title examination

Dirt lawyers: guard your clients and your offices against sloppy title search practices

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Our Supreme Court has made it crystal clear that searching titles is the practice of law. For every real estate closing, the closing attorney should perform or supervise the title examination. Theoretically, all title insurance and malpractice claims caused by title search errors can be prevented. Having safe title examination practices in real estate closing offices would go a long way toward minimizing claims and protecting clients and their properties!

The following are some dangerous practices that lead to claims:

  • Hiring title examiners who are inexperienced, who cut corners and who are not covered by errors and omissions insurance coverage.
  • Failing to properly instruct title examiners as to how titles should be searched. Whether law firm employees or outside abstractors are used, the closing attorney should develop and use his or her own set of title examining procedures.
  • Failing to require title examiners to pull documents. It is not sufficient to search titles using indexes. Doing so puts the lawyer and client at the mercy of the county employee who typed the index.
  • Failing to review chain documents. The attorney should review chain documents. Attorneys spot issues that are missed by abstractors. If a link in the chain of title is a foreclosure or an estate, the foreclosure file or the estate file should be reviewed.
  • Failing to use proper search periods. The long-standing search period standard in South Carolina is sixty years. Title insurance companies have shortened this standard to forty years, particularly for residential transactions. But some title insurance companies and sloppy practitioners are allowing for much shorter periods of time, like ten years, or “up from the developer” or “up from the deed into the borrower” without informing the client that the title has not been examined. Title examinations are the practice of law in South Carolina, and  title companies do not have the power to permit a lawyer to shorten search periods without the informed consent of the attorney’s client.
  • Relying on prior title insurance policies that are not worthy of reliance. In “tacking on” to prior policies, closing attorneys should use common sense and good judgment. Determine who issued the prior policy and decide whether that person’s work should be substituted for your own. Review the prior policy to determine whether it looks normal on its face. Some title insurance companies are issuing products that are not backed by title examinations or are backed by very short title examinations. Those policies are not worthy of reliance in an atmosphere where title examinations are the practice of law. As in the case of other short searches, informed consent confirmed in writing from clients should be obtained for employing a short search based on a prior policy.
  • Failing to pull back title notes where a short search is used. It does not help that the attorney’s office has closed properties in the same chain of title if that prior title work is not used. Exceptions and requirements from the prior title work should be used in the current title insurance commitment and policy.
  • Failing to search for a longer period of time where the shorter search does not reveal normal easements and restrictions for the type of property being searched. A search involving a residential subdivision created in the 1950’s should not stop in the 1960’s.

At least two sets of eyes should review every title examination. And one of those sets of eyes should belong to an attorney who was taught in law school to spot issues!

Malpractice Case Questions Delegation of Responsibility for Title Work

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SC Supreme Court decides client’s informed consent is required.

The South Carolina Supreme Court has ruled that a closing attorney cannot delegate the ultimate responsibility for delivering clear title to a purchaser without the purchaser’s informed consent. Johnson v. Alexander is an attorney malpractice case decided on July 29. This case involved Amber Johnson’s 2006 closing of a home in North Charleston.  Ms. Johnson alleged that her closing attorney, Stanley Alexander, breached his duty of care by failing to discover the house had been sold at a tax sale in 2005.

shutterstock_113463292The title examination had been performed by another attorney, Charles Feeley at the request of Ms. Johnson’s previous attorney, Mario Inglese.  Mr. Alexander purchased the title work from Mr. Inglese and relied on the title examination, which concluded that no back taxes were owed on the property. Ms. Johnson stopped making mortgage payments when she learned she didn’t have title to the property, and the property went to foreclosure.

At trial, Ms. Johnson moved for partial summary judgment as to Mr. Alexander’s liability. At the summary judgment hearing, an affidavit of the Delinquent Tax Collector for Charleston County was proffered to prove the availability of the delinquent tax records during the time when the title would have been examined.  Mr. Feeley’s affidavit indicated he could  not remember the specific title work, but that he always searched titles the same way, and he always checked delinquent taxes for a ten-year period. His notes showed that he found no outstanding taxes. Further, Mr. Feeley attested that the tax sale would not have appeared in the chain of title because the tax sale deed was actually recorded after the closing.

As a side note to abstractors: recent tax sales often do not appear in chains of title because the deeds are not yet recorded. Title examiners should check for payment of taxes for a ten-year period to uncover ad valorem tax delinquencies.

The trial court granted Ms. Johnson’s motion on Mr. Alexander’s liability.  On appeal, the Court of Appeals reversed and remanded, holding the lower court incorrectly focused its inquiry on whether an attorney conducting a title examination should have discovered delinquent taxes from 2003 and 2004 and the tax sale from 2005. Instead, the appellate court held the proper question was whether Mr. Alexander acted reasonably in relying on the title work and reversed and remanded the case for trial.

The Supreme Court reversed and remanded for a determination of damages. Ms. Johnson argued that the Court of Appeals erred in holding the correct inquiry is whether an attorney reasonably relied on another attorney’s work where that work is outsourced. She contended that an attorney should be liable for negligence arising from tasks he delegates unless he has expressly limited the scope of the representation. The Supreme Court agreed.

The Supreme Court said the Court of Appeals erroneously equated delegation of a task with delegation of liability. The opinion, written by Justice Hearn, stated that while Feeley’s negligence was the issue, that does not displace Alexander’s ultimate liability.

The opinion states, “while an attorney may delegate certain tasks to other attorneys or staff, it does not follow that the attorney’s professional decision to do so can change his liability to his client absent that client’s clear, counseled consent.”

The Court cited Rule 1.8(h) of the Rules of Professional Responsibility which indicates a lawyer shall not make an agreement prospectively limiting the lawyer’s liability to a client for malpractice unless the client is independently represented in making the agreement.

Notice that the Court makes no distinction between delegating a task to staff and delegating it to another attorney. Mr. Alexander had argued that because Ms. Johnson knew he did not personally examine the title, its accuracy was not within the scope of his representation to her. The Court clearly held that the scope of representation can only be limited through the clear, counseled consent of the client.

Many residential closings are handled in South Carolina by attorneys who have nothing to do with the title examination. This case clearly states that those attorneys should limit the scope of their representation and obtain their clients’ clear, counseled consent. Otherwise, the title work is the ultimate responsibility of the closing attorney regardless of who performs it.

shutterstock_233295964And on a related topic, it is my opinion that any title examination that covers less than a full-search period or is based on a prior title insurance policy should be used only after consultation with the client and obtaining the client’s informed consent.  Many residential and commercial closing attorneys rely heavily on prior title policies for back title, and they may want to tweak their practices after they read this opinion.

Closing attorneys’ files should be papered with those informed consents confirmed in writing!

Heads Up Residential Dirt Lawyers: Use Engagement Letters!

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August 1 changes will make them even more important.

Lenders will no doubt be more in control of the closing process when the CFPB rules take effect in August. Several major lenders have announced that they will produce and deliver the borrower’s Closing Disclosure, the form that will replace the HUD-1. This form will be delivered to borrowers at least three business days prior to closing. This change may limit the closing attorney’s involvement with clients early in the closing process.

house parachuteResidential real estate lawyers will need to use engagement letters more than ever to establish that important attorney-client relationship, to explain the new closing environment and to quote fees and costs. These matters are too crucial to leave in the hands of lenders!

Also, a major change in the treatment of owner’s title insurance by the CFPB will require that attorneys explain the importance of the one document in the stack of closing papers that protects the purchaser. An engagement letter sent early in the process is the ideal place for this essential explanation. The closing table may be too late!

The CFPB will require that the full premium, not the discounted simultaneous issue premium, must be disclosed for the loan policy on the CD. The owner’s policy premium will be shown in the “Other” section of the CD and will be reflected as “Optional”.  The cost of the owner’s policy will be the total premium discounted by the cost of the loan policy and adding the simultaneous issue premium.  Some lenders may even show the full premium for the owners and loan policies on page two of the CD and a “rebate” for the discount on page 3. Confusing?  Definitely!

Purchasers strapped for funds may be tempted to skip this “optional” charge. Attorneys will need to explain how title insurance protects their clients. Savvy attorneys realize that owner’s title insurance protects them, too. It has even been suggested that it may be malpractice for an attorney not to recommend owner’s title insurance.

In this environment, I’m providing my dirt lawyer friends with a couple of paragraphs that can be edited to explain the importance of owner’s title insurance in engagement letters:

house protection hands“Title insurance protects the ownership of your home. The purchase of a home may be the largest transaction you’ll make during your lifetime. For a relatively low, one-time premium of $____, you can be protected against legal problems over property rights that could cost thousands of dollars, and even result in the loss of your home.

Lender’s title insurance is required for this transaction, but it does not protect your equity. You must purchase owner’s insurance for that valuable protection. We will perform a title examination for you, but the most thorough and competent title examination cannot protect against loss from hidden title defects created by misfiling and misindexing in the public records. Risks not created in the public records, such as fraud and forgery, are also covered by title insurance. Dollar for dollar, an owner’s title insurance policy is one of the most cost effective forms of insurance available to homeowners. I highly recommend that you purchase an owner’s policy and will make it available to you unless you let me know otherwise.”

When the closing process changes, let’s make sure important relationships are established and clients are protected early in the closing process!