Real Estate

Facts of HOA-Developer dispute called “not for the weary”

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On February 8, the South Carolina Supreme Court issued an opinion* in a real estate case involving the I’On development in Charleston County. Justice Hearn’s opening sentence is revealing: “This case involves promises made and broken to homeowners by a developer and its affiliated entities.” The first sentence describing the facts is equally telling: “The facts of this case are complicated, and, (in the words of a prior Supreme Court opinion, citation omitted) are “not for the weary.”

I’On is described as a high-density residential development that comprises public squares, restaurants, shops, and homes designed to imitate historic urban housing, including a replica of downtown Charleston’s Rainbow Row. The opinion recites that after the Court rejected a referendum effort to restrict multi-use zoning, construction of I’On Phase II began around 2000.

In 2010 two individual homeowners sued the developer entities and individuals for various causes of action related to the nonconveyance of certain real property and community amenities within the neighborhood. A mistrial was ordered to realign the homeowner’s association as a plaintiff. A subsequent trial resulted in a jury verdict in favor of the HOA in the amount of $1.75 million for breach of fiduciary duty and in favor of an individual owner in the amount of $20,000 for negligent misrepresentation.

The history of the development includes a 1998 Property Report filed with the U.S. Department of Housing and Urban Development to comply with the Interstate Land Sales Full Disclosure Act. The report contained a paragraph in all caps promising that “recreational facilities” would be conveyed to the HOA upon completion of construction. But the report warned that certain recreational facilities may be owned and operated by persons other than the HOA.

The Court recited that shortly after the Report was issues, the developers began a pattern of conduct altering their initial promise to convey ownership of the disputed properties to the HOA. Later, an easement agreement was executed and signed by the same person in three different roles, as manager of the I’On Club, as president of the HOA, and as general manager of the I’On Company. A property owner expressed the concern that this agreement was “sort of shaking hands with yourself.”

The Court of Appeals waffled, first upholding the lower’s court’s verdicts, then, on rehearing, practically nullifying the verdicts.

I am not going to get down into the weeds on the complex facts, but I do want to make a couple of points for your information.

First, the statute of limitations issues were thorny, and the Supreme Court upheld the Circuit Court’s submission of these issues to the jury and stated that the facts supported the jury’s determination of the question of when the statute of limitations began to run.

Second, please pay attention to footnote 7. It states that the developer conceded on appeal that one individual owner’s contract to purchase his lot was a sealed instrument and thus has a twenty-year statute of limitations under S.C. Code §15-3-520. Please pay particular attention to whether your clients signed “sealed instruments” because liability under those instruments may be much longer than anticipated.

Otherwise, the Court was adamant that the verdicts were appropriate because of the “plethora of evidence presented of the Developers’ bad faith, broken promises, and self-dealing.”

Represent your developer clients well, dirt lawyers, to avoid losing cases like this one.  Read this case carefully and share it with your developer clients as an excellent lesson of what not to do!

*Walbeck v. The I’On Company, LLC, South Carolina Supreme Court Opinion 28134 (February 8, 2023)

FinCEN warns that Russian bad actors seek to invest in U.S. commercial real estate

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Financial institutions have reporting obligations under the Bank Secrecy Act, and Financial Crimes Enforcement Network (FinCEN) published an alert on January 25 warning financial institutions to be alert to potential investments in commercial real estate by sanctioned Russian elites, oligarchs, their family members, and the entities through which they act.  Commercial real estate lawyers should also be alert to these dangers.

You can read the Alert in its entirety here.

Use this link for a list of sanctioned Russian elites and their proxies.

Commercial real estate transactions are particularly vulnerable to exploitation by bad actors because of the complex financing methods and opaque ownership vehicles routinely employed. Because commercial properties are so high in value, buyers and sellers seek to use these methods and vehicles to limit their legal, tax and financial liability. In addition, foreign investors are common in commercial real estate.

The Alert points to the following types of transactions and vehicles that are so common that protection against invasion into them by bad actors would be difficult at best. The green, italicized words are mine:

  • The use of pooled investment vehicles, including offshore funds, to avoid due diligence and beneficial ownership protocols established by financial institutions. In other words, a bad actor may attempt to reduce its ownership percentage in a property to avoid normal due diligence for owners with higher percentages.
  • The use of shell companies and trusts to conceal ownership interests.
  • Involvement of third parties to invest in behalf of a criminal or corrupt actor.
  • Inconspicuous investments that provide stable returns. The properties may not be high end. They may be multi-family housing, retail, office, industrial or hotels in small and mid-size urban areas.

Thankfully, FinCEN’s Alert provides several red flags to assist in these difficult determinations.

  • The use of a private investment vehicle that is based offshore to purchase commercial real estate and that includes politically exposed persons or other foreign nationals (particularly family members or close associates of sanctioned Russian elites and their proxies) as investors. I had to Google the term “politically exposed person”. It means a person who has been entrusted with a prominent public function. These individuals generally represent a higher risk for potential involvement in bribery and corruption by virtue of their positions and influence.
  • When asked questions about the ultimate beneficial owners or controllers of a legal entity or arrangement, customers decline to provide information. In my former life in which I represented developers, when I asked questions about the identity of the beneficial owners, I got answers. It is a red flag if you are unable to obtain those answers.
  • Multiple limited liability companies, corporations, partnerships, or trusts are involved in a transaction with ties to sanctioned Russian elites and their proxies, and the entities have slight name variations.
  • The use of legal entities or arrangements, such as trusts, to purchase commercial real estate that involves friends, associates, family members, or others with close connection to sanctioned Russian elites and their proxies.
  • Ownership of commercial real estate through legal entities in multiple jurisdictions (often involving a trust based outside the United States) without a clear business purpose. Again, if you can’t get good answers to your questions, this is a red flag.
  • Transfers of assets from a politically exposed person or Russian elite to a family member, business associate, or associated trust in close temporal proximity to a legal event such as an arrest or an OFAC designation of that person. Remember that we check the OFAC (Office of Foreign Assets Control) list for individuals in our transactions using links provided by title companies. If you have questions about how to perform this function, call your friendly title insurance company underwriter. You can use this link.
  • Implementation of legal instruments that are intended to transfer an interest in commercial real estate from a politically exposed person or Russian elite to a family member, business associate or associated trust following a legal event such as an arrest or an OFAC designation of that person.
  • Private investment funds or other companies that submit revised ownership disclosures to financial institutions showing sanctioned individuals or politically exposed persons that previously owned more than 50 percent of a fund changing their ownership to less than 50 percent.
  • There is a limited discernable business value in the investment, or the investment is outside of the client’s normal business operations.

This is the fourth FinCEN alert on potential Russian illicit activity since Russia’s invasion of Ukraine. The Federal government is serious about policing these activities. I recommend that you contact your favorite title insurance underwriter any time you determine that sanctioned persons or their proxies involved in your transactions. Be careful out there!

Texas Attorney General investigating Home Title Lock

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Several years ago, a prominent Myrtle Beach real estate lawyer called me to suggest that our (title insurance) company should develop a product like Home Title Lock. That company advertises that it alerts homeowners if fraudulent or forged deeds are recorded in their chains of title. I contacted corporate leaders to explore this idea, and it was quickly decided that the product was virtually meaningless.

Last week, another prominent Myrtle Beach-area lawyer emailed me with news that the Attorney General for Texas is investigating the company. Here the South Carolina dirt lawyer’s direct quote, “After the number of older clients I have had who come into a transaction confused and scared by the talking heads on conservative media who have been schilling for this company, I am glad to see law enforcement taking an interest.”

Ken Paxton, the Attorney General, apparently agrees. He issued a press release on January 24, stating, “I won’t tolerate false, misleading, or deceptive advertisements targeted to any Texas consumers—especially Texas seniors. If Home Title Lock is misrepresenting its services or the need for its services I will put a stop to its unlawful behavior.”

The AG announced an investigation of this company for potentially violating the Texas Deceptive Trade Practices Act by misleading consumers with deceptive statements concerning the prevalence of home title theft and the need for this company’s services.

The press release states that Home Title Lock is a California-based entity that claims to provide 24/7 monitoring of a consumer’s home title. (How could that even be done?) The press release states that the company has received scrutiny in recent months over questionable advertisements, including its claim that the FBI calls home title theft “one of the fastest growing white-collar cyber-crimes in America.” Apparently, Home Title Lock admits that it markets to “older customers.”                      

The Texas AG’s office issued a Civil Investigative Demand on December 15 ordering the company to make documents available substantiating the following, among other matters:

  • Any home title theft resolution services;
  • Representative samples of customer contracts;
  • The claim that the Company monitors the title of consumers 24/7;
  • The claim that the Company provides nationwide monitoring;
  • The claim that like other white-collar crimes, title fraud remains under reported with losses totaling more than $5 million in 2015;”
  • The claim that a victim is responsible for payments incurred due to a fraudulent home equity loan. (“Now thieves take out massive loans using your home’s equity-leaving you with the payments and mountains of legal bills;”) and
  • The claim that the company offers “complete protection – including up to $250,000 in legal fees and expense coverage.”

I’m so glad to see this investigation is starting, and I hope other states follow.

Will 2023 be a “normal” year in real estate?

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The “Greenville Business Magazine” published an article on January 27 that should interest all dirt lawyers. The article, written by David Caraviello, is entitled, “Leaving the Frenzy Behind: Could 2023 Be a More ‘Normal’ Year in South Carolina’s Real Estate Market?” You can read the article in its entirety here.

The article outlines the frenzy of the 2022 real estate market in South Carolina which culminated in an acute inventory shortage. While industry leaders budgeted for 2023, they wondered whether home prices would plummet because of rising interest rates. The national picture may be bleak because of these factors, but the article points out that experts do not foresee a gloom-and-doom scenario for South Carolina.

I’ve seen several news sources recently, including this one, pointing out that South Carolina is a primary destination for consumers looking for milder winters and following jobs at BMW, Volvo, and other companies. The market does not look dismal for us.

Please take a minute to read the article. To some real estate professionals, it says, the scenario entering 2023 sounds “refreshingly normal,” although we may have forgotten what normal is.

Perhaps 2023 will return to the ordinary seasonal ebbs and flows to which law firms can adapt from a staffing and other cost standpoint. Maybe everyone will be able to take a vacation this year. Let’s hope so! Good luck out there!

MV Realty sued by Florida Attorney General

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This blog has previously discussed MV Realty PBC, LLC. South Carolina title examiners report they are discovering “Homeowner Benefit Agreements” or “Exclusive Listing Agreements” filed in the public records as mortgages or memoranda of agreement. The duration of the agreements purport to be forty years, and quick search revealed hundreds of these unusual documents filed in several South Carolina counties. The documents indicate that they create liens against the real estate in question.

The company behind these documents is MV Realty PBC, LLC which appears to be doing business in the Palmetto State as MV Realty of South Carolina, LLC. The company’s website indicates the company will pay a homeowner between $300 and $5,000 in connection with its Homeowner Benefit Program. In return for the payment, the homeowner agrees to use the company’s services as listing agent if the decision is made to sell the property during the term of the agreement. The agreements typically provide that the homeowner may elect to pay an early termination fee to avoid listing the property in question with MV Realty.

In response to numerous underwriting questions on the topic, Chicago Title sent an underwriting memorandum to its agents entitled “Exclusive Listing Agreements”. Chicago Title’s position on the topic was set out in its memorandum as follows: “Pending further guidance, Chicago Title requires that you treat recordings of this kind like any other lien or mortgage. You should obtain a release or satisfaction of the recording as part of the closing or take an exception to the recorded document in your commitments and final policies.”

Googling MV Realty results in a great deal of information. Real estate lawyers should familiarize themselves with this company and its program to advise clients who may question whether the program makes sense from a financial and legal perspective.

In December, Florida’s Attorney General sued the company calling the venture a “deceptive scheme”. The lawsuit seeks an injunction, preventing enforcement of the contracts with consumers, preventing future deceptive and unfair trade practices, and returning funds to consumers.

News sources report that the company is active in 23 states, including South Carolina, and that Attorneys General in several other states are investigating the activities of this company. News sources also report numerous lawsuits against consumers seeking to enforce these contracts. U.S. Senator Sharrod Brown (D-Ohio) has indicated the company could face scrutiny from the Senate Committee on Banking, Housing and Urban Development.

Dirt lawyers, pay attention to this situation. We will certainly see updates.

Second real estate case of the year rejects replacement mortgage doctrine

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SC Supreme Court discards arguments of ALTA and PLTA

Real estate cases can be absent from our Advance Sheets for months, but we have seen two cases already in 2023. In ArrowPoint Federal Credit Union v. Bailey* our Supreme Court was asked to adopt a novel replacement mortgage doctrine, but the Court deflected the question, deferring to the legislature, even though American Land Title Association and Palmetto Land Title Association filed amicus briefs in favor of the doctrine.

This is a real estate mortgage priority dispute between two institutional lenders concerning a residential property in Winnsboro.  Jimmy and Laura Bailey mortgaged their residence at 247 Morninglow Drive to Quicken Loans in the amount of $256,500. The mortgage was recorded on October 20, 2009. One week later, the Baileys closed an equity line of credit with ArrowPoint Federal Credit Union in the amount of $99,500. The second mortgage was recorded on November 4. ArrowPoint had record notice of the Quicken mortgage. On November 23, the Baileys refinanced the Quicken mortgage with Quicken, this time in the amount of $296,000.

In connection with the refinance, the Baileys executed an interesting document entitled “Title Company Client Acknowledgment”, which stated the only outstanding lien on the property was the prior Quicken mortgage. This statement was false. The Court stated that there was no clear explanation as to whether Quicken had the title searched at this point.

The Baileys used $257,459 from the refinance to pay off the first mortgage. On December 15, Quicken released the first mortgage and recorded the refinance mortgage. Quicken assigned the mortgage to U.S. Bank, the petitioner in this case.

(If these facts make you break out into a cold sweat, then you were around doing real estate closings at the break-neck speed we suffered during this time frame.)

The Baileys defaulted on the line of credit, and ArrowPoint filed this action seeking a declaration that its line of credit had priority over the Quicken refinance mortgage. Both lenders moved for summary judgment. U.S. Bank claimed it had priority under the replacement mortgage doctrine. The special referee and Court of Appeals agreed with ArrowPoint, and the Supreme Court affirmed. Both appeals courts concluded that adopting the replacement mortgage doctrine is a question for the General Assembly.

Dirt lawyers are intimately familiar with South Carolina’s race-notice statute (S.C. Code §30-7-10) which prioritizes liens based on notice and the recording date.

The Supreme Court recited that it had recognized the equitable subordination doctrine as an exception to the race-notice statute. The Court noted the right of subrogation is essentially a creation of the court of equity, which allows a person who is secondarily liable for a debt, upon paying the debt, to assume by law the place of the creditor whose debt is paid.  Decades later, the Court declined to recognize the doctrine for a lender that refinanced its own mortgage but failed to discover an intervening mortgage. The Court said in the case at hand that it had previously warned lenders of their duty to search titles!**

The Court noted that the replacement mortgage doctrine is another exception to the race-notice statute, and many jurisdictions either recognize the doctrine or follow its logic. Cases from other jurisdictions were cited, and the Restatement (Third) of Property was quoted. According to the Restatement, the replacement mortgage doctrine provides:

  • If a senior mortgage is released of record and, as a part of the same transaction, is replaced with a new mortgage, the latter mortgage retains the same priority as its predecessor, except
  • To the extent that any change in the terms of the mortgage or the obligation it secures is materially prejudicial to the holder of a junior interest in the real estate, or
  • To the extent that one who is protected by the recording act acquires an interest in the real estate at a time that the senior mortgage is not of record.

The Court said that it was required to respect the authority of the legislature on public policy matters and declined to sit as a “superlegislature” to second-guess the General Assembly’s decisions. The Court differentiated the equitable subrogation doctrine from the replacement mortgage doctrine by saying that the “race” begins with the original mortgage in the equitable subrogation situation, and the intervening lender suffers no loss. Under the replacement mortgage doctrine, on the other hand, the original first mortgage is satisfied of record and replaced with a new mortgage that is recorded after the intervening mortgage.

The Court also criticized the replacement mortgage doctrine because it dilutes the importance of title examinations. Lenders who seek to refinance their own mortgages, as Quicken did in this case, can easily search the title to discover the intervening lien. The last words of the case state, “Finally, we emphasize parties must conduct diligent title searches to protect their interests under the race-notice statute.”

I, for one, will not argue with that final statement. It now appears that if ALTA and PLTA want a replacement mortgage doctrine in South Carolina, they need to approach the legislature.

*South Carolina Supreme Court Opinion 28129, January 11, 2023.

**All the citations are omitted but are set out in detail in the subject case.  

Happy New Year dirt lawyers

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2023’s first real estate case is both humorous and sexy!

If real estate lawyers weren’t easily amused, our profession might live up to the common misconception that it’s boring. But the first South Carolina real estate case of 2023 is both funny and sexy. I’ll explain the funny part shortly. Sadly, the only thing sexy about this case* is that the property is occupied by two strip clubs. But let’s agree to be entertained where we can.

This is a specific performance case involving property in Charleston County. Clarke owned a strip club located at 2015 Pittsburgh Avenue in Charleston. The defendant’s predecessor in title owned a strip club across the street at 2028 Pittsburgh Avenue. The Supreme Court called the property at 2028 Pittsburgh Avenue the subject property, so we will, too. The subject property includes buildings and a parking lot.

In 1999, Clarke entered into a lease which permitted him to share the parking spaces on the subject property with the property owner. The lease contained the following language: “Right of First Refusal: Lessor grants the Lessee the right of first refusal should it wish to sell.”

Before we discuss what the Supreme Court had to say about this language, let me throw in my two cents. Don’t use the terms “lessor” and “lessee” when you draft leases. Use the terms everyone can understand, “landlord” and “tenant”. And please pay attention to prepositions. In this language, which party is “it”?  A drafter of real estate documents cannot be too precise!

Back to the case. I often read cases by starting with the dissent or concurrence. With complicated cases, the minority opinion often explains the holding quickly. This case isn’t complicated, but Justice Few really cut to the chase in his concurrence. And this is the funny part. Justice Few quips, “This instrument says nothing, does nothing, restrains nothing.” (Remember I admit to being easily amused.)

Justice James’ majority opinion goes into more detail.

When Clarke learned that his landlord had conveyed to subject property to Fine Housing for $150,000, he initiated this action for specific performance. Interestingly, the closing attorney failed to raise the lease and the right of first refusal with the purchaser, but Fine Housing admitted it had record notice of both.

The trial court ruled the right of first refusal is enforceable as to the entire property and ordered Fine Housing to convey title to Clarke upon his payment of $350,000. There is no explanation for this figure. Appraisals must have been involved. The Court of Appeals reversed, holding the right of first refusal is an unreasonable restraint on alienation and is therefore unenforceable.

The Supreme Court affirmed, stating that whether a right of first refusal is enforceable turns on whether the right unreasonably restrains alienation. The Court agreed with The Restatement (Third) of Property: Servitudes §3.4 and held that the factors to be considered include: (1) the legitimacy of the purpose of the right; (2) the price at which the right may be exercised; and (3) the procedures for exercising the right. The Court further held that these factors are not exclusive, and in this case, agreed to address another point raised by Fine Housing—the lack of clarity as to what real property the right encumbers.

Clarke argued that the lease provides the right applies to all the property, the price should be determined by the seller, and South Carolina law requires that the right should be exercised within a reasonable time.

Fine Housing argued that the lease merely identifies the location of the leased parking spaces, and the remaining language does not provide the clarity needed to identify the property intended to be encumbered by the right. The Supreme Court agreed, holding that the uncertainty as to what property is encumbered supports the conclusion that the right is an unreasonable restraint on alienation.

The Court also agreed with Fine Housing that the failure of the right to determine a price and the procedures for its exercise also created an unreasonable restraint on alienation.

The bottom line is that the Court held the language to be so imprecise as to be unenforceable. While real estate lawyers are always interested in obtaining the best deal for clients, the second most important aim of drafting real estate documents should be clarity.

Always keep in mind how Justice Few dismissed the language that says nothing, does nothing and restrains nothing! You never want language you draft to be dismissed so easily!

*Clarke v. Fine Housing, Inc., South Carolina Supreme Court Opinion 28126 (January 4, 2023)

Fifth Circuit addresses short-term rental challenge

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This blog has previously discussed challenges by various cities, including cities in South Carolina, to short-term rentals in residential areas.

Vrbo and Airbnb are two go-to websites to find interesting short-term rentals in vacation locations. Sometimes a cabin or house seems much more appropriate and fun than a hotel room for a family get-away. Having a kitchen and room for dining is often a plus.

Arguments against such rentals often focus on noise and parking problems in otherwise quiet residential subdivisions.

Rules vary greatly in the cabins and houses we’ve rented, but a common theme seems to be that parties are not allowed. I’ve also seen limits on the number of cars that can be accommodated and, of course, the number of people permitted. Pets may or may not be allowed.

The Fifth Circuit Court of Appeals recently addressed such a challenge in Hignell-Stark v. City of New Orleans, 46 F. 4th 317 (August 22, 2022). Thanks to Professor Dale Whitman of the University of Missouri at Kansas City Law School via the Dirt Listserv for information on this case.

An ordinance in the City of New Orleans required an owner to be a resident of the city to obtain a license to become a landlord allowing short-term rentals. When the plaintiffs challenged this ordinance using a “takings” theory, the Fifth Circuit held that theory to be inapplicable because permission to make short-term rentals of a residential unit is not a property interest. It is instead, according to the Court, a privilege.

The plaintiffs also argued that the ordinance was an undue burden on interstate commerce, and the Court agreed, stating that an ordinance that discriminates against interstate commerce is per se invalid unless there are no available alternative methods for enforcing the city’s legitimate policy goals. The ordinance in question was a blanket prohibition against out-of-state property owners’ participation in the short-term rental market. The Court pointed out that the ordinance doesn’t just make it more difficult for non-residents to compete in the market for short-term rentals in residential neighborhoods; it forbids them from participating altogether.

The Court pointed to alternative methods for achieving the city’s legitimate goals of preventing nuisances, promoting affordable housing, and protecting neighborhoods’ residential character. More aggressive enforcement of nuisance laws, increased penalties for nuisance violations, increased taxes on short-term rentals, requiring an operator remain on the property during night hours, and capping the number of short-term rentals licenses in particular zoning district might be alternatives.

The ordinance was held unconstitutional and void because the city’s objectives could be addressed in other ways that did not burden interstate commerce.

What do you think? Would you be comfortable with short-term rentals in your neighborhood?

A Blog for Thanksgiving Week

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The top ten things this dirt lawyer is thankful for professionally…

As a happy United Methodist (by virtue of my marriage 42 years ago to a P.K.* who refused to be baptized again at a Baptist church) I believe an attitude of thankfulness makes life better.

So, from a real estate standpoint, here are the top ten things for which I’ll give thanks this Thursday:

  1. We live and work in a state where closing real estate transactions is the practice of law and where, by hard work and vigilance, we are in a position to protect the interests of our clients.
  2. We help our consumer clients achieve one of their biggest dreams, home ownership.
  3. We help our commercial clients purchase, lease, finance and refinance properties. These activities allow our clients to make money and allow our communities to thrive.
  4. We don’t ignore title problems. We find them, discuss them, cure them, obtain insurance over them, and, hopefully, make them better for the property owner and lender, and for the next lawyer.
  5. If things go well, everyone involved in the closing is “happy”.
  6. We generally, as a community of real estate lawyers, seek to get along with each other. (Don’t make me point out exceptions to this rule!) Older lawyers mentor younger lawyers. Lawyers ask each other for guidance and, generally, that guidance is given with a smile. We train lawyers and paralegals, we serve on committees, we speak at seminars, write papers and books, participate in the Bar’s and the law schools’ mentorship programs and handle pro bono matters. As lawyers, we try to be good citizens.
  7. Those of us who weathered the financial downturn that began in 2007 encourage those of us who have not that there is life on the other side. If we suffer from another downturn in 2023, we will get through it.
  8. Technology has made our lives easier in the last few years, and improvements in technology will continue to make our lives easier. (I know that technology has also led to a great deal of fraud that we must fight every day, but I’m being positive here! Work with me!)
  9. I am thankful for the team of dedicated professionals who worked with me before I retired and who continue to take the best care possible of title insurance agents (dirt lawyers and their staff members.)
  10. I am thankful for the network of attorney agents who ably handle real estate matters throughout the Palmetto State.

I know. I know. Many of you are shaking your heads and pointing out that I no longer work “in the trenches” and don’t see the problems that plague real estate lawyers in the form of the constantly changing environment, changing technologies, difficulties in hiring and retaining staff members, increased competition and encroachment into “our” part of the closing by third parties.  I do see those difficulties, I am sympathetic, and that team of professionals I used to work with are constantly seeking improvements.

But, for Thanksgiving week, let’s pause for just a moment to be thankful!

*I’m guessing most South Carolinians know what a P.K. is, but, just in case you don’t, it’s an acronym for Preacher’s Kid, which I am told means the worst kid in church. My husband tells two stories to demonstrate:  (1) His father once spoke to him from the pulpit and threatened to have him sit with him during the sermon if he didn’t behave; and (2) There are unconfirmed rumors that my husband’s initials have been carved in various church pews across South Carolina.

Fannie Mae will accept attorney opinion letters in lieu of title insurance

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Fannie Mae’s updated Selling Guide now allows attorney opinion letters in lieu of title insurance in some circumstances. This change aligns Fannie Mae with Freddie Mac’s similar announcement. Will the marketplace change dramatically because of these policy announcements. I hope not and I doubt it.

Fannie Mae touts its change as a method to reduce costs for borrowers. I don’t believe South Carolina lawyers will issue title opinions for residential loans that will be less expensive than title insurance. I know I wouldn’t.

The guidance indicates opinion letters will not be accepted where the loan is secured by a condominium, a leasehold estate, or a manufactured home.

According to the guidance, the attorney’s title opinion letter must:

  • be addressed to the lender and all successors in interest of the lender
  • be commonly accepted in the area where the subject property is located
  • provide gap coverage for the duration between the loan closing and recordation of the mortgage
  • list all other liens and state they are subordinate
  • state the title condition of the property is acceptable and the mortgage constitutes a lien of the required priority on a fee simple estate in the property

Do you see any problems with this list? I’ve never issued an opinion letter that provided gap coverage and I don’t recommend that you accept that risk in your transactions. What happens if you update title and discover a mechanic’s lien recorded in the gap? That lien would become your problem as the attorney who agreed to cover the gap as of the date of the opinion letter or the closing date.

Before the general use of title insurance, attorney’s routinely issued opinion letters to lenders and buyers. But title insurance has historically been determined to be the better choice.  Attorneys should not be responsible for title problems that cannot be discovered through a title examination.  A forgery in the chain of title, for example, would be covered by title insurance but should not be covered by an attorney’s opinion. The same may be true for missing heirs, matters that may be apparent from a visit to the property and survey matters.

But it concerns me that lenders who accept attorney’s opinions may perceive those items (and others) to be covered. To ensure your opinion letters are not perceived to cover matters outside the title examination, proper “exceptions” should be added to your letters. To protect you, your law firm and your malpractice carrier, your letters should contain many paragraphs of exceptions!

My best advice is to resist this proposed change in the marketplace. I believe title insurance provides the best coverage for owners and lenders, and it indirectly provides protection for closing attorneys. We can be encouraged that Freddie Mac’s similar announcement two years ago has not greatly impacted our industry. Let’s hope Fannie Mae’s announcement will have a similar reaction.