Sometimes the sky isn’t so blue in Malibu

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California case might spell trouble for real estate agents and brokers across the country

The California Supreme Court decided a case in late 2016 that may have wide-ranging effect for real estate companies in that state.* The case involves a Chinese millionaire’s 2007 purchase of a mansion in Malibu for $12.25 million.

The seller, a trust, engaged Chris Cortazzo, a salesman in Coldwell Banker’s Malibu West office to sell the property.  As Cortazzo prepared to list the property, he obtained information from the tax assessor’s office that indicated the property’s living area was 9,434 square feet. The building permit described a single-family residence of 9,224 square feet, a guest house of 746 square feet, a garage of 1,080 square feet and a basement of unspecified area. The MLS listing stated that the property “offers approximately 15,000 square feet of living area”. Cortazzo also prepared and distributed a flyer making the same square footage representation.house measuring tape

In 2007, a couple made an offer to purchase the property. By handwritten note, Cortazzo informed them that Coldwell Banker did not “guarantee or warrant” the square footage, and advised them to “hire a qualified specialist to verify the square footage”. When the couple requested documentation of the square footage, Cortazzo gave them a letter from the property’s architect stating the “size of the house, as defined by the current Malibu building department ordinance is approximately 15,000 square feet.”  In a cover note, Cortazzo again cautioned them to hire a specialist. This sale fell through.

Horishi Horiike had been working for several years with Chizuko Namba, a sales person in Coldwell Banker’s Beverly Hills office, to find a residential property to buy. Namba showed Horiike the residence in question. Cortazzo gave Horiike the marketing flyer advertising approximately 15,000 square feet and an MLS printout that did not specify the square footage and contained note in small print that “Broker/Agent does not guarantee the accuracy of the square footage.” Horiike and the selling trust entered into a contract.

Before the closing, Horiike signed three disclosure forms confirming that Coldwell Banker represented both the buyer and the seller in the transaction. Under California law, a real estate broker may act as a dual agent for both parties, provided both parties consent to the arrangement after full disclosure.  The broker may act through one or more “associate licensees”, typically the salespeople who operate under the broker’s license and supervision. The governing statute provides that when an associate licensee owes a duty to any party in a real estate transaction, that duty is equivalent to the duty owed to that party by the broker.

Cortazzo did not state in writing to Horiike that there may be a discrepancy in the square footage, as he had done with the previous potential buyer. He also did not advise Horiike to retain an expert to verify the square footage. After the closing, Horiike learned that the property had less than 12,000 square feet of living area (although Coldwell Banker experts testified at trial that the living area was 14,186 square feet.)

In 2010, Horiike filed suit against Cortazzo and Coldwell Banker for intentional and negligent misrepresentation, breach of fiduciary duty, unfair business practices and false advertising. He did not sue the selling agent, Namba.

In a unanimous decision, California’s Supreme Court stated that the case presented a single, narrow question:  whether the associate licensee who represented the seller owed a duty to learn and disclose all information materially affecting the property, including the discrepancy in the square footage. The Court held that Coldwell Banker, as broker, owed a fiduciary duty to both parties and that Cortazzo, as associate licensee, had the responsibility to properly investigate and disclose all important information related to the transaction. The Court concluded Cortazzo owed a duty to Horiike equivalent to the duty owed to him by Coldwell Banker.

Several trade associations filed amicus briefs in the case. One concern is that an agent working with a buyer has no idea what property that buyer will ultimately purchase. Whether the same broker will represent the seller can’t be predicted. Another concern is that this decision may also reach commercial transactions. It is also possible that this case may open selling agents open to lawsuits from their clients for over-disclosure.

Could this happen in South Carolina? A provision in our statutory scheme may save brokers from the fate set out in this case, at least where different branch offices of a real estate firm are involved. Here, each branch office must be managed by a broker-in-charge. South Carolina Code §40-57-350 (I)(2) states that a broker-in-charge and associated licensees in one office of a real estate brokerage firm may conduct business with a client of another office of the real estate brokerage firm without creating a dual agency relationship, so long as the branch offices each have separate brokers-in-charge and do not share the same associated licensees.

I can’t find similar protection for listing and selling agents who work in the same branch office, nor for companies with listing and selling agents in the same location.  And, as we all know, there is no predicting what our court might say in connection with real estate matters. We will have to pay attention to see whether other courts, and particularly South Carolina courts, follow the lead of the California Supreme Court.

*Horiike v. Coldwell Banker Residential Brokerage Co., 1 C5th 1024 (2016)

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The hazards of drafting survivorship deeds for consumers

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Pay attention to tricky South Carolina law!

More than a decade has elapsed since our Supreme Court surprised dirt lawyers with Smith v. Cutler,* the case that told us there were already in place two survivorship forms of ownership in South Carolina. We apparently missed that day in law school! The two forms of ownership are joint tenancy (which we knew and loved) and tenancy in common with an indestructible right of survivorship (which slipped by us somehow). This is a mini-history lesson about how we got to this state of the law and a reminder for dirt lawyers to carefully draft deeds.

Under the common law in South Carolina, tenancy in common is the favored form of ownership. A deed to George Clooney and Amal Clooney (whether George and Amal are married or not) will result in a tenancy in common. At the death of George or Amal, the deceased’s fifty percent interest in the property will pass by will or intestacy laws. Joint tenancy was not favored in South Carolina, and there was no tenancy by the entirety that would have saved the property from probate (and creditors) for a married couple.

A rather convoluted 1953 case** interpreted a deed that intended to create a tenancy by the entirety as creating a shared interest in property between husband and wife referred to as a tenancy in common with an indestructible right of ownership. This is the case that the Smith v. Cutler Court referred to as creating the form of ownership we missed.

It’s not technically true that all of us missed this form of ownership. Some practitioners did use the language from the 1953 case to create a survivorship form of ownership. The magic language is “to George Clooney and Amal Clooney for and during their joint lives and upon the death of either of them, then to the survivor of them, his or her heirs and assigns forever in fee simple.”  Other practitioners routinely used the common law language: “to George Clooney and Amal Clooney as joint tenants with rights of survivorship and not as tenants in common.”

Conveying title from a person to himself and another person establishing survivorship was not possible in South Carolina prior to 1996 because the old common law requirement of unities of title could not be met. To create a survivorship form of ownership, the property owner conveyed to a straw party, who would then convey to the husband and wife, complying with the unities of title requirement and establishing survivorship.

A 1996 statutory amendment to §62-2-804 rectified this problem by providing that a deed can create a right of survivorship where one party conveys to himself and another person. The straw party is no longer needed. This statute was given retroactive effect.

In 2000, our legislature added §27-7-40, which provides that a joint tenancy may be created, “in addition to any other method which may exist by law” by the familiar words “as joint tenants with rights of survivorship and not as tenants in common”.  The statute addresses methods for severing joint tenancies which typically results in a tenancy in common. For example, unless the family court decides otherwise, a divorce severs a joint tenancy held by husband and wife, vesting title in them as tenants in common.  A deed from a joint tenant to another severs the joint tenancy. A conveyance of the interest of a joint tenant by a court severs the joint tenancy.

Following the enactment of §27-7-40, most practitioners used the language set out in the statute to create a joint tenancy, “as joint tenants with rights of survivorship and not as tenants in common.” Five years later, Smith v. Cutler required us to examine our drafting practices with fresh eyes. The court held that a joint tenancy with a right of survivorship is capable of being defeated by the unilateral act of one tenant, but a tenancy in common with an indestructible right of survivorship is not capable of being severed by a unilateral act and is also not subject to partition.

Real estate lawyers in the resort areas in our state are often asked to draft survivorship deeds because couples from other states as accustomed to tenancy by the entirety. Until Smith v. Cutler, most practitioners did not believe different estates were created by the different language commonly in use. We believed joint tenancy was created in both cases.

Now, clients should be advised about the different estates and should choose the form of ownership they prefer. I’ve discussed this issue with many lawyers who advise married couples to create the indestructible form of ownership. Others who seek survivorship are often advised to create joint tenancy under the statute.  I see many deeds from the midlands and upstate that use the traditional tenancy in common form of ownership. I’ve heard estate planners prefer tenancy in common so the distribution at death can be directed by will. Lawyers who draft deeds for consumers need to be aware of and need to address the various forms of ownership with their clients.

One final thought on the survivorship issue in South Carolina. Do we now have a form of ownership that protects property from creditors of one of the owners? If a tenancy in common with an indestructible right of survivorship is not subject to partition, then it may not be reachable by the creditors of one of the owners. Let me know if you see a case that makes such a determination. It would be an interesting development.

 

366 S.C. 546, 623 S.E.2d 644 (2005)

** Davis v. Davis, 223 S.C. 182, 75 S.E.2d 45 (1953)

 

How to cure a defective deed

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Why South Carolina should consider a legal specialty in real estate.

The Real Estate Practices Council of the South Carolina Bar is considering petitioning our Supreme Court to create a specialty for the practice of real estate law. Two committees have been formed, one to consider residential real estate as a specialty and the other to consider commercial real estate as a practice specialty. If you have ideas that may help, please pass them along to me!

One reason for consulting a real estate lawyer might be for assistance in curing a defective deed. It is impossible to list all the types of defects that appear in deeds of record. The list grows every day! Some of the most common defects are property description discrepancies, grantor and grantee name discrepancies, out-of-state forms that do not comply with South Carolina statutory requirements, right of survivorship attempts that fail, discrepancies in ownership percentages, failure to recite consideration, grantor signature discrepancies, and authority issues of seller entities.

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Curing defective deeds will often require corrective deeds or quitclaim deeds from parties with outstanding interests. Note that corrective deeds are exempt from the deed recording fees imposed by §12-24-10 et seq. of the Carolina Code. See, specifically, §12-24-40(12). With corrective deeds, it may be necessary to obtain a deed back from the grantee. An example would be a deed from the developer to Richard Roe for lot 35, where Mr. Roe actually bought and occupied lot 34. To cure this problem, in addition to obtaining a deed from the developer to Mr. Roe of lot 34, Mr. Roe would need to convey lot 35 back to the developer. I continue to be amazed at the number of real estate professionals who think this step can be skipped, and that a corrective deed will somehow get the title back for the other lot. Also remember that mortgages may have to be re-executed or otherwise corrected once the deed issue is cured.

I am often asked whether the lawyer can “fix” the problem on the original deed and re-record it without the involvement of the parties. The answer is a strong “no”. The grantor must at least initial any changes. The more serious the problem, the more likely it will be that a corrective deed will be needed and that the grantor as well as the grantee will have to be involved.

When a deed discrepancy is discovered after the title has been conveyed again, the question often arises whether the corrective deed should run to the original grantee, and whether that would create the necessity for deeds from each grantor to each grantee in the chain of title after the problem. I often suggest that the corrective deed be given to the current property owner. The participation of intervening property owners is not needed.

Deed reformation actions are possible, and foreclosures often include additional causes of action for deed reformation to correct legal descriptions and other mistakes. Title insurance companies are often responsible to pay for these additional causes of action.

With these difficulties to be faced, don’t you think real estate practice as a specialty is a good idea?

News from Wells Fargo

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Lender issues settlement communication on June 1

Wells Fargo continues to update its settlement agents on a quarterly basis. South Carolina closing attorneys should pay close attention to these newsletters, which may highlight changes in closing processes and documentation. You can read the latest version here.

Significantly, the latest newsletter provides the following updated information:

  • Closing Insight™ training has been completed within Wells Fargo internally, and use of this portal method for communicating about closing files will continue to expand in all geographic areas. Closing attorneys should expect to receive requests to use Closing Insight™.
  • The numbers of “findings” are being reduced by RealEC, meaning some technicalities that were previously reported as closing file irregularities will now be eliminated. This change is good news for closing agents and applies not only to Wells Fargo, but to other lenders as well. An example is that file numbers will no longer trigger a “data mismatch” for dashes (-) if the rest of the file number matches. Another example is that differences in capitalization, formatting, common abbreviations and punctuation will no longer trigger findings.
  • The Service Provider Verification of Identity (SPVI) form has been updated and will now allow all document signers to use one form. Also, the revised form no longer requires details on the method of identification, such as drivers’ license numbers of borrowers.
  • The SPVI form for FHA loans must be send to the lender prior to disbursement. For all other loans, this form may be provided to the lender with the other executed loan documents.
  • Settlement agents are not authorized to sign any documents on Wells Fargo’s behalf. Any documents requiring the lender’s signature should be sent to the loan processor or closer.
  • Wells Fargo Tax Services will no longer provide services as an affiliate. Instead, the tax services will be provided by Wells Fargo Bank, N.A. The tax service fees previously disclosed in Section B or C of the Closing Disclosure will now be disclosed in Section A.

This blog will continue to attempt to keep closing attorneys updated on lender communications as they are distributed.

How to employ a suspended lawyer

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Supreme Court offers guidance

Have you ever wanted to hire your suspended lawyer buddy?  What if your best friend from law school gets suspended and is desperate for work?  What if she is a great title abstractor? Now you can, under limited circumstances, hire her, and if you’re careful, you’ll keep your own license safe.

In February of 2015, the South Carolina Supreme Court softened its long-standing rule barring lawyers from employing disbarred or suspended lawyers, directly or indirectly, in any capacity. Under the former version of Rule 34* a lawyer without a current license could not be employed as a paralegal, investigator or in any capacity connected with a law practice.

Rule 34 was amended in 2015 to allow the employment of a lawyer suspended from practice for less than nine months under limited circumstances. The new version of Rule 34 allows these suspended lawyers to engage in:

  • Clerical legal research and writing, including document drafting, library or online database research, and searching titles, including obtaining information in the recording office; and
  • non law-related office tasks, including but not limited to, building and grounds maintenance, personal errands for employees, computer and network maintenance, and marketing or design support.

These suspended lawyers who are employed by a lawyer or law firm are forbidden from:

  • Practicing law in any form;
  • Having contact or interaction with clients, former clients or potential clients;
  • Soliciting prospective clients;
  • Handling client funds or trust accounting;
  • Holding himself or herself out as a lawyer; or
  • Continuing employment with the lawyer, law firm, or any other entity where the misconduct resulting in the suspension occurred.

The suspended lawyer must be supervised by a lawyer in good standing, and the two must submit a written plan to the Commission on Lawyer Conduct to outline the scope of the employment, anticipated assignments and procedures in place to insure no further misconduct.

After the amendment of Rule 34, the South Carolina Bar filed a petition with the Supreme Court to amend Rule 5.1 of the Rules of Professional Conduct, to detail the responsibilities of a supervising lawyer who elects to employ a suspended lawyer. By its order dated May 17, 2017, the Court adopted the Bar’s proposal and amended Rule 5.3 in addition to Rule 5.1.  You can read the entire order here.

If you have a heart of gold and want to help out a friend down on his luck, you now have the Court’s blessing and guidance. But, use caution and meticulously follow the rules to avoid finding yourself in your friend’s unfortunate position!