Lawyer publicly reprimanded for closing irregularity

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Most South Carolina dirt lawyers were disappointed with the result of the 2017 Quicken Loan case which did not hold, as many had hoped, that a South Carolina licensed lawyer must be at the center of each residential real estate closing, overseeing each step, and ensuring that the consumer client’s interests are protected in each step. That case blessed a scenario where an out-of-state entity oversaw the closing process and divvied up the required lawyer functions among various functions.

A disciplinary case* from August of 2021 demonstrates just one way the scenario approved by Quicken can go awry.

The lawyer was hired by Superior Closing and Title Services, LLC to serve as closing attorney for a home purchase for an attorney’s fee of $200. That fee is our first clue about the type of closing that is the subject of this case.  The Court refers to the purchaser as “C.W.” The lender was 1st Choice Mortgage, and the loan was assigned to Wells Fargo.

Almost two years after the closing, Wells Fargo demanded 1st Choice repurchase the loan because of a discrepancy with the title. The Court states “it was discovered” that C.W. was a straw purchaser who never made a payment on the loan.  The lawyer argued, and the Office of Disciplinary Counsel did not dispute, that the lawyer was unaware of the straw purchase. The closing statement showed a payment by C.W. of $11,598.16. At the closing, a copy of a $12,000 cashier’s check made payable to Superior Closing was shown to the lawyer and to 1st Choice Mortgage as the source of the down payment.

The lawyer signed the normal certification at closing representing that the settlement statement was a true and accurate account of the transaction.

The $12,000 check was never negotiated, and 1st Choice never received the funds. 1st Choice paid over $39,000 to settle the claim with Wells Fargo.

1st Choice sued Superior Closing and the lawyer. The lawyer represented that Superior Closing prepared the closing statement and acknowledged that he failed to properly supervise the preparation of the settlement statement and the disbursement of funds. As a result of the lawsuit, a $39,739 judgment was filed against the lawyer and Superior Closing. The judgment has been satisfied.

We all know how challenging it is to supervise the disbursement of a residential closing where the funds do not flow through the closing attorney’s trust account. This disciplinary case demonstrates the danger of skipping that problematic but necessary step.

*In the Matter of Ebener, South Carolina Supreme Court Opinion No. 28047 (August 11, 2021)

This tax sale case has an interesting twist

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The alleged successful purchaser seeks to void the sale!

I’ve always believed our courts will happily void any tax sale on the flimsiest of technicalities, but apparently not when the purported tax sale buyer is the party seeking to get out of the purchase.

Alterna Tax Asset Group, LLC v. York County* is a Court of Appeals case from July dealing with a 2014 tax sale. Alterna claims it was the successful bidder at the sale and sought to void the sale and cancel its ownership relying on §12-61-20 of the South Carolina Code, which reads, in part:

“Any…person…(that) has purchased at or acquired through a tax sale and obtained title to any real or personal property, may bring an action in the court of common pleas of such county for the purpose of barring all other claims thereto.”

The complaint alleged that the title to the property was clouded because of York County’s failure to provide proper notice. The complaint set up four causes of action: (1) declaratory judgment; (2) injunctive relief, (3) quiet title, and (4) unjust enrichment.

The Master consulted the County’s records and took judicial notice that Alterna was neither the purchaser of the property at the tax sale, nor the owner currently listed on the deed. The Master ruled Alterna was not a real party in interest and lacked standing. The Master also ruled that the quoted code section does not create a valid cause of action to void a tax sale.

Alterna appealed claiming the Master erred in taking judicial notice of the public records. The Court of Appeals termed this use of judicial notice “problematic” but decided the appeal on what it called a more fundamental issue:  whether, as the alleged tax sale purchaser, Alterna may seek to rescind its successful purchase based on the facts in this case.

Since the purpose of the code section is to clear tax titles, the Court held that Alterna states to viable cause of action when it seeks to defeat rather than defend its title.

The Court accepted for the purposes of this appeal from a 12(b)(6) motion Alterna’s allegation that it purchased the property at the tax sale and concluded that no valid causes of action for declaratory judgment or injunctive relief existed.

The Court then stated that the remaining questions whether a winning bidder at a tax sale may use the quiet title doctrine or claim of unjust enrichment to defeat rather affirm the bidder’s title, are novel questions in South Carolina. The Court held that the complaint does not allege a proper cause of action for quiet title because there is no existing adverse claim. Neither the County nor anyone else was challenging Alterna’s tax title, so the claim is “imaginary or speculative”.

The unjust enrichment cause of action, which claimed the county was enriched by picketing the tax sale proceeds yet delivering a clouded title, collides, according to the Court, with South Carolina Code §12-51-160, which establishes as a matter of law the presumption that a tax deed is prima facie evidence of good title.

The Court further noted that Alterna’s alleged cloud on the title, that York County’s notification was defective, was a matter of public record visible to Alterna before the sale.

Finally, the Court held that Alterna’s claim was not a justiciable controversy. Alterna claimed its title was hopelessly clouded and would someday be snatched away by someone with a superior claim. The court resisted the request to “tame paper tigers or pass upon issues not subject to a genuine, concrete dispute.”

This is a very interesting case! I’ll keep you posed of future developments.

*South Carolina Court of Appeals Opinion 5836, July 14, 2021

Court decides an interesting, but unpublished, case on the effect of a plat notation

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Unpublished opinions don’t typically get my attention, but my friend, Bill Booth, sent this one* to me because he found it interesting, and I do, too. As a reminder, unpublished opinions have no precedential value, but they sometimes provide insight on how the Court might react in a similar situation, at least under the current makeup of the court.

The issue in this case was whether a notation on a subdivision plat that certain lots were “for agricultural use only” created a valid restriction of the use of the lots. Mikell Scarborough, Master-in-Equity for Charleston County, granted summary judgment, relying on extrinsic evidence to conclude that there was no intent to create a restriction despite the plain language on the face of the plat. That decision was affirmed.

The Court cited familiar cases holding that restrictive covenants are contractual in nature and must be strictly construed in favor of the free use of property. The Court also referred to cases holding that when a deed describes land as shown on a plat, the plat becomes a part of the deed. The interesting twist became whether the plat notation created an ambiguity that would allow the introduction of extrinsic evidence.

The Court found that the language in the plat was not ambiguous, but that the origin of the note created the ambiguity. The surveyor provided an affidavit to the effect that the Charleston County Planning Commission placed the agricultural use restriction on the plat “for the purpose of indicating that Charleston County would not, at that time, approve building permits for the lots because (the lots in question) did not meet current minimum standards for a modified conventional sub-service disposal system.”

When the plat was submitted for approval, the property owners included a letter explaining they were aware that the land possessed poor soil conditions for septic systems. The letter requested that the subdivision be approved with the stipulation that any lot that did not support a septic system would be restricted from becoming a building lot until public sewer service became available.

The case doesn’t make this point clear, but I am assuming the Appellant sued other lot owners who had built on their lots despite the plat notation. In other words, the Appellant wanted the restriction enforced as to other lots, not the lot the Appellant purchased. Interestingly, one house had been built before the Appellant purchased its lot.

A representative of the Appellant claimed he relied on the plat notation and that his title insurance company told him the lots were restricted. The Court found it significant, however, that the property owners who recorded the plat did not intend to restrict the property.

The Appellant argued that the deeds for all the lots specifically state that the property is subject to all restrictions, reservations, easements and other limitations that appear of record, including on the Plat. The Court held, citing 20 Am. Jur. 2d Covenants, Conditions, and Restrictions §151 (2015) that common “subject to” language does not create a restriction where none exists.

The Appellant also argued that an agricultural use exception in the title insurance policy was evidence that the restriction ran with the land, but the Court held that the title insurance company was merely noting the provision was on the plat so that it would not be liable if the Appellant could not build on its lot.  

The Court concluded that the record does not contain a scintilla of evidence to support the imposition of a building restriction on the Respondents’ lots.

Carpenter Braselton, LLC v. Roberts, South Carolina Court of Appeals Unpublished Opinion No. 2021-UP-280.

SC Supreme Court deals with Rock Hill stormwater issue

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Justice Few declares piping storm water under a house is “wrong”

I love a case where a separate opinion (usually a dissent) cuts to the chase and explains in a few words a multiple-page quagmire.  That’s what we have in Ray v. City of Rock Hill*, a case decided on August 4 by the South Carolina Supreme Court.

Lucille Ray sued the City of Rock Hill for inverse condemnation, claiming her property was taken as a result of stormwater flowing through pipes under City streets into a terra cotta pipe that runs behind her property. The circuit court granted summary judgment to the City, and the Court of Appeals reversed, holding a genuine issue of material fact exists as to whether the City engaged in an affirmative, positive, aggressive act sufficient to support the inverse condemnation claim. The Supreme Court modified and affirmed that decision, remanding the case for a determination on that issue.

The facts are particularly interesting for dirt lawyers. Ray purchased her house on College Avenue in 1985. Before the house was built in the 1920s, someone—there is no record as to who—installed a 24-inch underground terra cotta pipe under the property. The property and the pipe are located at the topographical low point of a 29-acre watershed. Three stormwater pipes installed and owned by the City collect stormwater and transport it under various streets in the neighborhood. Stormwater runs through the pipe to a catch basin directly in front of Ray’s house. When the water reaches the catch basin, it is channeled under Ray’s house to the back of her property. The pipe has been channeling stormwater in this fashion for roughly 100 years although the record reflects no evidence of an easement.

You won’t be shocked that Ray’s property had a history of sinking and settling. In 1992, Ray saw her gardener fall waist-deep into a sinkhole. The house’s roof was subject to bending and movement. The steps on the front porch sank. In 2008, Ray contacted the City and was told about the pipe running under those steps. (This exchange supported the City’s claim that the statute of limitations had run on a damages claim.)

In 2012, Ray brought this action seeking inverse condemnation and trespass. Other relief was sought and the South Carolina Department of Transportation was added as a defendant, but those issues are not relevant to this appeal. Shortly after Ray brought the suit, the City began maintenance work on a sewer line beneath College avenue.

To get to the sewer line, the City had to dig up part of College Avenue in front of the property and to sever three stormwater pipes from the catch basin. The basis of the inverse condemnation claim is that the City’s reconnection of the pipes to the catch basin was an affirmative, positive, aggressive act. That issue was returned to the circuit court for determination.

Justice Few’s separate opinion (not categorized as a concurrence or a dissent) is cogent. He wrote to make two points. First, the City should not be piping stormwater under Ray’s house! It is wrong, he said, and he doesn’t care who built the pipe or whose fault it is that the house is sinking because of the water. “The City should do the right thing and fix the problem.”

Justice Few’s second point is that all wrongs are not subject to redress in our civil courts. To the extent Ray’s inverse condemnation theory is valid, he said, the taking occurred many years ago, either when the pipes were installed or when the deterioration of the pipes began to harm the property. He said it makes no difference that the pipes were reconnected in 2012. The effect of that act was to continue to run storm water under property Ray alleges had already been taken.

Justice Few concluded that there is simply no right of action available under an inverse condemnation theory and that the circuit court correctly dismissed that claim

I look forward to what happens next!

* South Carolina Supreme Court Opinion 28045, August 4, 2021

Do we face lurking condo repair problems like those in Surfside, Florida?

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This is a difficult subject, and I’ve waited to address it for time to pass since the tragic June 24 collapse of the 136-unit Champlain Towers South condo project in Surfside, Florida.

South Carolina has many aging condominium projects, particularly along our coast. And we have an earthquake fault line to consider. Do our local homeowners’ association boards face expensive repair and reserve dangers similar to those in Florida?

Dale Whitman, the esteemed retired professor from the University of Missouri School of Law who moderates the national Dirt Real Estate Lawyers Listserv (Dirt@listserv.umkc.edu) has commented on Florida’s concerns in this regard. (If you’re not already following this listserv, I highly recommend it for all South Carolina dirt lawyers.)

Professor Whitman pointed to two informative and insightful news stories on the collapse, one from NBC News and the other from the Miami Herald.

The legal news following the collapse is that the Florida Bar has appointed a committee to review existing Florida legislation and to make recommendations for changes. Apparently, Florida law requiring reserve studies is weak and can be waived by a majority of the unit owners. To my knowledge, South Carolina has no such legislation.

It was estimated that nearly $17 million would have been needed to make the necessary repairs to the building that collapsed, but that available reserves amounted to only $770,000. Massive special assessments (more than $300,000 per unit) would have been needed. Collection was ongoing at the time of the collapse. But many unit owners simply did not have access to funds in that amount.

Professor Whitman wrote in the listserve on July 8:

“A much more robust program of reserves would have been needed to avoid this problem. But how much?  The need for a large expenditure to shore up the building’s structure is inherently unpredictable; it isn’t like a roof with a 20-year life, for example. But some sort of prediction is nonetheless necessary. Pick a number: say, a goal of achieving a reserve of 20% of the building’s original capital cost over the first 20 years of the building’s life, with continuing growth at the same rate thereafter. That would mean that the original assessments would be considerably higher than they would be with a more modest, conventional reserve program. It would add to the residents’ monthly cost and would make ‘affordable housing’ harder to achieve. But isn’t that better than a catastrophic collapse?”

He also speculated that periodic structural inspections by qualified engineers may be necessary. The building that collapsed apparently had such an inspection in 2018. That inspection revealed structural problems that could have been repaired for $9 million.

A couple of Florida Counties require aging high-rises to go through inspections after they reach 40 years of age. Failing the inspections can result in the loss of certificates of occupancy. But there is no similar state-wide requirement in Florida or South Carolina.

Much more stringent building inspection and condominium law requirements may be needed in South Carolina. I believe our HOA legislative scheme provides only the bare bones necessary to create and maintain a horizontal property regime. And I am not aware of any state-wide legislation that requires periodic inspections of high-rise buildings.

We should watch to see what Florida does and consider making similar changes. These issues are difficult to legislate and enforce but preventing comparable tragedies in South Carolina must be worth the effort.

South Carolina legislature passes “IPEN” electronic notary law

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Don’t know what that is? Neither did I!

South Carolina rarely leads the pack when it comes to innovation, and we certainly didn’t break our streak with the early passage of an electronic notarization law. When we did pass legislation, it undoubtedly wasn’t the RON (remote on-line notary) legislation we need to move into this century. Instead, we have “IPEN” legislation—in person electronic notary, a term I had never heard. Why do we need in person electronic notarization when old fashion notarization is easier?

Doing my best to put a positive spin on this idea, perhaps we have taken baby steps.  Our legislature passed the South Carolina Electronic Notary Public Act on May 13, and Governor McMaster signed it into law on May 18. Our Code was amended to add Chapter 2 to Title 26. Chapter 1 was also amended.

At first blush, the new law does appear to be RON legislation, but buried deep inside is the requirement that signatory be in the notary’s presence. This provision defeats the whole purpose of RON legislation.

The last time I was at an in-person seminar with a roomful of South Carolina real estate lawyers where the topic of RON was discussed (and that seminar was pre-COVID, so it’s been awhile), several lawyers pushed a collective panic button and encouraged the group to lobby against this idea because they believed RON legislation may lead to electronic notaries, not South Carolina lawyers, supervising closings.

The new law specifically addresses that issue. Section 26-1-160 was amended to add Section 5, “Supervision of attorney”, which reads, “Nothing in this act contravenes the South Carolina law that requires a licensed South Carolina attorney to supervise a closing.”  Maybe this is the baby step we need. If lawyers are assured that this provision will be included in RON legislation, they may support that legislation.

Implementing the new law we do have will not be a simple process. Our Secretary of State has significant work to do to get ready to receive applications for registration of electronic notaries. The Secretary of State must create the regulations necessary to establish standards, procedures, practices, forms and records relating to electronic signatures and seals. The regulations must create a process for “unique registration numbers” for each electronic notary. The Secretary of State must approve “vendors of technology.”

Each electronic notary must secure an electronic signature, an electronic journal, a public key certificate and an electronic seal. A form called a “Certificate of Authority for an Electronic Notarial Act” must accompany every electronic notarization. I’m not sure any of this is worth the effort unless it facilitates the implementation of true RON legislation that may be passed in the future. The earliest the new legislation can be considered is January of 2022.

South Carolina dirt lawyers: let’s get behind RON legislation with the provision requiring lawyers to continue to supervise closings. We really don’t have anything to lose, and there is much to gain!

Special thanks to Teri Callen, professor and dirt lawyer extraordinaire,  who helped me figure out what is going on with this legislation!

SC Supreme Court’s footnote impacts easement law

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In a March 17 case*, the South Carolina Supreme Court made a thought-provoking comment on easement law through a footnote.

As with most real estate cases involving neighbors, the facts in this case are interesting. (I should probably admit the facts may only be interesting to dirt lawyers.) Paul and Susan McLaughlin bought Lot 22 in Seabrook Island and spent the next six years meeting and negotiating to build on the lot because of the existence of a pipe and an easement they were told had been abandoned.

The backstory involves a draining pipe and easement running through the backyards of seven lots. The easement and pipe were originally owned by Seabrook Island Property Owners Association (SIPOA). Over the years, the pipe degraded and became porous such that, aside from carrying away stormwater from the road, as intended, it also drained standing water from the lots. Nearly 20 years later, SIPOA installed a new draining system for the road, rendering the old one obsolete. At a property owner’s request, SIPOA abandoned the easement, but left the porous pipe in place.

After six excruciating years, the McLaughlins received home design and location approval from SIPOA, including the right to build on a former “no-build area” occupied by the abandoned easement. They removed the pipe and built their new home.

Neighbors Richard and Eugenia Ralph owned Lot 23 and sued claiming their backyard flooding became even worse as a result of the pipe removal. The jury awarded the Ralphs $1,000 in “nominal” damages. The Court of Appeals reversed and remanded for a new trial on damages alone, and the Supreme Court reversed the Court of Appeals and reinstated the jury’s verdict.

I won’t dwell on the remainder of the opinion, which deals mostly with litigation issues, but I wanted to point dirt lawyers specifically to footnote 5.

The Ralphs claimed some sort of ownership right in the abandoned easement, which the Supreme Court did not feel the need to address. But the Supreme Court did express concern over the Court of Appeals discussion of a seminal easement case in South Carolina, Blue Ridge Realty Co. v. Williamson**.

Blue Ridge is the case we rely upon for the right of property owners who buy lots with reference to a plat to use the roads shown on that plat. Without that case, many properties would have access issues.

The Supreme Court voiced concern over the alteration of a quote from the Blue Ridge case by the Court of Appeals. The Court of Appeals quoted the case: “It is generally held that when the owner of land has it subdivided and platted into lots and (easements,) and sells and conveys the lots with referenced to the plat, he hereby dedicates said (easements) to the use of such lot owners (and) their successors in title…”

Blue Ridge actually said, “It is generally held that when the owner of land has it subdivided and platted into lots and streets and sells and conveys the lots with reference to the plat, he thereby dedicates said streets to the use of such lot owners, their successors in title, and the public. (Emphasis added by the Supreme Court in the current case.)

The Supreme Court said the scenarios presented by the current case and the Blue Ridge case were fundamentally different. Blue Ridge involved the claim of a property owner to use a public street shown on a recorded plat. In the current case, lot owners whose property contains an easement intended for the benefit of the HOA claims an ownership interest because the easement inadvertently benefits the property owner as well.

In Blue Ridge, the property owner and its successors in title were the intended beneficiaries.  Here, the opposite is true. The owners of Lots 22 – 28 were never intended to benefit directly from the easement. The fact that they did so, according to the Supreme Court, was a pure accident, caused by the unexpected degradation of the pipe. In short, Blue Ridge does not stand for the proposition for which it was cited by the Court of Appeals, according to the Supreme Court.

This distinction might be significant in many of the title scenarios real estate practitioners face routinely.

Interesting indeed! I also find it interesting that the Supreme Court refers to the Blue Ridge case, as we dirt lawyers refer to it, as the Williamson case, but that’s a blog for another day.

*Ralph v. McLaughlin, South Carolina Supreme Court Opinion 28015, March 17, 2021.

**247 S.C. 112, 145 S.E.2d 922 (1965).

Protracted litigation leads to noteworthy federal title insurance case

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Early in my legal career, I searched a title prior to contentious litigation surrounding a commercial tract in Horry County. I was eight months pregnant with my son at the time. Title examiners as old as I am will remember we used to pull huge books down from high shelves to search titles in South Carolina. I remember this project so well not because of the difficult work in my puffy condition, but because of the time it took to resolve the litigation. When we finally received the final order, my son was in the second grade.

That timing may not hold a candle to the case decided last year in The United States District Court for South Carolina surrounding a tract in Dorchester County. Dudek v. Commonwealth Land Title Insurance Company* is the culmination (I hope) of what the court calls a “long- standing and enduring legal battle” over an eight-acre tract that was divided into two parcels of six and two acres, respectively.

Summarizing the almost undisputed facts as briefly as possible, plaintiffs Stephen Dudek and Doreen Cross entered into a contract to purchase the six-acre tract in 2012. A third party, Molly Morphew, entered into a back-up contract with the sellers to purchase the property in the event the plaintiffs’ purchase fell through. Both parties ultimately sued the seller for specific performance, and the plaintiffs in this case prevailed.

Dudek and Cross purchased the property in 2017 and obtained a title insurance policy from Commonwealth. The litigation with Morphew continued with two subsequent suits, the first alleging fraud and abuse of process in the purchase, and the second seeking to enforce a contract provision setting up a water and sewer easement in favor of the two-acre tract, which by this time had been purchased by Morphew. Dudek and Cross filed a title insurance claim on the easement issue, and Commonwealth denied the claim relying on an exception for easements and the exclusion for risks created by or known to the insured prior the policy date.

I’m eliminating a lot of facts and procedural nuances that title insurance nerds like me will find fascinating, so pull the case for the long story.

The Court held Commonwealth had no duty to defend the insured property owners, relying on the fact that they knew about the easement before they closed. Simple enough, right?

The more convoluted and interesting discussion revolves around the treatment of the policy of the easement issue.  The covered risk in question in the policy was that “someone has an easement on the Land”. The policy contained two exceptions, however, one for unrecorded easements and one for recorded easements. The court stated that the policy simultaneously extended and eliminated coverage for easements, rendering the policy provision meaningless and illusory.

Title insurance agents routinely add specific exceptions to title insurance policies to limit coverage. This case cautions against adding exceptions that operate to prevent all coverage from a covered risk. We will all need to be careful about this holding as time progresses.

*466 F. Supp. 3d 610 (D.S.C. 2020)

ALTA/NSPS Survey Standards have been revised

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Changes will take effect February 23, 2021

Almost every commercial transaction requires an ALTA/NSPS survey, so commercial practitioners are familiar with the most recent 2016 guidelines. Those guidelines are reviewed every five years, and a new version will be in effect beginning February 23, 2021.

You can review the new standards in their entirety, including a red-lined version, here.

The changes were made primarily to make the standards easier to understand and to correct a few inconsistencies. One change was made as a result of the 1995 U.S. Supreme Court case, Gutierrez de Martinez v. Lamagno, which held the word “shall” is a false imperative that actually means “may”. As a result, the word “shall” in the standards was changed to the word “must” to indicate an obligation or imperative.

Section 5.E was revised to clarify that the surveyor must only note observed evidence of easements, servitudes and other uses which are “on or across” the surveyed property instead of those which affect the surveyed property. This section also changes the necessity to locate utility poles within ten feet of the surveyed property from the prior requirement of five feet.

A change to Section 6.C states that if the surveyor becomes aware of a recorded easement not listed in the title evidence, the surveyor must advise the title company (in our case, the closing attorney) of the easement. If evidence of the easement isn’t provided to the surveyor, the easement must be shown or explained. This section was also revised to allow the surveyor to omit matters of record that are not survey related from the summary of title matters.

The introductory paragraph of Table A optional items has been revised to clarify that the wording of a Table A item may be negotiated. Item 6 of Table A was modified to clarify that zoning information must be provided to the surveyor. Item 11 regarding underground utilities has been simplified to two choices: (a) plans and/or reports provided by the client; or (b) markings coordinated by the surveyor pursuant to a private utility request. Item 18 (wetlands) was deleted. If a wetlands delineation is required, it must now be negotiated as an additional Table A, item 20. Item 19 was revised to allow for off-site easements appurtenant to be surveyed in their entirety.

We have a couple of weeks to become fully familiar with the new standards.