured. However, if an easement is unusual or if a restrictive covenant significantly limits the property's use, the buyer may require documentation or may reduce their offer to account for the restriction.
Working with the Title Company to Insure or Discharge Exceptions
The title company plays a crucial role in clearing title. Once exceptions are identified, the executor and their team work with the title company to either discharge each exception (remove it from the title) or arrange for the title company to insure over the exception (acknowledge it but agree to protect the buyer if it becomes a problem).
For exceptions that can't be discharged, the title company will issue a title commitment showing what exceptions will appear in the final title policy. The buyer reviews this commitment and decides whether they're willing to accept those exceptions. If the buyer objects to an exception, the executor must find a way to clear it. For example, if an old easement can't be located or discharged, the executor might need to obtain a legal opinion that the easement likely no longer exists or no longer affects the property.
In some cases, if an exception can't be cleared, the executor and buyer can arrange title insurance that covers loss resulting from that exception. The title company agrees to insure the buyer against loss if the exception becomes a problem. This is a reasonable solution for minor exceptions that are unlikely to ever affect the property's value or use.
Court Actions to Clear Title: Clearing Mechanic's Liens and Removing Encumbrances
In some cases, clearing an exception requires court action. For example, if a contractor or supplier has filed a mechanic's lien and no longer exists or can't be located, the executor may need to file a court action to obtain a judgment clearing the lien. Similarly, if an easement was improperly filed or is no longer valid, the executor may need to file a court action to formally remove it from the title.
New York law provides procedures for clearing title of problematic exceptions through court actions. For mechanic's liens, the executor can file a lien foreclosure action or seek relief under the Real Property Law. For unknown or clouds on title, the executor can file an action for declaration of title. These actions typically require professional legal assistance and result in a court order clearing the title, which is then recorded with the county clerk.
These court actions take time and cost money, but sometimes they're necessary to achieve a clear title and allow the sale to proceed. The executor should factor these costs and timing into the sale planning.
Managing Title Issues During the Closing Process
As the closing approaches, the executor must ensure that all title exceptions are resolved. A final title commitment is issued close to the closing date, showing which exceptions will appear in the final title policy. If any new exceptions appear or if previously resolved exceptions have reappeared, they must be addressed before closing.
At closing, funds must be available to discharge liens and satisfy liabilities related to the title exceptions. The executor should coordinate with the escrow agent or title company to ensure that funds are applied correctly to discharge each exception. The closing statements should clearly show how sale proceeds are being allocated: first to pay the real estate broker's commission, then to satisfy the mortgage and any liens, then to pay estate debts and administrative expenses, and finally to distribute the remainder to beneficiaries or the estate.
After closing, the executor should verify that all exceptions have been discharged by obtaining a final title commitment showing clear title. This confirms that the sale was successful and that the buyer received the clear title they were promised.
How Keystone Pinnacle Can Help
Whether you're navigating an estate property sale, exploring investment opportunities, or need guidance through a complex real estate transaction, Keystone Pinnacle Property Advisors is here to help. Our team specializes in guiding families through the real estate aspects of estate settlement throughout Brooklyn, Queens, Nassau County, and the greater New York area.
Contact us today for a free consultation, or call (516) 703-6942 to speak with an advisor.
