Real Estate Lawyers Association of North Carolina Standards of Practice May 9, 2011 Version Purpose:

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1 Real Estate Lawyers Association of North Carolina Standards of Practice May 9, 2011 Version Purpose: Formed in February 2011 by a group of attorneys licensed to practice law in North Carolina, the Real Estate Lawyers Association of North Carolina (RELANC) is committed to promoting and protecting the attorney led system of conveying interests in real property and the accuracy of North Carolina s public records, as well as protecting the general public of North Carolina against harmful consumer abuses and practices. To further those goals, the members of RELANC have promulgated and adopted the below standards of practice as a baseline measure of representation they will provide to their client(s) in a North Carolina real estate transaction. These guidelines demonstrate the high level and degree of representation that each client can expect to receive when represented by a RELANC member in a real estate transaction. These guidelines also demonstrate the high level and degree of supervision that each client can expect the North Carolina licensed attorney to provide any non-attorney assistants that assist in facilitating a real estate transaction. These standards of practice are meant to supplement the North Carolina licensed attorney s ethical and legal responsibilities. The guidelines and standards set forth below were adopted voluntarily by each member of RELANC as a Best Practices Model developed by a cross-section of those attorneys who practice most frequently in the area of real estate transactions for the benefit of their clients. RELANC believes adopting these standards of practice will benefit other North Carolina real estate attorneys, the greater North Carolina State Bar, and most importantly North Carolina citizens, their assets, real property owners, the financial industry, and the State of North Carolina by providing insight into the care, time, and effort involved in finalizing each real estate transaction. Guidelines for a Closing Attorney in Residential Real Estate Purchase Transactions and Non-Purchase Residential Real Estate Transactions I. General Standards of Supervision and Malpractice Insurance 1. Supervision by North Carolina Licensed Attorney Many aspects of the preclosing and post-closing stages, and to a limited extent some aspects of the closing stage, as described herein are handled by non-attorneys under the supervision of a North Carolina licensed attorney. RELANC believes that it is critical to establish and delineate the degree of supervision that is necessary for the North Carolina licensed attorney to provide to these non-attorney assistants. This standard of supervision is important not only to comply with North Carolina law, North Carolina State Bar promulgated ethics opinions, and the rules of 1

2 professional responsibility, but also to establish the high standard of supervision of non-attorney assistants to which all RELANC attorneys subscribe. Throughout these guidelines/standards, the terms supervision and supervise are utilized to describe the various oversight functions that the North Carolina licensed attorney performs when overseeing work by non-attorneys that assist the attorney in preparing for and conducting the closing. The terms supervision and supervise, as used throughout these guidelines/standards, shall mean that the North Carolina licensed attorney has provided the applicable standards of care regarding adequate supervision of non-attorney assistants referenced, delineated, and described below in this section. Thus, the North Carolina licensed attorney whom is a RELANC member and that supervises non-attorney assistants during a real estate transaction shall ensure the following: a. Attorney shall at all times be ultimately responsible for the work product of the non-attorney. b. Attorney shall make all reasonable efforts to ensure that the nonattorney s conduct is compatible with the professional and legal obligations of the attorney. c. The attorney shall ensure that the non-attorney assistants are competent, adequately trained, and knowledgeable about the specific aspect(s) of the closing on which they work, as well as the general closing process. Attorney should consider obtaining background references about the non-attorney s previous work experiences and education; conducting reference checks; interviewing the non-attorney to ascertain their ability and suitability for aid in closings; and obtaining a work product sample. d. Attorney shall be reasonably available at all times to answer any questions or concerns that the non-attorney assistants may have regarding the closing. Attorney should confirm that appropriate channels of communication are present and understood by the non-attorneys to ensure supervision can be timely and is always available. e. Attorney shall ensure that the non-attorney assistant receives continuing training and education about legal and industry changes. f. Attorney shall delegate tasks associated with the closing to non-attorney assistants based upon the complexity of the transaction, the degree of difficulty of the task, and the ability of the non-attorney assistant. g. Attorney shall regularly review non-attorney s work product to ensure non-attorney s work product is accurate, reliable, and in compliance with the attorney s legal and ethical obligations to his/her client. 2

3 h. Attorney has an ongoing duty to exercise his/her professional judgment and skill to maintain the level of supervision necessary to advance and protect the client s interest and ensure that the non-attorney is providing the best service and representation to the client. i. The non-attorney may not exercise independent legal judgment in making decisions on behalf of the client and the non-attorney may not give direct legal advice to the client, including the explanation of closing documents to the buyer/borrower as described in Section III.1 below. j. Attorney must ensure that non-attorney is aware that professional obligations require no breach of client confidentiality and attorney shall use reasonable care to use communication methods with non-attorney that best maintain and protect confidential information. 2. Malpractice Insurance Standards for RELANC Members a. Coverage Limits - A North Carolina licensed attorney that is a RELANC member shall have in force and maintain professional malpractice insurance coverage in an amount sufficient for the value and complexity of the transaction which the attorney is handling with an insurance company licensed to sell insurance in North Carolina; however, in any event, attorney shall have in force and maintain professional malpractice insurance coverage with policy limits of no less than five hundred thousand dollars ($500,000) per incident and one million dollars ($1,000,000) aggregate. Attorney shall provide proof of insurance coverage to any interested party to the closing transaction in accordance with the rules adopted by the North Carolina State Bar. b. Minimum Financial Strength Rating of Insurer A North Carolina licensed attorney that is a RELANC member shall obtain and have in force professional malpractice insurance coverage with an insurance company that shall have a B+ Best s Financial Strength Rating or better. 3. Professional Independence of Closing Attorney In order to maintain his or her professional independence as required under North Carolina State Bar Rule of Professional Conduct 5.4, the North Carolina licensed closing attorney responsible for handling a real estate closing on behalf of one or more parties to the transaction shall not be employed by, affiliated with or an agent of any non-attorney settlement shop, title agency, or other third-party non-attorney providing closing related services whereby the closing attorney contracts document preparation, receipt and disbursement of closing funds, the closing conference, or other material elements of the closing transaction to such settlement shop, title agency, 3

4 II. or other third-party non-attorney, unless the closing attorney adequately and directly supervises the provision of such services by any non-attorney contractor as set forth in Section I.1 herein and as required by the State Bar Ethics opinions outlining an attorney s professional obligations with respect thereto. Pre-Closing Stage Collection of Information and Review 1. Conflicts of Interest Establish all conflicts of interest, including potential multiple representation, that must be disclosed, consented to, and/or waived, and obtain the informed written consent of such parties in accordance with the Rules of Professional Conduct. 2. Engagement Letter Send engagement/representation letter to the client(s)/parties to the transaction detailing scope of representation, fees, and general overview of process, and obtain confirmation that client(s)/parties to the transaction received the letter. Specifically delineate what the scope of representation includes for that specific transaction and include general reference that additional items beyond that scope shall require a new engagement letter. Attorney shall obtain informed written consent from client to perform an abbreviated title search/tack to a prior title policy by describing in the engagement letter the potential risks of policy tacking, performing an abbreviated search, and of the existence of uncancelled deed(s) of trust, lien(s) of records, easements, restrictions, and other items that will not be revealed by an abbreviated search period. 3. Review the Sales Contract Obtain, review the sales contract, and advise client on any changes that may be necessary for the specific transaction. 4. Certify Title North Carolina licensed attorney to perform and supervise detailed title search of the subject property and said licensed attorney shall personally review the title abstract/notes/title documents prior to personally certifying a preliminary title opinion, especially noting any curative measures that must be completed prior to closing. The general steps of the title search should include, but are not limited, the following: a. Search of the city and county tax offices for tax information (and any delinquent amounts). b. Search of the Register of Deeds Attorney shall utilize the Grantor/Grantee index (and naming conventions to facilitate a complete and accurate search of the records) and search all of the ins and outs dealing with the subject property until reaching a valid Warranty Deed conveyance at least 30 years ago, in compliance with the North Carolina Marketable Title Act. However, if attorney is able to locate an existing 4

5 policy of title insurance and attorney obtains informed written consent from the client(s) regarding the attorney tacking to that title insurance policy, attorney may either conduct a full title examination or may tack to the prior policy, whichever is in the best interests of the client. Note that attorney shall use his/her professional judgment in all cases to determine the sufficiency of the search period and whether a longer search period is necessary given the circumstances of the individual transaction, especially with respect to undeveloped property. If the attorney tacks to an existing title insurance policy, the attorney s title examination would begin with the date and time of issuance of that existing title insurance policy. Attorney shall also identify which, if any, outstanding deeds of trust are equity lines of credit for which cancellation by the sellers/borrowers will be required pursuant to NCGS Section 45-81(c). c. Clerk of Court Record Searches search the Administrative Office of the Courts (AOC) computer system for Judgments, Civil Actions, Estate & Devises (if applicable), Mechanics Liens, and Special Proceedings for all Grantors. d. Organizational/Entity Records search the Secretary of State s Corporations Database and potentially request organizational documents. e. Bankruptcy Searches determine if seller has filed bankruptcy petition using the Pacer system. f. Manufactured Homes If a manufactured home is located on the property, then attorney shall determine if the Department of Motor Vehicles has issued a title for the manufactured home as personal property, if any lien which must be satisfied or released is shown on the title, or if the title has been cancelled. 5. Order and Review Survey Determine whether client wishes to have a survey performed, order survey if necessary, and review the survey upon receipt, noting any encroachments or other items disclosed. 6. Legal Description North Carolina licensed attorney to prepare and/or review legal description of the subject property, noting any inconsistencies in prior deeds or the contract and any curative measures that must be completed prior to closing. 7. Payoff Information If seller is not represented by outside counsel or the transaction is a refinance of an existing loan, attorney shall obtain a third party authorization, and obtain and review payoff information directly from the lender(s) for all liens affecting the subject property to facilitate the closing; 5

6 otherwise collect information from seller s attorney. If any such liens are equity lines of credit secured by a Deed of Trust, then attorney shall send a payoff request letter to the lender signed by the sellers or borrowers (as applicable) directing that all further transaction on the equity line be blocked to avoid changes in the payoff amount, or obtain proof/confirmation that lender has received similar equity line close-out letter(s) signed by sellers or borrowers (as applicable) from sellers/borrowers or seller s counsel. 8. Hazard Insurance Determine hazard insurance carrier for purchaser, review declaration page to ensure policy dates, coverage amounts, and loss payee information are satisfactory to lender 9. Homeowner s Association Dues Collect and review homeowner s association dues statement/invoice and determine what fees are due at closing 10. Covenants, Conditions, and Restrictions (CCRs) Disclose existence of any covenants, conditions, and restrictions (CCRs) that run with the land and affect the use and enjoyment of the land in planned communities to client. Attorney s scope of representation agreement with client shall determine the degree of review and explanation of restrictive covenants to client. However, should client have questions regarding the restrictive covenants, only a North Carolina licensed attorney shall answer those questions. 11. Inspection Letters Collect inspection letters to ascertain compliance with the sales contract, termite letter, HVAC letter, and/or other letters required by the sales contract, lender s instructions, or addendums thereto. 12. Obtain Title Commitment Utilizing title certification and attorney s preliminary title opinion, obtain title commitment from a reputable title insurance company that is in the best interests of the client(s). 13. Prepare and Review Settlement Statement Prepare Settlement Statement according to closing instructions and any invoices provided, and review Settlement Statement to verify compliance with sales contract and the Real Estate Settlement Procedures Act (where applicable). 14. Prepare, Review, Approve Loan Documents Either prepare, review, and approve the Loan Documents, especially to certify compliance with closing instructions, to verify proper loan terms and parties to the loan, and to insure loan documents contain adequate and accurate legal descriptions. 15. Review Title Commitment Review title insurance company s commitment for title insurance and verify compliance with the requirements and exceptions of that commitment, and obtain, prepare, review, and/or provide any documents required by the title insurance company to issue a final title policy, which may include, but are not limited to the following: 6

7 a. NCLTA Form 1, NCLTA Form 2, and/or NCLTA Form 3 b. Survey or Survey Waiver c. Privacy Disclosure d. Insured Closing Protection Letter e. Short Sale Approval Letters 16. Deed Preparation or Review North Carolina licensed attorney shall prepare deed as limited representation of Seller or review the deed prepared by Seller s attorney, insuring that proper warranties are included, proper legal description is included, proof that the signatory has authority to sign, and vesting names match prior deed and contract. 17. Power of Attorney North Carolina licensed attorney shall prepare, review, and/or obtain lender s approval of any power of attorney to be utilized in the transaction. In accordance with N.C.G.S. 32A-40, and unless there is actual knowledge that a writing is not valid or the action being taken is beyond the apparent power or authority of a named attorney in fact (AIF), where a closing attorney in good faith relies on a writing, and/or the validity and action of a named AIF as set forth in any such writing which is signed or duly acknowledged and otherwise appears regular and purports to confer the powers and authority that reasonably appear to be granted to the AIF designated in that writing, then said closing attorney dealing with that named AIF shall not be responsible for any breach of fiduciary duty by that AIF, including any breach of loyalty, any act of self-dealing, or any misapplication of money or other property paid or transferred as directed by that AIF. In addition, and in accordance with N.C.G.S. 36C (f), a closing attorney who acts in reliance upon a certification of trust without knowledge that the representations contained in the certification are incorrect is not liable to any person for so acting and may assume without inquiry the existence of facts contained in the certification of trust, and mere knowledge of the terms of the trust may not be inferred solely from the fact that the closing attorney who is relying on the certification may hold a copy of all or part of the trust instrument. 18. Prepare, Review, Approve other applicable closing documents North Carolina licensed attorney shall prepare, review, and approve other applicable closing documents that may include, but are not limited to the following: a. Internal Revenue Service Form 1099 b. Seller s Affidavits c. Equity Line Loan Cancellation Authorization pursuant to NCGS Section 45-81(c) executed by the sellers/borrowers (as applicable). 7

8 d. Organizational and/or Corporate Documents of any organization/entity that is a party to transaction. III. Closing Stage - Explanation, Execution, Recordation, and Disbursement 1. Explanation of Closing Documents to Buyer/Borrower North Carolina licensed attorney shall explain to the buyer/borrower the closing documents, which may include, but are not limited to: a. Disclosure and consent to multiple representation (if applicable). b. Deed, and any/all warranties contained therein. c. Survey, and any encroachments, easements, or other matters disclosed therein. d. Covenants, Conditions, Restrictions (CCRs), disclose to buyer existence of any restrictive covenants and explain restrictive covenants to buyer according to attorney s scope of representation. e. Settlement Statement explaining the fees and figures as disclosed by the Settlement Statement. f. Loan Documents, specifically noting the following provisions, as applicable: i. Annual Percentage Rate (vs. Interest Rate). ii. Interest Rate - disclose/explain if the loan has an adjustable rate, which requires disclosing when the rate can adjust, how often the rate can adjust, and what affect the adjustment may have upon the buyer/borrower s loan payment. iii. Amount of Loan. iv. Monthly Payment Amount including breakdown of payment amount between principal and interest, and escrows and mortgage insurance, if applicable. v. Date the First Payment is Due. vi. Payment Location. vii. Term of Loan and Maturity Date of Loan. viii. Late Payment Penalties. ix. Due on Sale Clause. x. Events of Default. xi. Foreclosure Proceedings. xii. Transfer of Loan Servicing Rights. 2. Supervise Execution North Carolina licensed attorney shall supervise the proper execution and notarization of the closing documents that are signed at the closing table. In this section, supervise shall mean that the attorney shall 8

9 be either physically present and presiding over the execution of the closing document or if execution of such documents occurs by mail, , or other electronic means for client convenience purposes, where the attorney and parties are not physically together, then the attorney shall make himself/herself available to explain all closing documents (see III.1. above) and answer all questions related thereto and shall personally review the closing documents upon receipt from client to ensure proper execution and notarization of the closing documents. Attorney shall require verification of identity of signers in all closings, including electronic or mail away closings. 3. Collection of Funds North Carolina licensed attorney shall collect funds required to close from the respective parties and verify that closing funds are goods funds in accordance with the North Carolina Good Funds Settlement Act and any other internal bank regulations. 4. Funding Approval North Carolina licensed attorney shall forward required funding documents to Lender for Lender s funding approval and obtain funding approval prior to recording. 5. Perform Title Update North Carolina licensed attorney shall supervise performance of title update prior to recording to verify no intervening matters (liens, judgments, out conveyances, etc.) appear on record since the attorney s most recent title work. Attorney shall ensure that title update utilizes the most current title information available at the Register of Deeds office and Clerk s office, which shall necessitate having the Attorney supervise a title update in the Register of Deeds office and Clerk s office and not via online resources, until such time as technology allows instantaneous updating of all title and judgment records. 6. Recording North Carolina licensed attorney shall supervise the recording of the recordable closing documents in the proper order and with adequate and accurate legal descriptions attached (as applicable) as soon as reasonably possible after execution and delivery of the documents. Unless Attorney supervises a title update at the Register of Deeds and Clerk s office concurrently and at the same time as an e-filing, Attorney shall refrain from e-filing, or otherwise remotely recording documents, until technology allows instantaneous updating of all title and judgment records to ensure no intervening matters appear on record. 7. Disbursement North Carolina licensed attorney shall disburse all of the closing funds in accordance with the settlement statement and lender s closing instructions after confirmation of recording, pursuant to the North Carolina Good Funds Settlement Act. North Carolina licensed attorney shall make all 9

10 reasonable efforts to be the party signing disbursement checks and initiating wire transfers. If circumstances prevent attorney from signing disbursement checks or initiating wire transfers for a given transaction, Attorney shall double check the disbursement as soon as reasonably possible. a. Note for Refinances with Same Lender The only exception to this guideline is when a borrower is refinancing a loan with the same lender and that lender is paying off its previous loan to the borrower with proceeds of the new loan to the borrower, neither the portion of the loan proceeds required to pay off the lender s prior loan to the borrower nor the lender s fees in connection with the new loan have to be disbursed by the closing attorney in accordance with the settlement statement. b. Disburse Defined means that the attorney shall make payment of all closing funds from the transaction to the persons or entities entitled to that payment. 8. Notice of Recording to Parties - North Carolina licensed attorney shall inform all parties to the transaction once the recordable closing documents are recorded. 9. Send Loan Package to Lender. IV. Post-Closing Verification and Final Title Opinion 1. Cancellations of Liens, Judgments, and Deeds of Trust If included within the scope of representation between the North Carolina licensed attorney and Seller, North Carolina licensed attorney, acting either as the closing attorney or as the Seller s counsel, shall obtain cancellation(s)/satisfaction(s) of record of any lien(s), judgment(s), and/or deed(s) of trust paid off and released as a result of the transaction according to the fee arrangement between Seller and attorney. Attorney may outsource such lien(s), judgment(s), and/or deed(s) of trust cancellation(s), provided that attorney obtains written consent from Seller and attorney maintains a quality control tracking system to ensure such lien(s), judgment(s), and/or deed(s) of trust cancellation(s) are obtained in a timely fashion. An attorney may limit his or her scope of representation to exclude obtaining on behalf of the seller any cancellation(s)/satisfaction(s) of lien(s), judgment(s), and/or deed(s) of trust paid off at closing, and if limited in such manner those tasks would be the responsibility of the Seller or Seller s lender that is paid from the closing proceeds and would not be the responsibility of the closing attorney. However, if attorney s limited scope of representation does not include obtaining such cancellations on behalf of Seller, attorney shall still maintain a quality control/tracking system to ensure that Seller/Seller s Lender fulfill their contractual and statutory duties to properly cancel or satisfy any 10

11 lien(s), judgment(s), and/or deed(s) of trust in a timely fashion. If Seller/Seller s Lender fail to cancel or satisfy lien(s), judgment(s), and/or deed(s) of trust in a timely fashion where attorney s scope of representation does not include this service, attorney shall inform Buyer of this and make Buyer aware of his/her potential remedies against the Seller/Seller s Lender for their failure to properly cancel or satisfy the lien(s), judgment(s), and/or deed(s) of trust. This cancellation section is designed with the dual goals of allowing the attorney to determine the scope of his/her representation with his/her client(s) and to maintain the accuracy and integrity of the North Carolina Public Records system by ensuring that the responsible party removes uncancelled lien(s), judgment(s), and/or deed(s) of trust from the public registry. 2. Perform a final title review - North Carolina licensed attorney shall personally review the final title and recording information, which may include, but is not limited to the following items: a. Verify documents were recorded in the correct priority and were properly executed/acknowledged. b. Verify recorded documents were indexed properly. c. Verify correct vesting and legal description on recorded documents. d. Verify that all liens, judgments, and deeds of trust that were paid in connection with the transaction are satisfied of record, if closing attorney s scope of representation included such responsibilities. 3. Issue a final title opinion - North Carolina licensed attorney shall personally draft, review, issue, and certify a final title opinion, which includes, but is not limited to the following items: a. Review of the information as listed above in III.1. b. Review and certification that the requirements of the title commitment were satisfied. 4. Send Final Title Opinion to Title Insurance Company North Carolina licensed attorney shall make reasonable efforts to submit the final title opinion to the title insurance company according to the following timelines: a. If the attorney waits for the appropriate cancellation(s)/satisfaction(s), releases, dismissals, etc. to be recorded prior to issuing his/her final title opinion, attorney shall take reasonable steps to submit his/her final title opinion to the title company within 2 weeks of obtaining the required cancellation(s)/satisfaction(s), releases, dismissals, etc. b. If the attorney prefers to issue his/her final title opinion prior to confirmation that the appropriate cancellation(s)/satisfaction(s), releases, dismissals, etc. are recorded, attorney shall take reasonable 11

12 steps to submit his/her final title opinion to the title company within 3 weeks of the closing date. Attorney that operates under this option shall institute a tracking system to insure that the required cancellation(s)/satisfaction(s), releases, dismissals, etc. are properly recorded, if closing attorney s scope of representation included such responsibilities. 5. Obtain Final Title Policy from Title Insurance Company North Carolina licensed attorney shall timely obtain a copy of the final title policy and perform a review of the policy to ensure policy contains the correct information, riders, exceptions, etc. 6. Send all applicable documents to the appropriate parties. 12