Protecting Land Transactions and Corporate Directors

It has been five years since we all became aware of the corruption surrounding Enron and WorldCom. The collapse of these two companies cost tens of thousands of jobs and investors billions of dollars. These events sent shockwaves through the business community that are still being felt – including here in Canada.

In a post-Enron-WorldCom era, corporate governance, executive liability, and public and shareholder accountability are all priority issues for executives and directors of companies. The rapid enactment of the Sarbanes-Oxley Act demonstrated that a substantial collective will exists, shared by risk managers and D&O insurers alike, to correct systemic weaknesses in corporate governance structures.

Sarbanes-Oxley’s objectives include improving accounting oversight, strengthening auditor independence, requiring more transparency in corporate financial matters, eliminating analyst conflicts of interest and requiring greater accountability from corporate officials. Sarbanes-Oxley also augments prosecutorial tools available in major fraud cases by expanding statutory prohibitions against fraud and obstruction of justice, increasing criminal penalties for traditional fraud and cover-up crimes and strengthening sentencing guidelines applicable to high-end frauds.

Even for the vast majority of business executives — the good guys who follow the rules and demonstrate integrity –there are powerful implications. Corporate oversight and accountability are broad terms that introduce substantial risks for individuals with governance responsibilities and decision-making power.

Take, for example, material business transactions such as mergers and acquisitions. Business leaders entering into such agreements are now being held to a much higher standard than ever before. The result is that new best practices are being explored and implemented to ensure that those at the top are truly upholding their responsibilities to the highest standards.

In the world of commercial real estate — the field in which I work — we are seeing the tangible impact of the pursuit of new best practices aimed at addressing concerns related to corporate oversight and accountability. A good example of this is commercial title insurance.

In the past, the purchase and financing of commercial real estate resulted in the need for a significant amount of due diligence, including the preparation and review of surveys, full title and off-title searches and title opinions. It was a long and expensive process that in the end provided a legal “snapshot” of the transaction assets, but not a certainty of protection. As a result, business decision-makers remained vulnerable and potentially liable, should crucial defects related to the title of the property go undetected.

Even if one could determine fully that a property is free of defects, there is a business-critical need to be protected between the time a business transaction closes and the registration of documents. This gap leaves a hole in the deal – one that does not allow the real estate transaction to close upon the signing of documents at the boardroom table, resulting in costly delays.

In multi-site, multi-jurisdictional transactions, such as a retail or hotel chain, delays in confirming registrations is not an option – leading business leaders in pursuit of protections that eliminate provincial, national or international anomalies – even time zones.

As if executive liability wasn’t enough, business leaders in the commercial real estate market will tell you that today there are too many dollars chasing too few opportunities. The result is a highly competitive real estate climate that demands business agility, including the ability to assess and close a deal as quickly as possible.

The combination of these business needs and concerns has resulted in a growing percentage of Canadian business leaders who view commercial title insurance as a best practice — one that significantly reduces risk, provides protection above that provided by a title opinion alone and allows commercial real estate transactions to close at the boardroom table.

Commercial title insurance first came to Canada about 12 years ago; however, the last five years have seen a substantial increase in its application as a best practice.

Commercial title insurance can offer protection against a host of risks including:

* defects that an up-to-date survey would reveal;

* zoning bylaw non-compliance;

* outstanding governmental work orders;

* non-compliance with agreements;

* lack of building or occupancy permits;

* lack of access;

* unmarketability;

* super-priority liens, and

* invalidity or unenforceability of the insured mortgage against the title.

One of the greatest advantages that title insurance offers is the ability to be highly creative in solving or addressing issues. Coverage is shaped to meet the unique needs of each individual deal.

A good example of the need to be creative concerned a power generation company looking to construct wind turbines in Ontario on a number of different sites, involving multiple landowners. The business-critical questions that needed to be addressed were whether the apparent owners of the land actually had title to the land; and how could the transaction be closed much more quickly without having to conduct all of the due diligence that would historically have been done — without the use of title insurance. Imagine being accountable for an investment in the range of tens of millions of dollars, only to find out that even one of your generating locations had to be torn down or that you did not have the right to transmit the power generated to a central location.

Through creative, knowledge-based, underwriting capabilities, we were able to reduce the volume of title searches and due diligence required to complete the transaction, while ensuring contiguous title rights to protect the transmission of generated power to a central location.

Not all business leaders find themselves mired in complexity, of course. For the vast majority of transactions under $10 million dollars — a retail outlet or apartment building — the issues still remain the same: how can the deal be safely closed, in the least amount of time, for a reasonable cost? With the significant growth we continue to see, it is clear that many business leaders believe title insurance to be the answer to this question.