Don’t Let a Title Opinion Expose You to the Risk of Becoming the Deep Pockets When the Property Is Used as Security for a Business Loan that Goes Bad

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A developing trend in the effort to hold lawyers responsible for business deals gone bad is for bank regulators to assert that lawyers performing title searches for property to be used as security for a business loan are also responsible for evaluating the soundness of the loan. To avoid this risk consider adding this paragraph to your title opinion letter of engagement:

The undersigned has examined title to the subject property solely for the purpose of determining the status of ownership of the subject property. The undersigned has not been requested to, and has not, evaluated the financial soundness of the borrower or the sufficiency of value of the property as collateral for any loan, and expressly disclaims any liability for the decision to enter into the loan, which decision is completely the responsibility of the institution making said loan.

This issue suggests it is a good time to review risk management of title opinions. The following is a list of frequent title opinion errors:

  • Erroneous description in deed of property to be conveyed
  • Misstated date to which interest was to be computed
  • Failure to fill in blank on form
  • Failure to reserve mineral rights
  • Failure to advise on impending change in law
  • Unauthorized delay or failure to strictly enforce closing time limits
  • Failure to discover encumbrances on the property:
    • mortgage lien
    • vendor’s lien
    • tax lien
    • mechanic’s lien
    • contract for deed
    • right-of-way
    • mineral lease
  • Failure to assure that clients received or conveyed title as represented:
    • remainder
    • dower
    • outstanding life
    • estate lease
  • Failure to perfect security interest:
    • failure to prepare mortgage document
    • failure to update title search at time of closing
    • failure to record or timely record a mortgage
    • filing in the wrong county
    • failure to obtain releases of other encumbrances
  • Failure to collect or protect security interest
  • Failure to attend commissioner’s sale
  • Failure to know other applicable law, e.g., probate, tax
  • Failure to disburse sale proceeds properly

Our standard risk management advice on title opinions is: Always use a letter of engagement to document the work to be done. Is the lawyer to prepare an abstract of title indicating only what land records contain or a title opinion on validity of ownership? Is the search for liens only? Is the lawyer responsible for accuracy through the date and time of the completion of the title search or required to bring the search current to the time of closing? Be precise, detailed, and exclusive in the scope description.

  1. Specify in the abstract or opinion the scope of the search, its purpose, authorized uses, and restrictions.
  2. If others are preparing evaluations on some parts of the transaction, clearly exclude those parts. If there is reliance on an expert opinion as part of the analysis (e.g., an environmental assessment), show that in detail.
  3. Be complete. Advise of any doubts or potential
    title defects no matter how remote. Taking risks on defects is the client’s decision – not the lawyer’s.
  4. Establish office procedures for quality control of title search documents. Procedures should indicate who is authorized to sign and release them for the firm and provide for a formal and cold review before release.

 


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Disclaimer: The contents of this Web site are intended for general information purposes only and should not be construed as legal advice or legal opinion on any specific facts or circumstances. It is not the intent of this Web site to establish an attorney’s standard of due care for a particular situation. Rather, it is our intent to advise our policyholders to act in a manner which may be well above the standard of due care in order to avoid claims having merit, as well as those without merit. In the event any statement on the Web site differs from a statement in an issued policy the policy will control.

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