Overholzer Clarified in California Title Defect Case: Valbridge Property Advisors’ Role in Setting New Legal Standards in Tait v Commonwealth Land Title Insurance, Cal.App 1st Dist. (A166676) 6/28/24

The Tait case clarifies the only major title case dealing with missed easements and deed restrictions, the 70-year-old Overholtzer v. Northern Counties Title Ins. Co. (1953) 116 Cal.App.2d 113.

Overholtzer held that value loss must be “measured by diminution in the value of the property caused by the defect in title as of the date of discovery of the defect, measured by the use to which the property is then being devoted….diminution in value of the property as it then exists.”  However, the property at issue in Overholtzer had already been developed to its highest and best use. The Overholtzer court did not consider whether an appraiser in a title insurance case could consider other reasonably possible uses.

In 2016, the Taits purchased a residential property in Danville for $1.25 million. Commonwealth issued the Taits an ALTA title insurance policy with insured the Taits against “actual loss” arising from certain defined covered risks, which include someone else having an easement on the property.

The policy limits Commonwealth’s liability for an unknown easement to the lesser of the Taits “actual loss” or the policy limit of $1.25 million. The policy does not define “actual loss.”

As they had intended upon purchasing the property, the Taits proceeded with plans to subdivide the property into two lots. They engaged in talks with the town about their subdivision and found support from staff. At the end of 2016, the Taits had a complete application for a tentative map, ready for submission.

In February 2017, the Taits learned about a 1988 maintenance easement the Taits believed would interfere with the potential lot split.  They tendered a claim to Commonwealth.

Commonwealth obtained an appraisal which applied the well-known standard in Overholtzer, valuing the property based on the date of the loss. The Commonwealth appraiser, as requested, valued the property both with and without the maintenance easement, concluding a diminution in value of $43,500, but with no consideration of a possible lot split.

The Taits engaged Valbridge. We also valued the property based on Overholtzer but concluded that without the maintenance easement there was a high probability the property could be subdivided to two lots. Valbridge’s diminution was $700,000, which Commonwealth denied.

The Taits filed suit. The trial court granted Commonwealth’s motion for summary judgement, ruling that the legal standard for title insurance losses does not permit consideration of a property’s highest and best use, only its actual use as vacant residential land.  The trial court therefore disregarded the Valbridge appraisal and found that Commonwealth’s appraisal was the only evidence of Tait’s losses.

The Court of Appeal engaged in a careful review of Overholtzer to determine whether it answers the question of how to calculate diminution in market value and therefore what losses are compensable under the policy.

The Taits argued that Overholtzer did not address how to determine a property’s market value, so the market value must be determined based on a standard appraisal that considers the property’s highest and best use. Commonwealth argued that Overholtzer precludes consideration of a property’s highest and best use. The Court agreed with Tait that Overholtzer does not foreclose the use of the highest and best use standard.

Commonwealth equated the highest and best use approach with awarding compensation for speculative uses of a property and that title insurance only compensates for actual losses, not possible or probable ones. The Court, however, found there was a reasonable probability that the Taits could subdivide their property and should have been allowed to present their evidence on that question at a trial.

The First Appellate District Court ruled on the case June 28, 2024, finding in favor of the Taits. The lower court judgement was reversed.

We are not lawyers, and we certainly encourage property owners and title companies to confer with experienced counsel. Nonetheless, Tait seems to be a case we will be talking about for years to come.

Kudos to James J. Ficenec, Esq. of Newmeyer & Dillion LLP for the appellate win and congratulations to Martin and Jane Tait; we thank them for trusting us in this assignment.

Norman C. Hulberg, MAI, Senior Managing Director, and Nolan Tong, Senior Appraiser, provided valuation services in this landmark case.