Hey there! If you’re in the process of buying or selling real estate, you may have heard the term “gap indemnity agreement” thrown around and wondered what exactly it is. Don’t worry, you’re not alone – gap indemnity agreements can be confusing if you’re not familiar with them.
In simple terms, a gap indemnity agreement is a legal contract that provides additional protection between the closing date and the recording date of a real estate transaction. It helps cover any losses that could occur if something goes wrong during the gap period.
Let’s break it down…when you close on a property, there’s typically a delay before the deed and mortgage get officially recorded with the county. This creates a “gap” between when you close and when your documents get stamped by the recorder’s office. A gap indemnity agreement bridges that gap and protects the parties involved if any liens, judgments, or other claims pop up during that timeframe. Make sense so far?
The gap period usually lasts a few days, but it could drag on longer depending on the locale. In 2020, COVID-19 registry closures significantly extended the gap in some markets. But no matter the reason, gap indemnity agreements have become a common safeguard to keep real estate deals moving forward despite recording delays.
When Are Gap Indemnity Agreements Required?
Gap indemnity agreements are most often required in “gap closing” situations where there’s an extended period between the closing date and the recording date.
Here are some common scenarios that can create a gap:
- The buyer and seller are located in different states, so closing documents need to be sent to a distant recording office.
- The county recorder’s office has a significant backlog of documents, leading to a long lag before deeds get stamped.
- COVID-19 closures have caused the recorder’s office to limit operations or shut down entirely.
- The transaction is complex and same-day recording isn’t feasible despite best efforts.
Whenever there’s a gap, there’s a risk of “intervening liens” or other claims getting recorded before the buyer’s deed and lender’s mortgage. This could mean those claims temporarily take priority.
Title insurance helps cover losses from gap claims, but gap indemnity agreements provide an extra layer of security. They ensure the seller will financially cover the buyer if something sneaks into the public record during the gap.
If closing and recording don’t happen simultaneously in your real estate transaction, expect to see a gap indemnity agreement.
What Risks Do Gap Indemnity Agreements Cover?
What exactly could go wrong during the gap period that would warrant this extra protection? Here are some examples:
- The seller neglected to pay their income taxes, and the IRS slaps a tax lien on the property between closing and recording.
- A creditor wins a judgment against the seller and secretly records it during the gap, temporarily tying up the property.
- The seller files for bankruptcy after closing but before the documents record, causing complications.
- A title issue like an old child support lien or expired property tax pops up when the recorder indexes the deed.
- The seller’s estranged spouse makes a claim on the property during the gap time.
- A deed or lien related to the seller gets mistakenly recorded even though the deal already closed.
Any of those scenarios could put the buyer’s rights in jeopardy during the gap period. The gap indemnity agreement protects against those risks by keeping the seller financially liable for any losses.
This allows the real estate deal to close as planned, despite the extended lag before the documents get stamped by the recorder. So gap indemnity agreements provide vital peace of mind!
Who Signs The Gap Indemnity Agreement?
If you’re the seller, expect to be asked to sign a gap indemnity agreement before closing day. This applies to both residential and commercial real estate transactions.
Here are the specifics:
- In a property sale, the seller signs the gap indemnity agreement. If there are multiple sellers, each person will need to sign.
- In a refinance situation, the borrower signs the gap indemnity agreement. For a married couple, both spouses should sign the agreement.
The title company or lender will likely require the fully executed gap indemnity agreement in advance, to protect their interests during the gap period after closing.
Having all sellers or borrowers sign the agreement provides maximum accountability if any issues arise. The title company can pursue financial remedies directly from the indemnitor.
What Are The Key Elements Of A Gap Indemnity Agreement?
Gap indemnity agreements are usually broad, sweeping documents meant to cover every imaginable mishap. Here are some key provisions to expect:
- Indemnification clause – This states the signer will financially cover any losses resulting from claims filed during the gap period. Very broad language.
- Hold harmless clause – Says the signer will shield the title company and lender from any legal action over gap claims. Also broad.
- No limit on damages – The indemnitor’s liability is unlimited. This ensures maximum possible coverage.
- Covers known and unknown claims – Even risks that nobody foresaw or expected will be the indemnitor’s responsibility.
- Survives closing – Seller’s obligations continue indefinitely after closing.
Gap indemnity agreements are written to create bulletproof accountability for the seller or borrower signing the contract.
It’s also crucial that the indemnitor has strong finances to back up their open-ended commitments. Keep reading for more on that…
Gap Indemnity vs. Gap Insurance Coverage
Gap indemnity agreements and gap insurance coverage work hand-in-hand to protect real estate deals from recording lag dangers. But what’s the difference between them?
First, gap insurance coverage is built into every lender’s and owner’s title insurance policy. It covers any defect or lien that gets recorded during the gap between the date of policy and the mortgage recording date.
For instance, say the title policy date is March 1st and the deed doesn’t get stamped until March 5th. If a lien gets recorded on March 3rd, the gap insurance will cover it. No special endorsement is needed.
Gap indemnity agreements provide additional peace of mind by contractually obligating the seller to pay for any gap claims. This backstop allows deals to move forward despite recording lags.
Think of it like buying both car insurance and an extended warranty. The insurance covers accidents and theft, but the warranty covers repairs down the road. Two layers of protection!
How Does the Title Company Handle Gap Indemnity Agreements?
Title companies take certain steps to make sure gap indemnity agreements provide maximum security:
- Review the indemnitor’s finances – They vet the seller or borrower to ensure they can actually cover major losses if needed.
- Add requirement to title commitment – The preliminary title report will list the gap indemnity agreement as a closing requirement.
- Have appropriate parties sign at closing – All sellers or borrowers must sign their respective agreement.
- Update title right before closing – This shortens the gap period and improves chances of recording first.
- Get documents recorded ASAP – They overnight documents to the recorder to minimize gap time after funds disburse.
- Keep sellers informed – They recommend sellers maintain insurance until the deed records, in case of fire, vandalism, etc.
As you can see, title professionals take numerous steps to make gap coverage as robust as possible!
Best Practices for Gap Indemnity Agreements
Follow these tips for smooth sailing when gap indemnity agreements are needed:
- Vet the indemnitor – Avoid having a shell company sign the indemnity. Make sure it’s a financially solvent entity.
- Record quickly – Getting the documents stamped ASAP limits risks. Don’t let the gap drag on unnecessarily.
- Inform buyers – Advise the purchaser of gap risks, especially if they forgo owner’s title insurance.
- Follow fraud prevention steps – Criminals exploit chaos, so verify any last-minute instructions.
- Get owner’s insurance – This provides gap coverage if an issue arises before the deed records.
Lean on your title company’s expertise as well. Their job is to steer these agreements to a successful conclusion!
Why Gap Indemnity Agreements Are More Common Now
In today’s real estate market, gap periods and indemnity agreements are increasingly common. Here are some reasons why:
- COVID-19 closures – Recording offices limited operations in 2020, leading to major recording delays.
- Remote transactions – As online deals surge, it takes longer to shuttle documents for recording.
- Frenzied demand – Ultra-competitive housing markets can force buyers to close on a gap basis before losing the home.
- Complex deals – Portfolio sales and corporate transactions often involve recording lags.
- Reduced staffing – Understaffed title offices juggle higher volumes, slowing document turnaround.
- Foreclosures and short sales – These distressed deals frequently require gap coverage.
Gap indemnity agreements have become a standard safeguard in today’s real estate landscape. They allow deals to push forward despite recording bottlenecks.
Conclusion
Now you’ve got the full scoop on gap indemnity agreements! Here are the key takeaways:
- Gap indemnity agreements provide financial backup between closing and recording when a delay is expected.
- They protect all parties if any encumbrances get recorded during the gap period.
- Sellers or borrowers are obligated to cover any gap-related losses per the agreement terms.
- Title insurance covers gap claims too, but indemnity agreements offer extra security.
- COVID-19, remote deals, and complex transactions have increased the need for gap coverage.
While the gap period causes understandable anxiety, gap indemnity agreements ensure you can proceed with confidence. Lean on your title company and real estate attorney for guidance, and you’ll navigate the gap like a pro!
