TITLE COMMITMENTS IN TEXAS

CHARLES FlSCUS Shackelford, Melton & McKinley, LLP

Board Certified Commercial Real Estate Residential Real Estate

Texas Board of Legal Specialization 3333 Lee Parkway, Tenth Floor

Dallas, Texas 75219 (214) 780-1454 (telephone)

(21 4) 780-1 401 (telecopier) cfiscus@shacklaw.net

State Bar of Texas

28TH ANNUAL ADVANCED REAL ESTATE LAW COURSE

June 29–July 1, 2006 San Antonio

CHAPTER 10

The author wishes to thank the following individual for assistance in the preparation of this article: - Darla R. Adams (Legal Assistant) OPINIONS & STATEMENTS REPRESENTED DURING THE PRESENTATION OF THIS ARTICLE ARE NOT LEGAL ADVICE. PAPER PREPARED AS OF June 12, 2006

CHARLES FlSCUS Shackelford, Melton & McKinley, LLP (Partner)

CERTIFICATIONS

Certified by the Texas Board of Le al Specialization for special experience and expertise concerning Commercial Real Estate and Residen v ~ a l Real Estate.

RECOGNITIONS

(2004) Texas Monthly Superlawyer (Real Estate)

PROFESSIONAL ASSOCIATIONS

State Bar of Texas Section Memberships Aooellate Practice construction Law Litigation Real Estate, Probate & Trust Law Tort & Insurance

MCE Certified in Commission.

Real Estate Law. Law of Contracts, and Law of Agency by the Texas Real Estate

OFFICES

Chair, Real Property Section, Dallas Bar Association (2003) Chair, Real Property, Probate &Trust Section, Denton County Bar Association (2002)

ARTICLES AND LECTURES

(2004) "Registration of Homebuilders And Homes Under The New TRCC s", authored and presented seminar article for the State Bar of Texas.

(2002) "Receivers And Special Remedies", authored and presented seminar article for the State Bar of Texas Advanced Real Estate Course.

(2000) "New Brokers Liens: Stron Sword Or Tin Foil?, authored and presented seminar article for the State Bar of Texas Advanced Real Estate jourse.

(1998) "Negotiation and Draftin of Commercial Leases", authored and presented seminar article for University of Houston Advanced Real Estate Sfort Course.

(1998) "New Summary Motion Hearin s Concerning Review And Removal of Mechanic's and Materialman's Liens", authored and presented seminar article ?or Dallas Bar Association Construction Law Section.

EDUCATION

Cumberland School of -aw. Samford Univers;ty, Birm~ngharn Alabama - J.D., 1980 Jn.vers'ry of Texas, Schoo of Business Adrninislrakon, AusGn Texas - B B.A. 1977

i

Title Commitments in Texas 2006 State Bar of Texas Advanced Real Estate Law Course

TABLE OF CONTENTS

I. SCOPE OF ARTICLE ............................................................................................................................................ 1

II. HISTORY AND OVERVIEW................................................................................................................................ 1

III. LEGAL ASPECTS OF A TITLE COMMITMENT............................................................................................... 2

IV. CONTENTS OF A TITLE COMMITMENT ......................................................................................................... 4

V. PREPARINGIRESPONDING TO A TITLE OBJECTIONS LETTER ................................................................. 5

VI. ACKNOWLEDGMENTS....................................................................................................................................... 6

VII. CONCLUSION ....................................................................................................................................................... 6

Index of Footnotes / Directory of Recited Statutes ........................................................................................................ 7

Research Bibliography.................................................................................................................................................... 8

Useful Websites .............................................................................................................................................................. 9

APPENDIX I - Roster of Forms and Rules ................................................................................................................. 10

APPENDIX II -Title Objections Letter(s) .................................................................................................................... 30

TITLE COMMITMENTS IN TEXAS

I. SCOPE OF ARTICLE

This seminar article is not meant to be a review of the law of title insurance. Rather, the emphasis of this seminar paper is to present a short analysis of the history, legal character, and practical aspects of interpreting and reviewing title commitments in Texas as part a commercial real estate transaction. For a broader research approach, please see the materials attached at the end of this Article.

All references to the Texas Department of lnsurance are hereinafter made as "TDI".

All references to the Texas lnsurance Code, Lexis Texas Annotated Texas Statutes and Codes (2005) are hereinafter made as the "Code".

All references to the Commissioner of lnsurance of the State of Texas are hereinafter made as the "Commissioner".

All references to the Basic Manual of Rules, Rates and Forms for the writing of Title lnsurance in the State of Texas, as available from numerous sources are hereinafter made as the "Basic Manual".

II. HISTORY AND OVERVIEW. Prior to the issuance of a title commitment and purchase of a policy of title insurance becoming the normal routine for commercial real estate transactions, the common method to facilitate a Texas real estate transaction

was to hire a local attorney or abstract company to prepare an abstract of title. An abstract of title is a chronological history of public records information concerning a parcel of real estate. An abstract of title typically summarizes a history of the original grant of title and all subsequent conveyances and encumbrances, including instruments, mortgages, deeds, judgments, charges, estates, etc., and any other liabilities to which the concerned property may be subject to enforcement. An abstract of title may also include items that aid and establish evidence of title, such as maps and plats, along with a certification that the abstract of title history is complete and accurate.

There is no question however, that an abstract of title report is not a policy of title insurance, nor a commitment for title insurance or any title insurance form. Code Section 2701.001(c) (2005). Likewise, a commitment for title insurance, title insurance policy or any title insurance form is not an abstract of title. Code Section 2701.001(c). See also Basic Manual, P-l(cc) - Definitions.

An attentive real estate practitioner should also be cognizant of the difference between defeasible title and marketable title, to wit; Defeasible title being title that can be made null and void or defeated upon satisfaction of a claim or the event of same future contingency for loss of title. Marketable title is good or clear title, leaving no question as to who owns the property, and reasonably free from the risk of

1

litigation over possible defects. It is title which a reasonable buyer, knowledgeable of the facts and legal implications, and acting in a reasonable manner, would be willing to accept.

In Texas, it is possible to obtain a policy of title insurance insuring Defeasible title. By statute, a Texas policy of title insurance cannot insure or warrant marketability of title. Code Section 2502.002(a).

111 LEGAL ASPECTS OF A TITLE COMMITMENT. First and foremost, what is a Title Commitment? Although the name may be deceptive, it should first be understood that usage of the phrase "Title Commitment" - is a complete misnomer. What is commonly known in the parlance of real estate closings as a "title commitment" is not a commitment to do anything, or to offer anything to anyone. Simply put, a "title commitment" is the name given to title information recited in a title binder collected and developed by a title insurer for its own purpose in determining: 1) Title to the property sought to be insured; and 2) providing information for the benefit of the concerned title company in making a decision as to whether or not there exists a sufficient lack of title risks such that a title company is willing to underwrite the risk of error in the title report. This information binder (the "title commitment") is not considered prepared or furnished for the use or reliance of anyone other than the title insurance company itself.

by which a title insurance company offers to issue a policy of title insurance subject to certain stated objections, requirements, and terms. A title insurance commitment is a statement of the terms and conditions under which the title insurance company is going to issue a policy. A title insurance policy or other title insurance form constitutes a statement of the terms and conditions of indemnity as detailed in the title insurance. See Code Section 2701.001 (a),(b)(2005).

The title investigation performed for preparation of the title binder report is not prepared for the benefit of the party sought to be an insured beneficiary of a title policy to be issued in the future.' This understanding is particularly relevant, as a title policy is a contract of indemnity which only contracts to pay an insured for damages upon the failure of the guaranty of reported title.' Also, a title company has no duty to a prospective insured to discover and disclose a title d e f e ~ t . ~ Indeed, a title commitment is prepared and submitted for review gratuitouslv and without fee by the preparing title company, therefore a title commitment company; preparing a title commitment report for review by concerned persons is not entitled to any fee for preparation of a title commitment, should the concerned parties not consummate a closing and conveyance through the title company preparing such title ~ommitment.~ The title commitment itself, as well as all title research gathered by the title company for its personal benefit, and is prepared for the private use and benefit of the title company. A title company

From a purely technical point of view, a commitment for title insurance means the title insurance form (which term includes a mortgagee title policy binder)

2

has no duty to notify a concerned party as to any defects or omissions in title; indeed, should a title company act otherwise, it may subiect itself to appropriate penaliies concerning the unauthorized practice of law.=

Human beings aren't perfect, and neither are title companies. Title companies often have errors in their title commitments, being errors of both omission and commission. As in other commercial enterprises, a title insurance company can be liable for a violation of the Texas Consumer - Deceptive Trade Practices Act if an affirmative representation later proves to be false.= See First Title Co. v. Garrett, 860 SW2d 74 (Tex. 1993), for the seminal case whereby a title insurance company was found liable for damages for an affirmative misrepresentation of "none of record" concerning the Schedule B exception clause for disclosure of restrictive covenants. ("The title commitment failed to reveal a restrictive covenant prohibiting use of the concerned property for a junkyard or auto salvage yard and all similar activities ...") Note however, the detailed and well-argued dissent of Justice Nathan Hecht, which outlined the differences between a title insurance policy and a regular policy of insurance, and noting that while an error in a title policy may give rise to an insurance claim, such error is not a violation of the Deceptive Trade Practices Act, and again reciting the historical interpretation that a title insurance policy is a contract of indemnity and not a policy of insurance, and that a title insurance company is not a title abstractor and owes no duty to examine title.

While it would be wrong to state that: Garrett is a "renegade" case, it would be a true statement that Garrett does not today represent the greater weight of judicial interpretation on point in Texas, and should generally be considered as pertinent only to unique facts of the case. As a general , judicial interpretation of title company responsibility I liability for errors in a title commitment and/or policy of title insurance have been favorable to the more restrictive interpretation of Justice Hecht, and generally disfavors a plaintiff complaining of any errors or omissions in a title commitment-report.

(Judgment for plaintiff reversed, no action existed for aiding a trespass as the issuance of title of insurance did not create a duty to the insured or any third-party, nor is it existence that the defendant and title insurer committed any DTPA violation),' (no fee is paid for preparation of a title commitment by a title company, the review of same by interested persons is gratuitous, and a service that is performed gratuitously is not purchased or leased within the meaning of the DTPA)', (Stewart Title Guaranty Company not liable for title company escrow officer's misrepresentation of no lien of record where no title policy was issued and no duty of indemnity existed, note however, that title company escrow officer's affirmative misrepresentation of no lien of record constituted separate affirmative misrepresentation for DTPA liability of escrow officer)''. See also Mary Ellen Sandlie Trust v. Pioneer Natr Title Ins. Co. 648 SW2d 761 (Tex.App.-Corpus Christ; 1983), for the proposition that title information on

3

which a title insurance company bases its decision relates to the condition of the title held by the grantor and is not necessarily made for the benefit of the perspective grantee or lien holder, such perspective grantee or lien holder not having the status of a third party creditor or third party beneficiary.

A very brief summary of the sources of liability for an error andlor omission in title commitment would be as follows: 1. a prospective purchaser of title insurance can have the status of a DTPA "consumer", regardless of whether or not a title commitment expires according to its terms, and also regardless of whether or not a consummated real estate transaction ever occurs and a policy of title insurance is ever issued; 2. an affirmative representation (i.e. "none of record, per P-4, Section IV of the Basic Manual", in a title commitment and/or policy of title insurance) can be, and is, an affirmative misrepresentation if incorrect, and may be a violation the DTPA; and 3. an omission of a recorded fault, defect, or encumbrance on title to real estate is an affirmative misrepresentation for DTPA purposes but may trigger a right to indemnity1'; and 4. Much of the DTPA liability zone of exposure in a private real estate transaction concerning a commitment for title insurance may have been mooted by the 1995 amendments1 exceptions to the DTPA, particularly if DTPA Section 17.49(f),or(g)" applies, as follows:

(f) "Nothing in the subchapter shall apply to a claim arising out of a written contract if:

(1) the contract relates to a transaction, a project, or a set of transactions related to the same project involving total consideration by the consumer of more than $100,000;

(2) in negotiating the contract the consumer is represented by legal counsel who is not directly or indirectly identified, suggested, or selected by the defendant or an agent of the defendant; and -

(3) the contract does not involve the consumer's residence.

(g) Nothing in this subchapter shall apply to a cause of action arising form a transaction, a project or a set of transactions relating to the same project, involving total consideration by the consumer of more than $500,000, other than a cause of action involving a consumer's residence."

IV. CONTENTS OF A TITLE COMMITMENT.

Like all forms, procedural rules, and rate rules used on a daily basis in Texas real estate transactions, the forms and format required to be used for preparation of a title commitment and issuance of a policy of title insurance are based solely upon documents and information promulgated and published by the Commissioner. Section IV - Procedural Rules and Definitions of the Basic Manual; P-18 is the specific Procedural Rule regarding a commitment for title insurance in a private real estate transaction. P-18 is

4

expires according to its terms within 90 days of the effective date of the commitment for title insurance as shown under Schedule A of the concerned commitment for title insurance; 2. A title company is not required to issue a commitment for title insurance unless a bona-fide order for a policy or policies of title insurance has been received; and 3. A commitment for title insurance cannot be used in lieu of a policy of title insurance.

Accordingly, except for commitments for title insurance issued to the Texas Department of Transportation (see Rate R-23), or to selected federal agencies (see Rate R-25), no fee is authorized to be charged or collected for preparation for a commitment for title insurance. The required contents and promulgated forms for a commitment for title insurance in Texas, and an owner's policy of title insurance, are too well-known to Texas real estate practitioners to require or warrant a detailed analysis of same in this Article. However, for easy review of same, see the pertinent forms for the foregoing as attached to this Article in Appendix I.

Additionally, P-21 of Section IV of the Basic Manual also details various financial disclosures as to percentages of ownership, identity of owner(s) and shareholder(s), estimated premium cost, fees by and between a title insurance company and a issuing title insurance agent, etc. are required to be attached to a commitment for title insurance. The foregoing disclosures are normally detailed in "Schedule D" of a commitment for title insurance. See Appendix I for the full language of this Rule.

V. PREPARINGIRESPONDING TO A TITLE OBJECTIONS LETTER.

It cannot be overemphasized that prior to commencement of a proper evaluation and review of a commitment for title insurance, an attentive real estate practitioner should obtain a clear and readable copy of all title exception items documents (i.e. restrictive covenants, easements, deeds of trust, mechanics liens, etc.) so as to determine the proper necessity for objection, and recommended exception item cure to title be recommended and requested in examples of title objections letters, and examples of title objections response letters, are not difficult to research and review. I have attached copies of an objections letter, and an objections response letter, utilized in my office under Appendix II. See also Chapter 8, Appendix 8E, of Texas Title Insurance, as detailed in the Research Bibliography.

Remember that the commitment for title insurance is a minimal review document and not a complete listing of all important items necessary -for opinion by an attentive real estate practitioner. An offer to purchase, right of first refusal, right of first offer, etc., in an unrecorded (and unreviewed) commercial lease will be considered a defect in coverage such that a title insurance company would be obligated to provide a defense or indemnity if not otherwise discoverable through a review of the public records. Accordingly, an attentive real estate practitioner will pay especial attention to the "standard printed exceptions" of a commitment for title insurance as a particular guide to what title documents, and miscellaneous encumbrance documents, should be reviewed in detail to prevent future problems.

5

In accordance with the general rule of practice, 1 recommend that a title objections letter following a review of commitment for title insurance should mirror the content and format of a commitment for title insurance, for ease of analysis and drafting by all concerned parties. Likewise, the title objections response letter should be drafted in mirror format to the objections letter, and should take into account new and developing information, updated documents, and if necessary, old fashioned common sense, referencing any new, updated, or additional matter that was mentioned in the original title objections letter. To the extent that the seller can or cannot commit to taking an action or refusing to take an action, say so in clear language. To the extent that the issue will need on-going investigation and research before a seller can determine its final position, say so in clear language. Leave open such items as may require further efforts to resolve, and if necessary, draft a specific extension agreement on any particular items, or even consider preparation of an Outstanding Items Letter Agreement concerning those items that can be concluded post-closing. Do not hesitate to attach pictures, any unrecorded Releases, etc., as may be necessary to provide clarity and finality on a title objections letter point of exception. Always remember to conclude a title objections letter and title objections response letter with a summary of the positions of the parties and a review of all applicable remaining timetables. Be clear that the title

objections response letter is not a termination of the contract, and likewise, the title objections response letter should be equally clear on the point, particularly where the title objections response letter takes a position on a title objections letter exception point that a specific referenced title objection exception point is considered by the seller to be a Permitted Exception by contract, or not within the seller's zone of responsibility or ability to cure.

VI. ACKNOWLEDGMENTS

I wish to acknowledge the courtesy of the numerous real estate lawyers with whom I have discussed the technical details, andlor philosophy and general nature of title commitments as a source of great information of real estate transactions. In particular, I wish to acknowledge the use of various definitions and languages from an article prepared by Ms. Tamara M. Anderson, Esq., as detailed in the following Research Bibliography.

VII. CONCLUSION

With a clear understanding of the history, legal opinions, and practical usefulness of title commitments in Texas, it is hoped that the normal chaos and hurly-burly of a commercial real estate transaction can be minimized by proper research and planning. If this paper has in some way promoted those goals, it is a success.

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INDEX OF FOOTNOTES

I . Stewart Title Guaranty Company v. Cheatham, 753 SW2d 315, 320 (Tex. App. - Texarkana 1988, no writ)

2. Stewart Title; id, at 319.

3. Stewart Title; id, at 319.

4. C. & W. Manhattan Associates v. Attorneys Title Company, 614 SW2d 883 (Tex.App - 1981, writ ref'd, n.r.e.)

5. Tamburine v. Center Savings Association, 583 SW2d 942, 950 (Tex.App. - Tyler, writ ref'd, n.r.e)

6. First Title Co. v. Garrett, 860 SW2d 74 (Tex. 1993)

7. First American Title Insurance. Co. v. Willard, 949 SW2d 342 (Tex.App.-Tyler 1997, writ denied)

8. Tri-Legends Corp. v. Ticor Title Ins. Co., 889 SW2d 432, 441 (7ex.App. - Houston lS' Dist. 1994, writ denied)

9. 32 Corp. v. Stewart Title Guaranty Company, 851 SW2d 933, 937 (Tex.App. - Beaumont 1993, writ denied)

10. Mary Ellen Sandlie Trust v. Pioneer Nat? Title Ins. Co., 648 SW2d 761 (7ex.App.-Corpus Christ; 1983)

I 1. Chicago Title Ins. Co. v. McDaniel, 875 SW2d 310 (Tex. 1994)

DIRECTORY OF RECITED STATUTES

5. Code Section 2701.001 (a),(b)(2005)

6. Texas Business and Commerce Code, Section 17.41, et seq. (the " D T P A )

12. Texas Business and Commerce Code, Subsection 17.49(f),(g)

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Title Commitments in Texas 2006 State Bar of Texas Advanced Real Estate Law Course

RESEARCH BIBLIOGRAPHY

Tamara M. Anderson, Reservations and Exceptions to Title - Conducting a Title Survey Review and Making Objections, (2006) University of Houston Law Foundation Real Estate Documents, Workouts and Closings Seminar

Amy W. Deatie + Arthur R. Kleven, The Devil In The Details: Water Rights And Title Insurance, 7. Denver. Water L. Rev. 381 (Spring, 2004)

Frank Oliver, Garrett and McDaniel: DTPA Liability for Issuance Of A Title lnsurance Commitment, 26 Tex.Tech L. Rev. 857 (1 995)

Charles J. Jacobus and Billie J. Ellis, Texas Title Insurance, Td Ed, Thompson-West (2003)

17 William V. Doranneo, Ill, Texas Transactions Guide, Chapter 74

Basic Manual Of s, Rates And Forms For The Writing Of Title lnsurance In The State Of Texas (Hart Graphics, Inc., also available on the TDI and TLTA websites)

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Title Commitments in Texas 2006 State Bar of Texas Advanced Real Estate Law Course

USEFUL WEBSITES

http://www.tdi.state.tx.us (official website of Texas Department of lnsurance includes all rate s, procedural s, title bulletins, claims procedures, etc., concerning title closings and title insurance practices).

htt~://www.tlta.com (Texas Land Title Association, contains exhaustive exhibits, forms, procedures, s, etc., regarding the Texas Department of lnsurance and the issuance of title commitments and title insurance policies).

htt~://www.virtualunderwriter.com (Stewart Title Virtual Underwriter Interactive Program)

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Title Commitments in Texas 2006 State Bar of Texas Advanced Real Estate Law Course

APPENDIX I - ROSTER OF FORMS AND RULES

NOTE: All of the following are exact copies of forms and/or of the information promulgated and published by the Texas Department of Insurance.

Form T-7: Commitment For Title Insurance.

P-21: Additional Requirements For Contents Of Commitment For Title Insurance. -

Form T-I: Owner Policy of Title Insurance.

P-4: Restrictive Covenants Exception

P-18: Commitment For Title Insurance.

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Texas Title Insurance Manual, Section I1 - Insuring Forms Page 4 o f 7

THE TEXAS DEPARTMENT OF INSURANCE

P. 0. BOX 149104 AUSTIN, TEXAS 78714-9104 FAX NO (512) 475-1771

TAMBIEN PUEDE ESCRlBlR AL: DEPARTAMENTO DE SEGUROS DE

TEXAS P. 0. BOX 149104 AUSTIN, TEXAS 78714-910 FAX NO. (512) 475-1771

THE FOLLOWING COMMITMENT FOR TITLE INSURANCE IS NOT VALID UNLESS YOUR NAME AND THE POLICY AMOUNT ARE SHOWN IN SCHEDULE A, AND OUR AUTHORIZED REPRESENTATIVE HAS COUNTERSIGNED BELOW.

COMMITMENT FOR TITLE INSURANCE --

Issued by

We ( )will issue our title insurance policy or policies (the Policy) to You (the urouosed insured) upon ~avment of the premium and other char~es due, and compliance with the requirements in schedule and schedule C. Our policy will be inthe form approved by the Texas Department of Insurance at the date of issuance, and will insure your interest in the land described in Schedule A. The estimated premium for our Policy and applicable endorsements is shown on Schedule D. There may be additional charges such as recording fees, and expedited delivery expenses.

This Commitment ends ninety (90) days from the effective date, unless the Policy is issued sooner, or failure to issue the Policy is our fault. Our liability and obligations to you are under the express terms of this Commitment and end when this Commitment expires.

By: ATTEST:

Secretary

Authorized Signatory

# Section ll-mgx

CONDITIONS AND STIPULATIONS

1. If you have actual knowledge of any matter which may affect the title or mortgage covered by this Commitment, that is not shown in Schedule B, you must notify us in writing. If you do not notify us in writing, our liability to you is ended or reduced to the extent that your failure to notify us affects our liability. If you do notify us, or we learn of such matter, we may amend Schedule B, but we will not be relieved of liability already incurred.

2. Our liability is only to you, and others who are included in the definition of Insured in the Policy to be issued. Our liability is only for actual loss incurred in your reliance on this Commitment to comply with its requirements, or to acquire the interest in the land. Our liability is limited to the amount shown in Schedule A of this Commitment and will be subject to the following terms of

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Texas Title Insurance Manual, Sectioil I1 - Insuring Forms Page 5 of 7

the Policy: Insuring Provisions. Conditions and Stipulations, and Exclusions

SCHEDULE A

Effective Date: GF No. Commitment No. , issued ,20-,

m.

1. The policy or polices to be issued are:

(a) OWNER POLICY OF TlTLE INSURANCE (Form T-I) (Not applicable for improved one-to-four family residential real estate)

Policy Amount: $ PROPOSED INSURED:

(b) TEXAS RESIDENTIAL OWNER POLICY OF TlTLE INSURANCE ---ONE-TO-FOUR FAMILY RESIDENCES (Form T-1R)

Policy Amount: $ PROPOSED INSURED:

(c) MORTGAGEE POLICY OF TlTLE INSURANCE (Form T-2)

Policy Amount: $ PROPOSED INSURED: Proposed Borrower:

(d) TEXAS SHORT FORM RESIDENTIAL MORTGAGEE POLICY OF TlTLE INSURANCE (Form T-2R)

Policy Amount: $ PROPOSED INSURED: Proposed Borrower:

(e) MORTGAGEE TlTLE POLICY BINDER ON INTERIM CONSTRUCTION LOAN (Form T-13)

Binder Amount: $ PROPOSED INSURED: Proposed Borrower:

(f) OTHER

Policy Amount: $ PROPOSED INSURED:

2. The interest in the land covered by this Commitment is:

3. Record title to the land on the Effective Date appears to be vested in:

4. Legal description of the land:

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Texas Title Insurance Manual, Section I1 - Insuring Foms Page 6 o f 7

SCHEDULE B

EXCEPTIONS FROM COVERAGE

In addition to the Exclusions and Conditions and Stipulations, your Policy will not cover loss, costs, attorney's fees, and expenses resulting from:

1. The following restrictive covenants of record itemized below (We must either insert specific recording data or delete this exception):

2. Any discrepancies, conflicts, or shortages in area or boundary lines, or any encroachments or protrusions, or any overlapping of improvements.

3. Homestead or community property or survivorship rights, if any of any spouse of any insured. (Applies to the Owner Policy only.)

4. Any titles or rights asserted by anyone, including, but not limited to, persons, the public, corporations, governments or other entites,

a. to tidelands, or lands comprising the shores or beds of navigable or perennial rivers and streams, lakes, bays, gulfs or oceans, or

b. to lands beyond the line of the harbor or bulkhead lines as established or changed by any government, or -

c. to filled-in lands, or artificial islands, or

d. to statutory water rights, including riparian rights, or

e. to the area extending from the line of mean low tide to the line of vegetation, or the rights of access to that area or easement along and across that area.

5. Standby fees, taxes and assessments by any taxing authority for the y e a r , and subsequent years; and subsequent taxes and assessments by any taxing authority for prior years due to change in land usage or ownership, but not those taxes or assessments for prior years because of an exemption granted to a previous owner of the property under Section 11.13, Texas Tax Code, or because of improvements not assessed for a previous tax year. (If Texas Short Form Residential Mortgagee Policy of Title lnsurance (T-2R) is issued, that policy will substitute "which become due and payable subsequent to Date of Policy" in lieu of "for the year - and subsequent years.")

6. The terms and conditions of the documents creating your interest in the land.

7. Materials furnished or labor performed in connection with planned construction before signing and delivering the lien document described in Schedule A, if the land is part of the homestead of the owner. (Applies to the Mortgagee Title Policy binder on Interim Construction Loan only, and may be deleted if satisfactory evidence is furnished to us before a binder is issued.)

8. Liens and leases that affect the title to the land, but that ere subordinate to the lien of the insured mortgage. (Applies to Mortgagee Policy (T-2) only.)

9. The Exceptions from Coverage and Express lnsurance in Schedule B of the Texas Short Form Residential Mortgagee Policy of Title lnsurance (T-2R). (Applies to Texas Short Form Residential Mortgagee Policy of Title lnsurance (T-2R) only. Separate exceptions 1 through 8 of this Schedule B do not apply to the Texas Short Form Residential Mortgagee Policy of Title lnsurance (T-2R).

10. The following matters and all terms of the documents creating or offering evidence of the matters (We must insert matters or delete this exception.):

SCHEDULE C

Your Policy will not cover loss, costs, attorneys fees, and expenses resulting from the following

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Texas Title Insurance Manual, Section I1 - Insuring Forms Page 7 o f 7

requirements that will appear as Exceptions in Schedule B of the Policy, unless you dispose of these matters to our satisfaction, before the date the Policy is issued:

1. Documents creating your title or interest must be approved by us and must be signed, notarized and filed for record.

2. Satisfactory evidence must be provided that:

---no person occupying the land claims any interest in that land against the persons named in paragraph 3 of Schedule A,

---all standby fees, taxes, assessments and charges against the property have been paid,

--all improvements or repairs to the property are completed and accepted by the owner, and that all contractors, sub-contractors, laborers and suppliers have been fully paid, and that no mechanic's, laborer's or materialmen's liens have attached to the property,

---there is legal right of access to and from the land,

---(on a Mortgagee Policy only) restrictions have not been and will not be violated that affect the -

validity and priority of the insured mortgage.

3. You must pay the seller or borrower the agreed amount for your property or interest.

4. Any defect, lien or other mater that may affect title to the land or interest insured, that arises or is filed after the effective date of this Commitment.

(Form T-7: Commitment for Title Insurance)

h Title ManuaLlndex h Section I -Chapter Nine, Texas Insurance Code C Section II - Insuring Fomls b Section MI - Rate Rules ,& Sectim-lV - Procedural Rules B Section V - Exhibits and Forms b S_ectionVI -Administrative Rules a+

S ~ t i o n V l l - Claims Handling Principals and Procedures C Bulletin Aopendix - Current Bulletins

. .. . ~.~~ .

For further information, contact: Title@tdi.state.tx.us

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Texas Title Insurance Manual, Section IV - Procedural Rules and Definitions, P-21 thru P... Page 1 o f 7

HOME text version n normal version admp_aAol -translation by ALS

Texas Department of lnsurance www.tdi.state.tx.us - Consumer Helpline 1-800-252-3439

v Basic Manual of Title Insurance, Section IV (continued)

b Sect~on iV Index

P-21. Additional Requirements for Contents of Commitment for Title Insurance---Each Title lnsurance Company and each Title lnsurance Agent, licensed to do business in Texas, shall, in connection with the issuance of each Commitment for Title lnsurance whereby a commitment is made to issue either a binder or policy of title insurance (insuring either alien or the title to real property), add to the promulgated Commitment for Title lnsurance form an additional schedule (which schedule shall be designated "Schedule D ) setting forth the following: 1 As to each Commitment for Title Insurance, the issuing Title lnsurance Company shall disclose:

(a) A listing of each shareholder owning or controlling, directly or indirectly, ten percent (10%) or more of the shares of the Title lnsurance Company; there shall also be disclosed all individuals, partnerships, corporations, trusts or other entities owning ten percent (10%) or more, of those entities directly owning ten percent (lo%), or more, of the Title lnsurance Company. Such additional disclosure requirement shall not, however, apply to a publicly held company whose stock is traded on a stock exchange or in the over-the-counter market or is a part of an insurance holding company system the parent of which is so publicly held;

(b) The names of the directors of the Title lnsurance Company; and (c) The names of the president, the executive or senior vice-president, the secretary and the

treasurer of the Title lnsurance Company. In connection with such disclosure, each Title lnsurance Company (i) may use in such iisting the

officers and d~rectors so holding each such respective office on the December 31st immediately preceding the date of such Commitment for Title Insurance, and (ii) shall furnish to each of its appointed Title lnsurance Agents the above required information for such Title lnsurance Agent to comply with th~s Paragraph 1 of this Rule P-21; and (iii) each Title lnsurance Agent shall be entitled to rely upon and use the information furnished to the Title lnsurance Agent by its appointing Title lnsurance Company.

2. As to each Commitment for Title lnsurance issued by a (i) a Title lnsurance Agent, or (ii) a Title lnsurance Company, where not issued by a Title lnsurance Agent, the issuing Title lnsurance Agent or Title lnsurance Company shall disclose:

(a) A listing of each shareholder, owner, partner, or other person having, owning or controlling one percent (1%) or more or the Title lnsurance Agent that will receive a portion of the premium.

(b) A listing of each shareholder, owner, partner, or other person having, owning or controlling 10 percent (10%) or more of an entity that has, owns or controls one percent (1%) or more of the Title lnsurance Agent that will receive a portion of the premium.

(c) If the Agent is a corporation: (i) the name of each director of the Title lnsurance Agent, and (ii) the name of the President, the Executive or Senior Vice-President, the Secretary and the Treasurer of the Title lnsurance Agent.

(d) The name of any person who is not a full-time employee of the Title lnsurance Agent and who receives any portion of the title insurance premium for services performed on behalf of the Title lnsurance Agent in connection with the issuance of a title insurance form; and, the amount of premium that any such person shall receive.

(e) For purposes of this paragraph 2, "having, owning or controlling" includes the right to receipt

15

Texas Title Insurance Manual, Section IV - Procedural Rules and Definitions, P-21 thru P... Page 2 o f 7

of a percentage of net income, gross income, or cash flow of the Agent or entity in the percentage stated in subparagraphs (a) or (b).

3. As to each Commitment forTitle Insurance, the following additional language shall be included in each Schedule D, together with all required information included within the blanks contained below:

"You are entitled to receive advance disclosure of settlement charges in connection with the proposed transaction, to which this commitment relates. Upon your request, such disclosure will be made to you. Additionally, the name of any person, firm or corporation receiving any sum from the settlement of this transaction will be disclosed on the closing or settlement statement. "You are further advised that the estimated title premium* is:

Owners Policy $

Mortgagee Policy $

Endorsement Charges $

Other $

Total $

Of this total amount: $ (or %) .will be paid to the policy issuing Title lnsurance Company; $ (or %) will be retained by the issuing Title lnsurance Agent; and the remainder of the estimated premium will be paid to other parties as follows:

Amount or%^- $ (or%) $ ( o r " / . ) -

To Whom For Services

"*The estimated premium is based upon information furnished to us as of the date of this Commitment for Title Insurance. Final determination of the amount of the premium will be made at closing in accordance with the Rules and Regulations adopted by the State Board of lnsurance." Each Title lnsurance Company and each Title lnsurance Agent shall, prior to usage, file its proposed Schedule D form with the State Board of lnsurance; in like manner each Title lnsurance Company and each Title lnsurance Agent shall file all amended Schedule D forms with the State Board of lnsurance prior to usage. Nothing contained in this Rule P-21 shall ever be deemed or considered to require the issuance of a Commitment for Title lnsurance prior to the issuance of any policy or binder for title insurance. Each Title lnsurance Agent and Title lnsurance company may, in preparing its Schedule D, use whatever reasonable format it elects, provided that such format does not alter or delete the furnishing of the disclosures hereby required. It is the express intent of this paragraph to enable usage of electronic equipment in preparation of the required Schedule D.

P-22. Payment of a Fee for Examination andlor Closing---No payment shall be made by a Title lnsurance Company, Title lnsurance Agent, Escrow Officer or any employee or agent of any of them, to any Person who is not its bona-fide employee for furnishing title evidence, examination of a title andlor closing a transaction unless:

(A) Such Person is (i) a Title lnsurance Company as defined in Article 9.02, lnsurance Code, and qualified to do business in the State of Texas, (ii) a Title lnsurance Agent as defined in Article 9.02, lnsurance Code, and licensed to do business in the State of Texas

16

Owner Policy o f Title Insurance (Form T-1) Page 1 o f 11

HOVE text version a normal version en Espafiol -translation by ALS

Texas Department of lnsurance www.tdi.state.tx.us - Consumer Helpline 1-800-252-3439

Basic Manual of Title Insurance, Section II (continued)

A - Section II Index

(Form T-I: Owner Policy of Title Insurance)

OWNER POLICY OF TITLE INSURANCE Issued by

BLANK TITLE INSURANCE COMPANY

SUBJECT TO THE EXCLUSIONS FROM COVERAGE, THE EXCEPTIONS FROM COVERAGE CONTAINED IN SCHEDULE BAND THE CONDITIONS AND STIPULATIONS, Blank Title lnsurance Company, a Blank corporation, herein called the Company insures, as of Date of Policy shown in Schedule A, against loss or damage, not exceeding the Amount of lnsurance stated in Schedule A, sustained or incurred by the insured by reason of:

1 Title to the estate or interest described in Schedule A being vested other than as stated therein;

2. Any defect in or lien or encumbrance on the title;

3. Any statutory or constitutional mechanic's, contractor's, or materialman's lien for labor or material having its inception on or before date of Policy;

4. Lack of a right of access to and from the land;

5. Lack of good and indefeasible title.

The Company also will pay the costs, attorney's fees and expenses incurred in defense of the title, as insured, but only to the extent provided in the Conditions and Stipulations.

[Witness clause optional]

BLANK TITLE INSURANCE COMPANY

President By:

Secretary

h Section ULndex

EXCLUSIONS FROM COVERAGE

The following matters are expressly excluded from the coverage of this policy and the Company will not pay loss or damage, costs, attorneys' fees or expenses which arise by reason of:

1. (a) Any law, ordinance or qovernmental regulation (including but not limited to building and zoning laws, ordinances, or regulations) restricting, regulating, prohibiting or relating to (i) the occupancy, use, or enjoyment of the land; (ii) the character, dimensions or location of

17

Owner Policy o f Title Insurance (Form T-I) Page 2 o f 11

any improvement now or hereafter erected on the land; (iii) a separation in ownership or a change in the dimensions or area of the land or any parcel of which the land is or was a part; or (iv) environmental protection, 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 the violation or alleged violation affecting the land has been recorded in the public records at Date of Policy.

(b) Any governmental police power not excluded by (a) above, except to the extent that a notice of the exercise 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.

2. Rights of eminent domain unless notice of the exercise thereof has been recorded in the public records at Date of Policy, but not excluding from coverage any taking that has occurred prior to Date of Policy which would be binding on the rights of a purchaser for value without knowledge.

3. Defects, liens, encumbrances, adverse claims or other matters:

(a) created, suffered, assumed or agreed to by the insured claimant;

(b) not known to the Company, not recorded in the public records at Date of Policy, but known to the insured claimant and not disclosed in writing to the Company by the insured claimant

- prior to the date the insured claimant became an insured under this policy;

(c) resulting in no loss or damage to the insured claimant;

(d) attaching or created subsequent to Date of Policy;

(e) resulting in loss or damage that would not have been sustained if the insured claimant had paid value for the estate or interest insured by this policy.

4. The refusal of any person to purchase, lease or lend money on the estate or interest covered hereby in the land described in Schedule A because of unmarketability of the title.

5. Any claim which arises out of the transaction vesting in the person named in paragraph 3 of Schedule A the estate or interest insured by this policy, by reason of the operation of federal bankruptcy, state insolvency, or other state or federal creditors' rights laws that is based on either (i) the transaction creating the estate or interest insured by this Policy being deemed a fraudulent conveyance or fraudulent transfer or a voidable distribution or voidable dividend, (ii) the subordination or recharacterization of the estate or interest insured by this Policy as a result of the application of the doctrine of equitable subordination or (iii) the transaction creating the estate or interest insured by this Policy being deemed a preferential transfer except where the preferential transfer results from the failure of the Company or its issuing agent to timely file for record the instrument of transfer to the insured after delivery or the failure of such recordation to impart notice to a purchaser for value or a judgment or lien creditor.

SCHEDULE A

File No.

Amount of Insurance $ Premium $

DATE OF POLICY at a.m. p.m.

1. Name of Insured:

2. The estate or interest in the land that is covered by this policy is:

3. Title to the estate or interest in the land is insured as vested in:

Policy No.

18

Owner Policy o f Title Insurance (Form T-1) Page 3 o f 11

4. The land referred to in this policy is described as follows:

SCHEDULE B

File No. Policy No

EXCEPTIONS FROM COVERAGE

This Policy does not insure against loss or damage (and the Company will not pay costs, attorney's fees or expenses) that arise by reason of the terms and conditions of the leases or easements

insured, if any, shown in Schedule A and the following matters:

1. The following restrictive covenants of record itemized below (the Company must either insert specific recording data or delete this exception):

2. Any discrepancies, conflicts, or shortages in area or boundary lines, or any encroachments or protrusions, or any overlapping of improvements. -

3. Homestead or community property or survivorship rights, if any, of any spouse of any insured.

4. Any titles or rights asserted by anyone, including, but not limited to, persons, the public, corporations, governments or other entities,

(a) to tidelands, or lands comprising the shores or beds of navigable or perennial rivers and streams, lakes, bays, gulfs or oceans, or

(b) to lands beyond the line of the harbor or bulkhead lines as established or changed by any government, or

(c) to filled-in lands, or artificial islands, or

(d) to statutory water rights, including riparian rights, or

(e) to the area extending from the line of mean low tide to the line of vegetation, or the rights of access to that area or easement along and across that area.

5. Standby fees, taxes and assessments by any taxing authority for the y e a r , and subsequent years; and subsequent taxes and assessments by any taxing authority for prior years due to change in land usage or ownership, but not those taxes or assessments for prior years because of an exemption granted to a previous owner of the property under Section 11.13, Texas Tax Code, or because of improvements not assessed for a previous tax year.

6. The following matters and all terms of the documents creating or offering evidence of the matters (The Company must insert matters or delete this exception.):

CONDITIONS AND STIPULAIONS

1. DEFINITION OF TERMS.

The following terms when used in this policy mean:

(a) "insured: the insured named in Schedule A, and, subjectto any rights or defenses the Company would have had against the named insured, those who succeed to the interest of the named insured by operation of law as distinguished from purchase including, but not limited to, heirs, distributees, devisees, survivors, personal representatives, next of kin, or corporate, partnership or fiduciary successors, and specifically, without limitation, the

19

Owner Policy o f Title Ii~surance (Form T-1) Page 4 o f 1 1

following:

(i) the successors in interest to a corporation, limited liability company or limited liability partnership resulting from merger or consolidation or conversion or the distribution of the assets of the corporation or limited liability company or limited liability partnership upon partial or complete liquidation;

(ii) the successors in interest to a general or limited partnership or limited liability company or limited liability partnership which dissolves but does not termhate;

(ili) the successors in interest to a general or limited partnership resulting from the distribution of the assets of the aeneral or limited partnership uDon partial or com~lete - liquidation;

(iv) the successors in interest to a joint venture resulting from the distribution of the assets of the joint venture upon partial or complete liquidation;

(v) the successor or substitute trustee(s) of a trustee named in a written trust instrument; or

(vi) the successors in interest to a trustee or trust resulting from the distribution of all or part of the assets of the trust to the beneficiaries thereof.

(b) "insured claimant": an insured claiming loss or damage

(c) "knowledge" or "known": actual knowledge, not constructive knowledge or notice that may be imputed to an insured by reason of the public records as defined in this policy or any other records which impart constructive notice of matters affecting the land.

(d) "land: the land described or referred to in Schedule A, and improvements affixed thereto that by law constitute real property. The term "land" does not include any property beyond the lines of the area described or referred to in Schedule A, nor any right, title, interest, estate or easement in abutting streets, roads, avenues, alleys, lanes, ways or waterways, but nothing herein shall modify or limit the extent to which a right of access to and from the land is insured by this policy.

(e) "mortgage": mortgage, deed of trust, trust deed, or other security instrument.

(f) "public records": records established under state statutes at Date of Policy for the purpose of imparting constructive notice of matters relating to real property to purchasers for v'alue and without knowledge. With respect to Section 1fa)fiv) of the Exclusions From Coveraae. . .. . "public records" alsoshall include environmental protection liens filed in the records of tlhe clerk of the United States district court for the district in which the land is located.

(g) "access": legal right of access to the land and not the physical condition of access. The coverage provided as to access does not assure the adequacy of access for the use intended.

2. CONTINUATION OF INSURANCE AFTER CONVEYANCE OF TITLE.

The coverage of this policy shall continue in force as of Date of Policy in favor of an insured only so long as the insured retains an estate or interest in the land, or holds an indebtedness secured by a purchase money mortgage given by a purchaser from the insured, or only so long as the insured shall have liability by reason of covenants of warranty made by the insured in any transfer or conveyance of the estate or interest. This Policy shall not continue in force in favor of any purchaser from the insured of either (i) an estate or interest in the land, or (ii) an indebtedness secured by a purchase money mortgage given to the insured.

20

Owner Policy o f Title Insurance (Form T-1) Page 5 o f 1 1

A .- Section I!~ Ln.dex

3. NOTICE OF CLAIM TO BE GIVEN BY INSURED CLAIMANT

The insured shall notify the Company promptly in writing (i) in case of any litigation as set forth in Section 4(a) below, or (ii) in case knowledge shall come to an insured hereunder of any claim of title or interest that is adverse to the title to the estate or interest, as insured, and that might cause loss or damage for which the Company may be liable by virtue of this policy. If prompt notice shall not be given to the Company, then as to the insured all liability of the Company shall terminate with regard to the matter or matters for which prompt notice is required; provided, however, that failure to notify the Company shall in no case prejudice the rights of any insured under this policy unless the Company shall be prejudiced by the failure and then only to the extent of the prejudice.

When, after the date of the policy, the insured notifies the Company as required herein of a lien, encumbrance, adverse claim or other defect in title to the estate or interest in the land insured by this policy that is not excluded or excepted from the coverage of this policy, the Company shall promptly investigate the charge to determine whether the lien, encumbrance, adverse claim or defect is valid and not barred by law or statute. The Company shall notify the insured in writing, within a reasonable time, of its determination as to the validity or invalidity of the insured's claim or charge under the - policy. If the Company concludes that the lien, encumbrance, adverse claim or defect is not covered by this policy, or was otherwise addressed in the closing of the transaction in connection with which this policy was issued, the company shall specifically advise the insured of the reasons for its determination. If the Company concludes that the lien, encumbrance, adverse claim or defect is valid, the Company shall take one of the following actions: (i) institute the necessary proceedings to clear the lien, encumbrance, adverse claim or defect from the title to the estate as insured; (ii) indemnify the insured as provided in this policy; (iii) upon payment of appropriate premium and charges therefor, issue to the insured claimant or to a subsequent owner, mortgagee or holder of the estate or interest in the land insured by this policy, a policy of title insurance without exception for the lien, encumbrance, adverse claim or defect, said policy to be in an amount equal to the current value of the property or, if a mortgagee policy, the amount of the loan; (iv) indemnify another title insurance company in connection with its issuance of a policy(ies) of title insurance without exception for the lien, encumbrance, adverse claim or defect; (v) secure a release or other document discharging the lien, encumbrance, adverse claim or defect; or (vi) undertake a combination of (i) through (v) herein.

4 Section I1 Index

4. DEFENSE AND PROSECUTION OF ACTIONS: DUTY OF INSURED CLAIMANT TO COOPERATE.

(a) Upon written request by the insured and subject to the options contained in Section 6 of these Conditions and Stipulations, the Company, at its own cost and without unreasonable delay, shall provide for the defense of an insured in litigation in which any third party asserts a claim adverse to the title or interest as insured, but only as to those stated causes of action alleging a defect, lien or encumbrance or other matter insured against by this policy. The Company shall have the right to select counsel of its choice (subject to the right of the insured to object for reasonable cause) to represent the insured as to those stated causes of action and shall not be liable for and will not pay the fees of any other counsel. The Company will not pay any fees, costs or expenses incurred by the insured in the defense of those causes of action that allege matters not insured against by this policy.

(b) The Company shall have the right, at its own cost, to institute and prosecute any action or proceeding or to do any other act that in its opinion may be necessary or desirable to establish the title to the estate or interest, as insured, or to prevent or reduce loss or damage to the insured. The Company may take any appropriate action under the terms of

21

Owner Policy o f Title Insurance (Form T-1) Page 6 o f 1 1

this policy, whether or not it shall be liable hereunder, and shall not thereby concede liability or waive any provision of this policy. If the company shall exercise its rights under this paragraph, it shall do so diligently.

(c) Whenever the Company shall have brought an action or interposed a defense as required or permitted by the provisions of this policy, the Company may pursue any litigation to final determination by a court of competent jurisdiction and expressly reserves the right, in its sole discretion, to appeal from any adverse judgment or order.

(d) In all cases where this policy permits or requires the Company to prosecute or provide for the defense of any action or proceeding, the insured shall secure to the Company the right to so prosecute or provide defense in the action or proceeding, and all appeals therein, and permit the Company to use, at its option, the name of the insured for this purpose. Whenever requested by the Company, the insured, at the Company's expense, shall give the Company all reasonable aid (i) in any action or proceeding, securing evidence, obtaining witnesses, prosecuting or defending the action or proceeding, or effecting settlement, and (ii) in any other lawful act that in the opinion of the Company may be necessary or desirable to establish the title to the estate or interest as insured. If the Company is prejudiced by the failure of the insured to furnish the required cooperation, the Company's obligations to the insured under the policy shall terminate, including any liability or obligation to defend. prosecute, or continue any litigation, with regard to the matter or matters requiring such cooperation.

C Se.~.!ionll_lndex 5. PROOF OF LOSS OR DAMAGE.

In addition to and after the notices required under Section 3 of these Conditions and Stipulations have been provided the Company, a proof of loss or damage signed and sworn to by the insured claimant shall be furnished to the Company within 91 days after the insured claimant shall ascertain the facts giving rise to the loss or damage. The proof of loss or damage shall describe the defect in, or lien or encumbrance on the title, or other matter insured against by this policy that constitutes the basis of loss or damage and shall state, to the extent possible, the basis of calculating the amount of the loss or damage. If the Company is prejudiced by the failure of the insured claimant to provide the required proof of loss or damage, the Company's obligations to the insured under the policy shall terminate, including any liability or obligation to defend, prosecute, or continue any litigation, with regard to the matter or matters requiring such proof of loss or damage.

In addition, the insured claimant may reasonably be required to submit to examination under oath by any authorized representative of the Company and shall produce for examination, inspection and copying, at such reasonable times and places as may be designated by any authorized representative of the Company, all records, books, ledgers, checks, correspondence and memoranda, whether bearing a date before or after Date of Policy, which reasonably pertain to the loss or damage. Further, if requested by any authorized representative of the Company, the insured claimant shall grant its permission, in writing, for any authorized representative of the Company to examine, inspect and copy all records, books, ledgers, checks, correspondence and memoranda in the custody or control of a third party, which reasonably pertain to the loss or damage. All information designated as confidential by the insured claimant provided to the Company pursuant to this Section shall not be disclosed to others unless, in the reasonable judgment of the Company, it is necessary in the administration of the claim. Failure of the insured claimant to submit for examination under oath, produce other reasonably requested information or grant permission to secure reasonably necessary information from third parties as required in this paragraph shall terminate any liability of the Company under this policy as to that claim.

.... + Section ~ II ~p~~~ Index

22

Owner Policy o f Title Insurance (Form T- I )

6. OPTIONS TO PAY OR OTHERWISE SETTLE CLAIMS; TERMINATION OF LIABILITY.

In case of a claim under this policy, the Company shall have the following additional options:

(a) To Pay or Tender Payment of the Amount of lnsurance

To pay or tender payment of the amount of insurance under this policy, together with any costs, attorneys' fees and expenses incurred by the insured claimant, which were authorized by the Company, up to the time of payment or tender of payment and which the Company is obligated to pay.

Upon the exercise by the Company of this option, all liability and obligations to the insured under this policy, other than to make the payment required, shall terminate, including any liability or obligation to defend, prosecute, or continue any litigation, and the policy shall be surrendered to the Company for cancellation.

To Pay or othetwise Settle With Parties Other than the lnsured or With the lnsured (b) Claimant.

(i) to pay or otherwise settle with other parties for on in the name of an insured claimant any claim insured against under this policy, together with any costs, attorneys' fees and expenses incurred by the insured claimant which were authorized by the - Company up to the time of payment and which the Company is obligated to pay; or

(ii) to pay or otherwise settle with the insured claimant the loss or damage provided for under this policy, together with any costs, attorneys' fees and expenses incurred by the insured claimant, which were authorized by the Company up to the time of payment and which the Company is obligated to pay.

Upon the exercise by the Company of either of the options provided for in paragraphs (b) (i) or (ii), the Company's obligations to the insured under this policy for the claimed loss or damage, other than the payments required to be made, shall terminate, including any liability or obligation to defend, prosecute, or continue any litigation.

7. DETERMINATION, EXTENT OF LIABILITY AND COINSURANCE

This policy is a contract of indemnity against actual monetary loss or damage sustained or incurred by the insured claimant who has suffered loss or damage by reason of matters insured against by this policy and only to the extent herein described.

(a) the liability of the Company under this policy shall not exceed the least of:

(i) the Amount of lnsurance stated in Schedule A;

(ii) the difference between the value of the insured estate or interest as insured and the value of the insured estate or interest subject to the defect, lien or encumbrance insured against by this policy at the date of the insured Claimant is required to furnish to Company a proof of loss or damage in accordance with Section 5 of these Conditions and Stipulations.

(b) In the event the Amount of lnsurance stated in Schedule A at the Date of Policy is less than 80 percent of the value of the value of the insured estate or interest or the full consideration paid for the land, whichever is less, or if subsequent to the Date of Policy an improvement is erected on the land which increases the value of the insured estate or interest by at least 20 percent over the Amount of lnsurance stated in Schedule A, then this Policy is subject to the following:

(i) where no subsequent improvement has been made, as to any partial loss, the Company shall only pay the loss pro rata in proportion that the amount of insurance at

23

Owner Policy o f Title Insurance (Form T-1) Page 8 o f 11

Date of Policy bears to the total value of the insured estate or interest at Date of Policy; or

(ii) where a subsequent improvement has been made, as to any partial loss, the Company shall only pay the loss pro rata in the proportion that 120 percent of the Amount of lnsurance stated in Schedule A bears to the sum of the Amount of lnsurance stated in Schedule A and the amount expended for the improvement.

The provisions of this paragraph shall not apply to costs, attorneys' fees and expenses for which the Company is liable under this policy, and shall only apply to that portion of any loss which exceeds, in the aggregate, 10 percent of the Amount of lnsurance stated in Schedule A.

& Section ~ I 1 Index 8. APPORTIONMENT.

If the land described in Schedule A consists of two or more parcels that are not used as a single site, and a loss is established affecting one or more of the parcels but not all, the loss shall be computed and settled on a pro rata basis as if the amount of insurance under this policy was divided pro rata to the value on Date of Policy of each separate parcel to the whole, exclusive of any improvements made subsequent to Date of Policy, unless a liability or value has otherwise been agreed upon as to each parcel by the company and the insured at the time of the issuance of this policy and shown by an express statement or by an endorsement attached to this policy.

9. LIMITATION OF LIABILITY.

(a) If the Company establishes the title, or removes the alleged defect, lien or encumbrance, or cures the lack of a right of access to or from the land, all as insured, or takes action in accordance with Section 3 or Section 6, in a reasonably diligent manner by any method, including litigation and the completion of any appeals therefrom, it shall have fully performed its obligations with respect to that matter and shall not be liable for any loss or damage caused thereby.

(b) In the event of any litigation, including litigation by the Company or with the Company's consent, the Company shall have no liability for loss or damage until there has been a final determination by a court of competent jurisdiction, and disposition of all appeals therefrom adverse to the title as insured.

(c) The Company shall not be liable for loss or damage to any insured for liability voluntarily assumed by the insured in settling any claim or suit without the prior written consent of the Company.

10. REDUCTION OF INSURANCE: REDUCTION OR TERMINATION OF LIABILITY.

All payments under this policy, except payments made for costs, attorneys' fees and expenses, shall reduce the amount of the insurance pro tanto.

24

Owner Policy o f Title Insurance (Fonn T-1) 1

Page 9 o f 11

1 1. LIABILITY NONCUMULATIVE.

It is expressly understood that the amount of insurance under this policy shall be reduced by any amount the Company may pay under any policy insuring a mortgage to which exception is taken in Schedule B or to which the insured has agreed, assumed or taken subject, or which is hereafter executed by an insured and which is a charge or lien on the estate or interest described or referred to in Schedule A, and the amount so paid shall be deemed a payment under this policy to the insured owner.

12. PAYMENT OF LOSS.

(a) No payment shall be made without producing this policy for endorsement of the payment unless the policy has been lost or destroyed, in which case proof of loss or destruction shall be furnished to the satisfaction of the Company.

(b) When liability and the extent of loss or damage has been definitely fixed in accordance with these Conditions and Stipulations, the loss or damage shall be payable within 30 days- thereafter.

13. SUBROGATION UPON PAYMENT OR SETLEMENT.

(a) The Company's Right of Subrogation.

Whenever the Company shall have settled and paid a claim under this policy, all right of subrogation shall vest in the Company unaffected by any act of the insured claimant.

The Company shall be subrogated to and be entitled to all rights and remedies that the insured claimant would have had against any person or property in respect to the claim had this policy not been issued. If requested by the Company, the insured claimant shall transfer to the Company all rights and remedies against any person or property necessary in order to perfect this right of subrogation. The insured claimant shall permit the Company to sue, compromise or settle in the name of the insured claimant and to use the name of the insured claimant in any transaction or litigation involving these rights or remedies.

If a payment on account of a claim does not fully cover the loss of the insured claimant, the Company shall be subrogated to these rights and remedies in the proportion that the Company's payment bears to the whole amount of the loss.

If loss should result from any act of the insured claimant, as stated above, that act shall not void this policy, but the Company, in that event, shall be required to pay only that part of any loses insured against by this policy that shall exceed the amount, if any, lost to the Company by reason of the impairment by the insured claimant of the Company's right of subrogation.

(b) The Company's rights Against Non-insured Obligors.

The Company's right of subrogation against non-insured obligors shall exist and shall include, without limitation, the rights of the insured to indemnities, guaranties, other policies of insurance or bonds, notwithstanding any terms or conditions contained in those instruments that provide for subrogation rights by reason of this policy.

25

Owner Policy o f Title lnsurance (Form T-I ) I

Page 10 o f 11

14. ARBITRATION.

Unless prohibited by applicable law or unless this arbitration section is deleted by specific provision in Schedule B of this policy, either the company or the insured may demand arbitration pursuant to the Title lnsurance Arbitration Rules of the American Arbitration Association. Arbitrable matters may include, but are not limited to, any controversy or claim between the Company and the lnsured arising out of or relating to this policy, any service of the Company in connection with its issuance or the breach of a policy provision or other obligation. All arbitrable matters when the Amount of lnsurance is $1,000,000 or less SHALL BE arbitrated at the request of either the Company or the lnsured, unless the insured is an individual person (as distinguished from a corporation, trust, partnership, association or other legal entity). All arbitrable matters when the Amount of lnsurance is in excess of $1,000,000 shall be arbitrated only when agreed to by both the Company and the lnsured. Arbitration pursuant to this policy and under the Rules in effect on the date the demand for arbitration is made or, at the option of the insured, the Rules in effect at Date of Policy shall be binding upon the parties. The award may include attorneys' fees only if the laws of the state in which the land is located permit a court to award attorneys' fees to a prevailing party. Judgment upon the award rendered by the Arbitrator(s) may be entered in any court having jurisdiction thereof. -

The law of the situs of the land shall apply to an arbitration under the Title lnsurance Arbitration Rules.

A copy of the Rules may be obtained from the Company upon request.

15. L lABlL lN LIMITED TO THIS POLICY: POLICY ENTIRE CONTRACT.

(a) This policy together with all endorsements, if any, attached hereto by the Company is the entire policy and contract between the insured and the Company. In interpreting any provision of this policy, this policy shall be construed as a whole.

(b) Any claim of loss or damage, whether or not based on negligence, and which arises out of the status of the title to the estate or interest covered hereby or by any action asserting such claim, shall be restricted to this policy.

(c) No amendment of or endorsement to this policy can be made except by a writing endorsed hereon or attached hereto signed by either the President, a Vice President, the Secretary. an Assistant Secretary, or validating officer or authorized signatory of the Company.

Section I! I_ndex

16. SEVERABILITY. In the event any provision of the policy is held invalid or unenforceable under applicable law, the policy shall be deemed not to inciude that provision, and all other provisions shall remain in full force and effect.

.&

section I! Index

17. NOTICES, WHERE SENT.

All notices required to be given the Company and any statement in writing required to be furnished the Company shall include the number of this policy and shall be addressed to the Company at (fill in).

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Owner Policy o f Title Insurance (Form T-1) Page 11 of11

COMPLAINT NOTICE:

Should any dispute arise about your premium or about a claim that you have filed, contact the agent or write to the Company that issued the policy. If the problem is not resolved, you also may write the Texas Department of lnsurance, P. 0. Box 149091, Austin, TX 78714-9091, Fax No. (512) 475-1771. This notice of complaint procedure is for information only and does not become a part or condition of this policy.

(Form T-I: Owner Policy of Title Insurance)

.+ Title~Ma_n_uallndez & Sectiw I - Chapter Nine. Texas Insurance Code 3+

Section 1 - Insuring Forms 1

Section Ill - Rate Rules I Sect~onJV - Procedural Rules & Sectron V - Exhibits and Forms b

Sectlon VI - Administrative Rules A

Sec_tlon VII - Claims Handling Principals and Procedures & Bul!etin Append-k - Current Bulletins

For further information, contact: TiJ~tdi.state.tx.us

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P-4 Restrictive Covenants Exception --- When the examination does not disclose that restrictive covenants affect the applicable land, lien or estate, the Company shall delete the restrictive covenant exception prescribed in policy forms. When such are disclosed, the Company shall indicate, following the prescribed in policy forms. When such are disclosed, the Company shall indicate, following the prescribed exception, the restrictive covenants by giving specific reference to the volume and page where each appears of record.

When examination of title discloses that restrictive covenants have expired by thie terms, or if in the opinion of counsel, the restrictive covenants are void and unenforceable by statute, have been effectively released, or have been cancelled by final judgment of a court of competent jurisdiction binding upon all of the property owners and lienholders affected by said restrictions, the Company may delete the restrictive covenant exception prescribed in the policy forms.

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P-18 Commitment for Title lnsurance A. After receipt of a bona fide order for an Owner Policy of Title lnsurance

on residential real property or for an Owner Policy not to exceed $3000,000.00, the Company must deliver to the proposed insured a Commitment in the form approved by the State Board of lnsurance. Delivery may be had upon the proposed insured's authorized agent, or other person in a fiduciary relationship with it, or its attorney, and if none of the aforementioned persons are available after using the Company's best efforts, then to the person designated by the person opening the order for insurance. Such Commitment shall be delivered as soon as practicable, using the Company's best efforts allowing reasonably sufficient time for review prior to the closing of the transaction.

B. The Commitment for Title lnsurance shall be issued only as preliminary instrument in instances in which the Company has a bona fide order for the policy or policies of title insurance specified therein, to be issued within 90 days from the effective date of the Commitment as shown under Schedule A of said Commitment.

C. For title insurance policies not included in A. above, the Commitment must be issued if the proposed insured so requests.

D. The Company shall not be required to issue a Commitment on an order it is unwilling to insure or when a bona fide order for the policy is placed after the real estate transaction is closed.

E. The liability and obligations under the Commitment end ninety (90) days after the Commitment's effective date, or when the Policy is issued, whichever occurs first, unless the failure to issue the policy is the company's fault.

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Title Commitments in Texas 2006 State Bar of Texas Advanced Real Estate Law Course

APPENDIX II

Title Objections Letter (by Purchaser)

Title Objections Response Letter (by Seller responding to Purchaser)

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June 12,2006

Re:

Dear

In connection with this office representing the Purchaser, or Assigns, with respect to the above referenced Contract, I have reviewed the following:

1. Commitment for Owner's Policy of Title Insurance, Commitment No. , as issued ,2006, (the "Commitment') dated effective as of December 2Znd, 2005, as issued by -

. (the "Title Company"), and having GF No.

2. ,2006, Survey of the Property (the "Survey"), as prepared by RPLS No. , as received in this ofice from , (hereinafter the "Survey").

3. Title Exception documents identified in Schedule B of the commitment, except as elsewhere noted in this communication.

With respect to the items furnished in the interest of complying with the Contract, pertaining to the Purchaser's review of such items, Purchaser's initial comments and objections are as follows:

A. Title Commitment.

1. Purchaser objects to the effective date of the Commitment, which is prior to the effective date of the Contract. The effective date of the Commitment should be a date the same as, or later than, the effective date of the Contract, being December -, 2005.

2. Schedule A, Item 3. Purchaser objects to Title Company's Note that Record Title to the Property appears to be vested in , a Texas limited liability partnership, as the Seller's Acquisition Deed as recorded at Volume , Page , Dallas County Official Records references the Seller as , A Texas limited company.

3. Schedule A, Item 4. Should be revised to read Lot No. -, Block N o . , of , an addition to the City of Richardson, Dallas County, Texas,

according to the Plat recorded in Volume - at Page of the Map Records of Dallas County, Texas", as described in the Survey, dated ,2006.

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4. Schedule B, Item 1. Purchaser objects to the following individual Items as set out below, and request that they be deleted as exceptions:

a. NIA.

5. Schedule B, ltem 2. Should be deleted on the Owner's Policy of Title lnsurance except for "shortages in area" concerning the Property. Purchaser expressly requests that the Title Company notify the undersigned that the Survey is approved by the Title Company for purposes of amending this exception, upon payment of the required applicable premium by Purchaser.

6. Schedule B, Item 3. Purchaser objects to Item 3. of Schedule B of the Commitment and requests that this Exception be deleted, as record owner of the Property is a business entity, and not a natural person, and as such, the Property cannot be subject to homestead or community property as survivorship rights, if any, of any spouse of any Insured.

7. Schedule B, Item 4. Purchaser objects to Item 4. of Schedule B of the Commitment in that no portion of the Property is affected by any body of water, filled in lands, artificial islands, and isnot subject to riparian rights.

8. Schedule B, item 5. Purchaser objects to Item 5. of Schedule B of the Commitment and requests that this exception for taxes be limited to the year of closing and subsequent years, not yet due and payable.

9. Schedule B, Item 7. Purchaser objects to Item 7. of Schedule B of the Commitment and requests that appropriate representatives of Seller can execute and deliver to the Title Comuanv an ~ff idavit of Bills ~ a i d ' i n a form and substance that is satisfactory to the Title Company in this regard:

10. Schedule B, ltem 8. All references to subordinate liens and leases should be deleted on the Mortaaaee Policv of Title Insurance. Purchaser reauires aoprooriate reoresentatives of Seller to . . ,

execute and &liver to the Title Company an Affidavit of parties and ~ossessidn in a form and substance that is satisfactory to the Title Company in this regard.

11. Schedule B, Item 9. Purchaser objects to ltem 9, of Schedule B of the Commitment in that the Exceptions to Coverage and Express lnsurance in Schedule B of the Texas Short Form Residential Mortgagee Policy of Title lnsurance are not applicable to this transaction.

12. Schedule B, ltem 10(a) All references to parties in possession under unrecorded leases or rental agreements should be deleted on the Owner's Policy of Title Insurance. Purchaser requires appropriate representatives of Seller to execute and deliver to the Title Company an Affidavit of Parties and Possession in a form and substance that is satisfactory to the Title Company in this regard.

13. Schedule C. In accordance with Sections 5.0 and 5.03 of the Contract, Purchaser objects to all Items under Schedule C and requires that Seller perform all necessary acts and execute all documents required by the Title Company prior to, or at closing, so that the-Items under Schedule C shall not be exceotions to the Owners Policv of Title Insurance, and so that Purchaser shall be assured of receiving indefeasible fee simple title co the Property

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B. The Survey.

1. Purchaser objects to the following individual Items as set out below, and requests that the following Exceptions be deleted from reference on the Survey:

a. The Avigation Release noted as recorded at Volume , Page P, should be revised to read as recorded at the Plat recorded in Volume , Page 2, of the Map Records of Dallas County, Texas, as re-recorded the Plat recorded in Volume , Page -, of the Map Records of Dallas County, Texas.

C. Recluested Additional Services and Endorsements.

1. Please confirm the Title Company will issue a T-19.1 Endorsement concerning the Property, at Purchaser's cost.

2. Please confirm the Title Company will issue a T-23 Access Endorsement concerning the Property, at Purchaser's cost. -

3. Please confirm the Title Company will issue a T-25 Contiguinity Endorsement concerning the Property, at Purchaser's cost.

The Purchaser reserves the right to make any additional comments and objections as to all items delivered or to be delivered, including, but not limited to, the Commitment, Surveys and any other items previously delivered or to be delivered to the Purchaser, until the expiration of the review period for such items as allowed by the Contract.

This letter is delivered to give Seller an opportunity to cure the items listed in this letter, and is not intended as a present termination of the Contract. We anticipate that the matters set forth in this letter will be resolved prior to Closing of the Property, and we look forward to working with you in that regard. Although the Purchaser reserves its rights to terminate the Contract, in the event Seller is unable to cure such items to Purchaser's satisfaction, the Buyer also reserves the right to waive any of its objections and proceed to Closing under the Contract. In addition, this letter does not waive of Purchaser's rights to terminate the Contract as provided in the Contract, nor waive any right of Purchaser to fully inspect the Property.

Thank you for your attention to this letter. I appreciate your courtesies in this matter, and please contact me if I can provide you with any information or assistance.

Sincerely,

Charles Fiscus

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June 12,2006

Re:

Dear

Please consider this letter responsive to your title objections letter dated ,2006.

As a preliminary comment, it appears that the majority (if not all) of the Assignee Purchaser's comments and objections should be considered to be within the responsibility of f i e

(the "Title Company), or others, and as such, are not the obligations andlor responsibilities of Seller. Accordingly, such items will be referenced as "Title Company matters, and therefore not requiring action or necessary direction by Seller. On such points, it is requested and suggested that your office coordinate all necessary curative efforts directly with Ms. Kathleen Hail, at the Title Company.

General Comment 1: Adjacent Lots 2, 3, and 4 (which Lots completely surround the Property, excepting only the public road frontage southwesterly side of the Property) are owned by a single set of separate sellers, all of which separate sellers' property is presently under contract to be acquired by the Assignee Purchaser, at or before , 2006, being the same Closing Date as contemplated by the Contract. Accordingly, as many (if not all) of the usual and customary title objections, boundary issues, limitations title questions, utility access points, designations, necessary municipal permits, etc., that would be appropriate and necessary in a normal commercial real estate conveyance and purchase, may be anticipated to be necessary of immediate debate and resolution; as many (if not all) such usual and customary issues will be resolved according to Assignee Purchaser's general development plan, as Assignee Purchaser commences construction and mobilization efforts at the Property, and the real property tracts surrounding the Property, into a single scheme.

On an item by item basis, my response comments are as follows:

I. Stewart Title Guarantv Company (the "Title CompanvL Title Commitment issued January -, 2005 with an Effective Date of December 30, 2005, bearing Title File No.

(the "Commitment")

Schedule A.

Item I (a). Title Company action item(s). Seller will execute an appropriate Special Warranty Deed at Closing.

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Title Company action item. No Seller action required.

Title Company action item. No Seller action required.

Schedule B.

w. Title Company action item. No Seller action required.

Title Company action item. No Seller action required.

w3. Title Company action item. Seller will execute, on or before Closing, all necessary documentation reasonably required by the Title Company to satisfy these ltems.

item Title Company action item. Seller will execute, on or before Closing, all necessary documentation reasonably required by the Title Company to satisfy these ltems.

& Title Company action item. No Seller action required

item Title Company action item. No Seller action required.

m7. Title Company action item. No Seller action required

Title Company action item. Note: Improved Property Commercial Lease to be executed by Assignee Purchaser for the benefit of Lollipop Guild Inc. is considered a Permitted Exception.

item Title Company action item. No Seller action required.

Item 10(a). Title Company action item. No Seller action required

ltem 10(b). Title Company action item. No Seller action required.

ltem 10(c). Title Company Action item. Note: Improved Property Commercial Lease to be executed by Assignee Purchaser for the benefit of Lollipop Guild Inc. is considered a Permitted Exception.

ltem 10(d). Title Company action item. No Seller action required,

ltem 10(e). Title Company action item. Seller will accommodate Surveyor's access to the Property to resolve this ltem.

Schedule C.

ltem 5. Seller will execute on or before Closing, all necessary documentation reasonably required by the Title Company to satisfy these ltems.

ltem 6. Seller will execute, on or before Closing, all necessary documentation reasonably required by the Title Company to satisfy these ltems.

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11. ALTAlACSM Land Title Survey prepared by , RPLS, Registered Land Surveyor No. -, dated ,2006, under Job No, ALTA (the "Survey")

General Note 2: Please consider this letter confirmation that pursuant to Section 3. of the Contract, that Seller was not required to retain the services of a professional surveyor to prepare the Survey. The Surveyor was retained by the Assignee Purchaser, and as such, is not an employee or independent contractor of Seller, and is thus not presumed to be responsive to Seller's directions or instructions. Accordingly, it is recommended and suggested that your office coordinate all necessary efforts directly with the Surveyor, such that an updated, properly certified Survey can be available at Closing. Seller will cooperate with the Assignee Purchaser and the Surveyor in such matters; however, until further notice, Seller considers all such referenced matters to be Surveyor action items, only, and no Seller action is required at this time, except as specifically set out below:

1. Regarding "the line that crosses the southwesterly boundary line of the Property (above word marked "Gravel"), see below: See General Comment No. 1. No Seller action required.

2. Regarding "the ownership of the fence along the Northeasterly boundary that appears to encroach on the adjacent Lots 2 and 3.", see below: See General Comment No. 1. No Seller action required.

3. Regarding "the ownership of the fence along the Southeasterly boundary of the subject Property.", see below: See General Comment No. 1. No Seller action required.

4. Regarding "ownership or provide a more detailed description of the "Sign with Lights" as shown on the Survey.", see below: See attached photo. The signage in question is affixed to the Property, and is owned in place by the Sellers, and has been in place on the Property for many years; and all right, title, and interest to the Sign will be conveyed to Assignee Purchaser as part of the fee title to be conveyed to the Assignee Purchaser by Seller. No Seller action required.

5. Regarding the "angled line in the center of the rectangle between the northwesterly side of the building and the Brick Retaining Wall", see below: See General Comment No. 1. No Seller action required.

Seller will perform various actions and accommodations as set out above in this communication. This letter is forwarded to give Assignee Purchaser the opportunity to review Seller's response concerning the items listed in your , 2006 letter, and other matters, and is not intended as a present termination of the Contract. Seller anticipates that the matters set forth in this letter will be resolved to our mutual satisfaction prior to Closing, and Seller looks forward to working with Assignee Purchaser in that regard.

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Accordingly, please contact my office upon your review of this letter and its contents to the mutual benefit of our respective clients. Please also inform me immediately if it is Buyer's intention to terminate the Contract prior to the close of business on , 2006, per Paragraph - of the Contract.

Thank you for your attention to this letter. I appreciate your courtesies in this matter, and please contact me if I can provide you with any information or assistance.

Sincerely,

Charles Fiscus

CFlda

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