It is often said that the business of transacting real estate is exceedingly local in nature. And local customs and rules can be challenging for today’s multi-state agent. This article provides guidance and a dose of claims prevention insight with thought-provoking title stories.
As a rule, it is always wise to affiliate with local counsel or title companies to complete a real estate transaction. It is prudent to refrain from venturing into an unfamiliar jurisdiction without acquiring the local expertise necessary to effectively do business in a new jurisdiction. NATIC agents have one immediately available resource: Your NATIC underwriting counsel and their one-hour guaranteed response time.
Beyond publicly available statutes, rules and regulations title professionals can read and review, there is often a need for local knowledge of the unwritten rules and local industry practices. Without this knowledge, a new and unfamiliar jurisdiction is fraught with danger for any unwitting title agent.
A perfect example of this exists in Washington, D.C., relating to a foreclosure of a standard deed of trust. Deeds of trust in Washington, D.C. were once called “Potomac Mortgages.” This is because the state of Maryland historically utilized the mortgage as the lien instrument of choice, and the District of Columbia was “carved out” of a piece of Maryland and situated on the Potomac River.
The first thing a prudent party would do to initiate a foreclosure would be to pull the foreclosure statutes and follow them to the letter. However, in D.C., things are not always as they appear, even in the statute books. A non-local practitioner utilizing the notice required by the District of Columbia statute could face the fatal flaw of failure of due process which would annul any final foreclosure judgment. A compliant statutory notice which falls short of actual notice, not being sent to the last known address of a secured party, would result in a lack of notice and a void judgment as to that secured creditor. Hence, this is a complete failure to obtain a valid, legal, insurable title even though every element of the statute was followed.
Another hidden problem was created when the D.C. legislature moved to correct the due process issues in the foreclosure statute. The new law was drafted to be “crystal clear” as to notice and process. It also contains cutting edge requirements for mediation between the borrower and the lender prior to moving forward with foreclosure. Again, things are not always as they appear.
The challenge, not apparent in the statute itself, was that the required mediation had to be conducted in accordance with new regulations to be written by someone other than the official legislature. Work commenced on drafting the regulations, and various parties in interest, including title industry professionals, offered commentary on how they believed the process would work most effectively. Meanwhile, two years passed with virtually no foreclosures in the District because no one could follow the “undrafted” mediation requirements of the statute. If one were to merely read the statute without being privy to the creation of the mediation provisions, one would think there were no issues surrounding a foreclosure in the District.
So now, the only valid foreclosure process in D.C. must occur judicially. This is ironic because deeds of trust were developed to avoid the need for judicial involvement in a foreclosure.
About 30 minutes north of the District of Columbia lies Baltimore, Maryland. Historically, much of the residential development in Baltimore occurred on ground leases rather than fee interests. The fee simple owner would lease a building lot to a tenant/purchaser for a long term, typically 99 years. Then the ground lease tenant would construct a home on the leasehold title. The fee owner would retain the underlying fee title. Sometimes, the owner would sell the fee title/reversionary interest, subject to the ground lease, to someone else. At that point, a title examiner now has two separate and distinct recorded title chains – the leasehold interest chain and the fee/reversionary interest chain.
Unfortunately, the deeds conveying the leasehold interest often do not contain the typical “assignment-type” language most frequently utilized to convey a leasehold interest. This can confuse inexperienced real estate professionals. Additionally, the parties to the leasehold transaction would often “grab” any deed form and use it to convey the leasehold interest. Those “grabbed” deed forms were often deeds drafted to convey fee simple title. What started as two separate and distinct title chains, leasehold and fee, became blurred and co-mingled. Things are not always as they appear.
An uninitiated settlement company might search a title back by two or three owners and find a chain of title that looks like a fee simple absolute title, which, in fact, is a leasehold title. That same title company would not think twice about issuing a title policy on the “fee title” they think they searched. These mistaken title professionals then would be involved in a claim on the policy.
Like many states, Virginia has what is commonly referred to as an “automatic subordination” statute. This provides a first lien priority to any “refinance” deed of trust over any existing subordinate financing where the new refinance deed of trust meets certain criteria as to amount, rate of interest and other specific characteristics set forth in the statute. Many of these characteristics must be reviewed in relation to the existing deed of trust to be refinanced. Refinance lenders love this statute because it means they can get to closing quickly without the need for a stand-alone subordination agreement from the existing lender.
Not long ago, I received a copy of a bulletin that went out to all Virginia offices of a major national lender decrying the fact that the automatic subordination statute had been repealed. In a move well known and anticipated by your NATIC underwriting staff, the Virginia legislature was in the process of updating and re-codifying sections of the Code of Virginia; specifically including the auto-subordination statute as a major overhaul of all Virginia real property statutes. While the existing automatic subordination section had been repealed, the loan office failed to understand that a new, identical statute with a new section number had gone into effect at precisely the same time as the repeal of the old section.
Yet, another oddity in Virginia occurred a few years ago when a married couple held title to real property as tenants by the entirety. They had each been previously married and each had children from the prior marriage. A tenancy by the entirety in Virginia creates a fictional “oneness” between married partners such that neither spouse can convey or encumber the estate without the express joinder of the other spouse. Upon the entry of a final divorce decree, a tenancy by the entirety is considered severed such that each spouse owns one half of the estate in common with their former spouse.
As part of this divorce, the spouses agreed that the wife would get the house and the husband gave his wife a deed. The deed was signed only by him and not by the wife. Moreover, no final divorce decree had yet been entered. Several months later, the wife recorded the deed she had received from her husband and thereafter, died. The husband died shortly after, and this is when the real trouble started.
The children of the husband from the previous marriage alleged that the deed from the husband to the wife was a nullity because only the husband signed that deed and one spouse cannot convey tenancy by the entirety property without the joinder of the other spouse. They argued that when the wife died, the title to the property vested in the husband as the surviving tenant by the entirety. Because he was now dead, his children from the previous marriage inherited his interest. The children from the wife’s previous marriage vehemently opposed this position.
Things are not always as they seem. Surprisingly, a Virginia court held that the deed from only the husband to the wife did convey the tenancy by the entirety property because the wife had manifested her intent for that deed to be valid; not by her normally required signature, but by her recordation of the deed. This position flew in the face of what virtually everyone in Virginia had always held about tenancies by the entirety property. It was such a bad decision contrary to a plethora of prior decisions in this area, that the Virginia legislature codified what we all knew to be the law previously; both spouses must sign a deed to effect tenants by the entirety property.
So, take it to heart. Work with your NATIC underwriting counsel who have local expertise in any jurisdiction in which you are operating. We are standing by to help you make certain none of your deals fail. Remember, things are not always as they appear to be.
Mark A. Heacock is NATIC’s Vice President and Regional Underwriting Counsel, Mid-Atlantic.
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