Beyond Closing: The Power of a Gap Indemnity

In a typical real estate transaction, there’s often a critical period between the closing and the official recording of documents—a period aptly known as the “gap.” This “gap” introduces a degree of risk, leaving room for unexpected encumbrances like liens or adverse judgments to rear their heads before the ink dries on the transaction documents. Naturally, the longer the gap, the broader the scope for potential issues.

Attorneys representing buyers or lenders will want to ensure that their client’s title policy covers the gap period. This can be accomplished by clarifying in the escrow closing instruction letter that the title company is bound to issue the policy in the form of an attached marked commitment or pro forma, which would, in turn, specify that it is effective as of the date and time of recordation of the applicable transaction document(s). A buyer’s or lender’s counsel may also want to bind the title company to issue the policy with no additional exceptions, regardless of intervening matters of record.

Given the fact that the title insurance policy is typically issued at the date and time of recordation of the applicable transaction document(s), a title company bears the risk of insuring the “gap” period. Some states allow electronic recordation, which mitigates this risk. Additionally, title companies may opt to update their title search right before closing or deliver documents personally or via overnight delivery for swift recording at the county office.

Yet, even these precautions cannot entirely close the gap, and the possibility of unforeseen complications still looms. This is where the gap indemnity agreement steps into the spotlight—a contractual shield provided by a property owner in favor of a title company against potential liabilities arising between the latest commitment date and the eventual recording of transaction documents.

For attorneys representing sellers or borrowers, crafting a gap indemnity agreement requires strategic foresight. It’s prudent to restrict the indemnity to matters directly stemming from the signing party’s actions or oversights—a safeguard most title companies readily agree upon. Moreover, setting a reasonable timeline for the agreement’s termination is advisable. For instance, the seller’s or borrower’s liability could cease upon the official recordation date, with a defined “Survival Date” granting the title company a window to finalize any pending tasks related to title indexing and notification of gap interests.

A crucial consideration in commercial real estate transactions involves the structure of ownership. Often, commercial properties are held by single-asset entities. In the aftermath of a sale, pursuing recourse against the former owner—a now asset-less entity—can pose challenges for claimants. To mitigate this risk and ensure access to post-closing remedies, buyers or a title company may request a gap indemnity from a parent company or affiliate of the seller.

In the intricate dance of a modern real estate transaction, gap indemnity agreements serve as a vital instrument, bridging the divide between closure and clarity, ensuring a smoother journey for all parties involved.

Related Practice Areas:

Real Estate | Commercial Leasing

About the Author:

Erin Johnson’s practice focuses on advising entities and individuals in the acquisition, disposition, leasing, development, and financing of office, retail, multi-family, and mixed-use projects throughout the United States. Erin is also experienced in a wide variety of corporate matters including entity formation, organization, and governance. You can reach Erin at 248-205-2526 or Her full bio can be viewed here.