As mentioned in last month’s issue of this publication, "witness" or "courtesy" closings have been a hot topic among North Carolina real estate attorneys and the Bar this year. Responses to our request for feedback ranged from no knowledge of the problem to a complete refusal to accommodate these transactions. While opinions were all across the spectrum, it appeared that most attorneys were appreciative to have an opportunity to discuss the problem and attempt to find a solution.

As we discussed, a witness closing is where a party is asked to perform what is a basically a notary function of "witnessing" the execution of loan documents prepared by the lender or an associated party. Witness closings have evolved and become more prevalent as the number of out of state lenders conducting transactions in North Carolina has risen. While attending an American Land Title Association’s "Title Agent’s Seminar on Strategic Alliances" in Chicago earlier this month, the keynote speaker (Robert Porter Lynch, President of the Warren Company) said that "lenders and borrowers drive the train, and the title industry is the caboose" when it comes to the real estate lending process.

He went on to say that title companies have little control over the transaction process and are considered a necessary evil that slows down the real estate transaction process. Being an attorney state, our real estate attorneys are considered a part of that slow down. Lenders are forming strategic alliances in order to create a networked enterprise. As a result, the trend will be for prices and profit margins in the title and legal industry to decrease as transaction speed and accuracy increase. We will address this issue in depth in a subsequent issue of this publication. The point is, however, that the lenders are going to find ways to speed up the transaction process whether we like it or not. Witness closings are a part of this process. The question is, can we find an acceptable way to accommodate transactions involving witness closings in a way consistent with our state law and ethical considerations?

Listed below are the main concerns voiced by those attorneys who responded. Respondents were real estate attorneys throughout the state, including several associated with the Real Property section of the Bar.

• The issue of aiding and abetting the unauthorized practice of law. It must be clear that the preliminary opinion of title was not prepared by someone other than a licensed North Carolina lawyer or a person under his direct supervision. Our position at Statewide is that we will not attempt to place a witness closing order with a non-lawyer, or with a lawyer other than the attorney who prepared the preliminary opinion of title, unless the original attorney cannot accommodate the transaction at that time.
• Perceived professional responsibility of the attorney by the borrowers. This addresses the issue of advance notification to the borrowers that the attorney is representing the lender only to the extent that he has reviewed title issues with regard to the property securing the loan. The borrower also needs advance notification from the lender that the attorney is not representing the borrower and that the borrowers acknowledge that they have received such notice and have had the right and adequate time to obtain an attorney of their own choosing to represent their interest.

After soliciting your feedback, we contacted legal representatives of several of the major national underwriters. We expressed the concerns of the North Carolina attorneys, and asked for input on drafting a disclosure form that would accommodate the transaction requirements of the lenders, the legal and ethical concerns of the attorneys, and the interests of the borrowers. The following "Disclosure Concerning Role of the Closing Agent" form is an attempt to resolve the issues and questions concerning the Real Property Bar. As we have stated repeatedly, Statewide stands by the rules and regulations set forth in our attorney state system, but realize that we must collectively find ways to accommodate the constantly changing demands of regionally and nationally driven real estate transactions. For additional feedback contact Harry at (800)821-5414.

DISCLOSURE CONCERNING ROLE OF CLOSING AGENT

BORROWER(S):_________________________________________________________

CLOSING AGENT:_______________________________________________________

LENDER: ______________________________________________________________

SETTLEMENT DATE: _____________________ LOAN AMOUNT: _______________

This Disclosure contains important information concerning the role of the Closing Agent in the settlement of the loan transaction between the Lender and Borrowers as identified above. If less than one Borrower is named above, the term "Borrowers" refers to the one borrower.

The undersigned Borrowers have read the following disclosure and understand that:

The Closing Agent’s involvement in this transaction has been to (1) review title issues for the Lender concerning the property securing the loan (the Closing Agent’s representation of the Lender does not extend beyond this review) and (2) to witness and notarize documents involved in this transaction. The Lender has prepared all loan documents in this transaction. The Closing Agent is not responsible for errors included in the loan documents.

The Closing Agent does not represent the Borrowers, and the Borrowers have received prior notice that the Closing Agent does not represent them. The Borrowers have had the right and adequate time to obtain an attorney of their choosing to represent their interests.

The Closing Agent has given no advice to the Borrowers or Lender regarding usury, homestead rights, marital interest rights, creditors’ rights, including ownership and title to the land, compliance with any federal or state laws, requirements relating to home equity loans, the rights of any third parties regarding this transaction, or any other matter.

This the ________ day of _____________, ___________.

SIGNED

__________________________________ __________________________________

BORROWER BORROWER

In the December, 1997 (Vol. 3, Issue 12) issue of our newsletter we commented on Briggs v Rankin, 491 S.E.2d 234 ( N.C.App. 1997) the North Carolina Court of Appeals opinion defining Modular Homes for the purpose of interpreting the application of restrictive covenants. That panel broadened the definition so that more units may be installed in the future without violating traditional subdivision restrictions. The Court listed some characteristics of the finished structure in order to determine which category the home fell under; "(1) whether the structure must comply with the N.C. Regulations for Manufactured/Mobile Homes, which are consistent with Housing and Urban Development (HUD) national regulations, or with the Building Code; (2) whether the structure is attached to a permanent foundation; (3) whether, after constructed, the structure can easily be moved or has to be moved like site-built home; (4) whether title to the home is registered with the N.C. Department of Motor Vehicles or title must be conveyed by a real property deed; and (5) how the structure is delivered to the homesite."

The Court of Appeals distinguished Young v. Lomax, 122 N.C.App. 385, 470 S.E.2d 80,(1996) in which the unit was transported to the site with attached wheels and tongue.

While those facts were present in Briggs they were not found to be determining. The North Carolina Supreme Court affirmed in a per curiam opinion. With this affirmation of the decision we can feel reasonably secure in insuring modular homes meeting the following criteria.

• Compliance of the Structure with the N.C. State Building Code
• Proper issuance of a building permit
• Lack of a Certificate of Origin or DMV title
• Existence of a Bill of Sale
• Proposed attachment to a permanent foundation
• Lack of a prohibition of Modular Homes in the restrictive covenants

We are frequently called upon to issue zoning endorsements to policies insuring commercial property. There are two standard zoning endorsements most commonly used in North Carolina, the ALTA 3 and the ALTA 3.1. This article will explain the insuring provisions of these endorsements and what is required from the certifying attorney in order to issue them.

The ALTA 3 can be issued on vacant or improved land and requires the least documentation from the attorney. The relevant insuring provisions are as follows.

The Company insures the insured against loss or damage sustained by reason of any incorrectness in the assurance that, at Date of Policy:

1. According to applicable zoning ordinances and amendments thereto, the land is classified Zone __________.

2. The following use or uses are allowed under that classification subject to compliance with any conditions, restrictions, or requirements contained in the zoning ordinances and amendments thereto, including but not limited to the securing of necessary consents or authorizations as a prerequisite to the use or uses:

 

There shall be no liability under this endorsement based on the invalidity of the ordinances and amendments thereto until after a final decree of a court of competent jurisdiction adjudicating the invalidity, the effect of which is to prohibit the use or uses.

Loss or damage as to the matters insured against by this endorsement shall not include loss or damage sustained or incurred by reason of the refusal of any person to purchase, lease or lend money on the estate or interest covered by this policy.

The basic assurance of the endorsement is that the property is zoned in a particular classification and that the classification permits the listed uses. An opinion of counsel based upon a review of the zoning ordinance and map of the governmental entity having jurisdiction is the preferred procedure for issuing this endorsement. We recognize that this is not always practical and will consider a satisfactory certification by the appropriate zoning official instead. Note that there are limitations on the coverage that are significant. The endorsement does not provide for losses arising out of the refusal of a buyer to purchase, or lender to make a loan.

The ALTA 3.1 can be issued only on improved land after all construction is complete and requires more documentation from the attorney. The relevant insuring provisions are as follows.

1. The Company insures the insured against loss or damage sustained by reason of any incorrectness in the assurance that, at Date of Policy:

(a) According to applicable zoning ordinances and amendments thereto, the land is classified Zone __________.

(b) The following use or uses are allowed under that classification subject to compliance with any conditions, restrictions, or requirements contained in the zoning ordinances and amendments thereto, including but not limited to the securing of necessary consents or authorizations as a prerequisite to the use or uses:

2. The Company further insures against loss or damage arising from a final decree of a court of competent jurisdiction

(a) prohibiting the use of the land, with any structure presently located thereon, as specified in paragraph 1(b); or

(b) requiring the removal or alteration of the structure on the basis that, at Date of Policy, the ordinances and amendments thereto have been violated with respect to any of the following matters:

(i) Area, width or depth of the land as a building site for the structure;

(ii) Floor space area of the structure;

(iii) Setback of the structure from the property lines of the land; or

(iv) Height of the structure.

There shall be no liability under this endorsement based on the invalidity of the ordinances and amendments thereto until after a final decree of a court of competent jurisdiction adjudicating the invalidity, the effect of which is to prohibit the use or uses.

Loss or damage as to the matters insured against by this endorsement shall not include loss or damage sustained or incurred by reason of the refusal of any person to purchase, lease or lend money on the estate or interest covered by this policy.

The assurances contained in this endorsement include those provided in the ALTA 3. However they go further in that they protect against losses form removal or alteration of the structure on the property because the requirements for; the size of the site, the square footage of the structure, the setbacks or the height of the structure have been violated. In order for this endorsement to be issued a current as-built survey showing all improvements will be required. Usually a review of the certificate of occupancy is required if the improvements were recently constructed. Also required is a certification from the applicable zoning department or agency as to the zoning classification and authorized uses and as to compliance of existing improvements with applicable zoning ordinances. In most zoning jurisdictions there is a significant fee for the certification. If the improvements were recently constructed, the title insurance agent may wish to review the zoning maps. You should verify that the actual use is not based upon a variance, non-conforming use, or exception. If such allowed use exists, consult with our underwriting personnel. They may then require an attorney’s opinion (paid by the borrower) by counsel competent in zoning matters. Most insurers prefer that this endorsement refer, in the second paragraph, to the "following use or uses" by excerpting language from the zoning ordinance and not by stating the use. If possible, request that the survey certify the zoning classification and compliance with applicable zoning ordinances. If you are requested to insure compliance with parking requirements, consult with your underwriting personnel. It is preferable for the title company (i) to receive a certification from the zoning authority as to compliance with parking requirements, (ii) that the survey state the number of parking spaces and certify compliance, and (iii) that you review the zoning ordinance to confirm compliance. Then it may be agreeable to add "number of parking spaces" or "required parking".

There is also an additional premium for issuing zoning endorsements. Because of the cost of the survey, certification and premium zoning endorsements are seldom required except on large transactions. The limitations on the ALTA 3.1 endorsement are the same as in the ALTA 3.

One of the most difficult requests for this endorsement comes in the context of the permanent construction loan. Often a lender in a very large loan of this type will provide the attorney with loan instructions that require the provision of an ALTA 3.1. As noted above the endorsement is designed to provide assurances that certain zoning problems do not exist. Attempting to do this in the construction phase of the loan, is in effect, providing surety insurance for the performance of the building contractor. In most cases the lender is satisfied with the provision of an ALTA 3 along with a commitment to provide the ALTA 3.1 upon receipt of satisfactory assurances after the completion of all construction. In the event that such a commitment is unacceptable a modified ALTA 3.1 including the following provisions may be agreed upon.

1. The Company hereby insures that, as of the Date of Policy:

(a) According to applicable zoning ordinances and amendments thereto, the land is classified [insert zoning classification].

(b) The following use or uses are allowed under that classification subject to compliance with any conditions, restrictions, or requirements contained in the zoning ordinances and amendments thereto, including but not limited to the securing of necessary consents or authorizations as a prerequisite to the use or uses:

[insert all permitted uses].

2. The Company hereby further insures against loss or damage arising from a final decree of a court of competent jurisdiction:

(a) prohibiting the use of the land, with any structure presently located thereon or hereafter erected thereon in accordance with plans (describe), (such present and future improvements are herein called the "structure"), as specified in paragraph 1(b); or

(b) requiring the removal or alteration of the structure on the basis that, at Date of Policy, the ordinances and amendments thereto have been violated with respect to any of the following matters:

(i) Area, width or depth of the land as a building site for the structure.

(ii) Floor space area of the structure.

(iii) Setback of the structure from the property lines of the land.

(iv) Height of the structure.

(v) Required parking (Note: This provision does not appear in standard 3.1).

Upon completion of the improvements to be constructed upon the land in accordance with said plans, the Company will issue ALTA Zoning Endorsement - From 3.1 without modification and without additional premium.

Loss or damage as to the matters insured against by this Endorsement shall not include loss or damage sustained or incurred by reason of the refusal of any person to purchase, lease or lend money on the estate or interest covered hereby in the land described in Schedule A.

In addition to the usual requirements a company may generally require an attorney’s opinion (paid by the borrower) by counsel competent in zoning matters (who should consider those matters referred to in the underwriting requirements for the ALTA Form 3. The opinion should refer to the specific plans to be incorporated in the endorsement.

The letter from the applicable zoning department or agency as to the zoning classification and authorized use should state that the proposed plans comply with applicable zoning ordinances. Request a copy of any issued building permit. If possible, request that the survey, if any, certify the zoning classification and compliance of the proposed improvements with applicable zoning ordinances. If you are requested to insure compliance of the plans with parking requirements the attorney’s opinion or zoning letter must certify compliance of the plans with such requirements.