Daily Development for Monday, January 7, 2002

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

CLOSINGS; TITLE SEARCH; MALPRACTICE: Attorney for the purchasers of residential property is not guilty of professional malpractice for failing to review the zoning records to determine whether there was a use limitation in effect with respect to the property, or for failing to advise the purchasers that the title search he conducted did not address zoning issues.

Schlindrer v. Manson, 2001 Conn. Super. LEXIS 3379 (12/29/01)

Note that this is simply a trial court opinion, and certainly establishes no precedent. But it provides an interesting little puzzle worth discussing.

Buyers entered into an agreement to purchase a lakefront home from Sellers in 1988 for $172,000. Apparently, no real estate agent or broker was involved in the transaction. Buyers retained Michael Dowley as their attorney to represent them in connection with their purchase of the premises -- although not until almost two months after they had executed the purchase agreement. The purchase agreement stated that the Sellers would deliver a warranty deed "subject only to the provisions of any ordinance, municipal regulations, public or private law, restrictions and easements as appear of record, if any, provided they do not affect the marketability of title . . ." With respect to encumbrances, the purchase agreement further provided that "nothing shall be considered an encumbrance which is not so considered by the Standards of Title of the Connecticut Bar Association." The purchase agreement did not require the Sellers to provide a certificate of title or an owner's title insurance policy.

The transaction closed on August 23, 1988, and another attorney from Mr. Dowley's office represented the Buyers at the closing. (Buyers and Mr. Dowley had, in fact, never personally met each other before the trial). The deed delivered to the Buyers covenanted that the Sellers owned the premises conveyed and that "the same are free from all incumbrances whatsoever, except as herein stated." No encumbrances were set forth in the deed. Mr. Dowley charged the Buyers a fee of $150 for "title services," and his files showed that he relied on a certificate of title prepared by another attorney (presumably in Mr. Dowley's office), which was subsequently "brought down" to August 24, 1988 (the day after closing, when the deed was recorded). This certificate of title stated that the property was vested in the Sellers free and clear of all recorded and properly indexed encumbrances, with certain exceptions, including "any and all provisions of any ordinance, municipal or other governmental regulation or public or private law."

The zoning records of East Haddam, Connecticut (where the property was located) specified that the subject property was zoned as a "seasonal residence," which meant that it could not be lived in year round. In May

1997, the town's land use department sent a letter to the Buyers, notifying them that they were using the premises as a year-round dwelling in violation of the applicable zoning regulation.

Buyers then filed the instant lawsuit, alleging that Mr. Dowley committed malpractice because the conveyance to the Buyers "did not vest good title in the [Buyers] in that prior to the conveyance the real property was encumbered by zoning regulations limiting and restricting the use of said premises to less than year round use and occupancy." (The counts of the complaint naming the Sellers were withdrawn and were not the subject of this lawsuit). The Buyers further alleged that they overpaid for the property because of Mr. Dowley's "negligent and unskillful examination of the title and his subsequent advice." Mr. Dowley countered that the evidence did not support a cause of action against him for failure to review the zoning records to determine whether a use restriction existed, or for failing to advise the Buyers that the title search did not address zoning issues.

The court first noted that expert testimony is required in connection with an attorney malpractice action in Connecticut. The court also noted that the Standards of Title of the Connecticut Bar Association "are deemed authoritative by real estate practitioners in Connecticut." According to the court, Mr. Dowley's expert witness, Michael Wells (a local experienced real estate attorney), "credibly explained that the purpose of a title search is to ensure that a client is receiving marketable title, as prescribed by the Marketable Record Title Act, meaning an unbroken chain of title for forty or more years, and by the Standards of Title." The applicable Connecticut statute (Conn. Gen. Statutes sec. 47-33b(a)) defines "marketable record title" as "a title of record which operates to extinguish such interests and claims, existing prior to the effective date of the root of title . . ." The court gave further credence to Mr. Wells' testimony that the applicable standard of care did not necessarily require a search of the zoning records, where there were no unusual circumstances evident from the land records or disclosed by the purchasers, such as foreclosure or bankruptcy, and that "zoning records are not title defects unless they rise to the level of a zoning violation, which is recorded on the land records and which constitutes an encumbrance." Mr. Wells further testified that his general practice was to provide clients with a certificate of title after the completion of a title search only when specifically requested by the client as an additional service (and at additional cost).

The court further found that Mr. Wells' testimony regarding the concept of marketable title was in accord with a Connecticut appellate court decision, Frimberger v. Anzellotti, 25 Conn. App. 401 (1991), which stated that "the concept of encumbrances cannot be expanded to include latent conditions on property that are in violation of statutes or government regulations. To do so would create uncertainty in the law of conveyances, title searches and title insurance. The parties to a conveyance of real property can adequately protect themselves from such conditions by including protective language in the contract and by insisting on appropriate provisions in the deed." Id. at 409. Finally, the court also agreed with Mr. Wells' conclusion that the fact that a zoning variance had been previously granted to the Sellers for the purpose of constructing a deck on the property "did not require a check of the zoning records, since it did not affect the marketability of title."

The court dismissed the testimony of the attorney designated as the Buyers' expert witness, Terrence Lomme, as not credible. The court noted that the attorney representing the Buyers in the subject litigation had formerly employed Mr. Lomme, and that Mr. Lomme was married to this attorney's sister-in-law. Mr. Lomme also acknowledged that he already knew, when he conducted his search of the title to the property in preparation for his testimony, that the premises were zoned as a seasonal dwelling because of his prior representation of the Buyers.

The court stated that Mr. Lomme "did not learn of the seasonal nature of the property from conducting a title search of a property with which he was previously unfamiliar." (Mr. Lomme also testified that it was his belief that "the standard procedure with respect to communicating an opinion of title was to issue a title insurance policy," and that it was "standard operating procedure for an attorney examining title, as the buyer's counsel, in a transaction of this type, to check the zoning file"). Furthermore, the court noted, the Buyers acknowledged that no Connecticut case law supported their position. The Buyers' attorney cited to a passage in a Connecticut real estate treatise that stated that because even title insurance policies excepted zoning laws from coverage, it was "important for the purchaser's attorney to determine if the property being conveyed is or will violate any law or regulation." However, the court ruled that this language was inapplicable, because (as it had noted earlier in its opinion) Connecticut case law was clear that an attorney was required to look only to the land records to ascertain whether the zoning authority had cited the property for a violation.

In summary, the court found that the title search performed by Mr. Dowley met the standard of care required of a Connecticut attorney, especially when his office (and, apparently, the Sellers) had never been informed by the Buyers of their intention to occupy the premises year-round instead of on a seasonal basis. (Mrs. Schlindrer testified at the trial that she and her husband intended to purchase the property as a year-round retirement home. However, no evidence was presented that this intention was ever communicated to Mr. Dowley). According to the court, "the Buyers were getting what their real estate agreement . . . required, good title."

Reorter's Comment 1: The court, citing Frimberger, explained the concept of "marketable title" in Connecticut as follows:

"[F]or a deed to be free of all encumbrances there must be marketable title that can be sold at a fair price to a reasonable purchaser or mortgaged to a person of reasonable prudence as a security for the loan of money . . . To render a title unmarketable, the defect must present a real and substantial probability of litigation or loss at the time of the conveyance."

This definition is in accord with most states' definition of marketability. The court agreed with the Frimberger court's holding that "latent" violations of zoning and land use regulations not recorded in the land records and not known to the seller, and which have not "ripened" into a recordable claim against the property, do not constitute an encumbrance that would cause a breach of a deed warranty.

Reporter's Comment 2: It is puzzling why the Buyers did not retain Mr. Dowley (whom they never even met until the trial) as their attorney until almost two months after signing the purchase agreement for the home. It is also unclear whether Mr. Dowley's law firm was located in the East Haddam area and was familiar with properties in that area. Furthermore, it is also puzzling why the purchase agreement did not require the Sellers to produce a certificate of title or title insurance policy (which the Buyers' expert witness, Mr. Lomme, testified was the standard procedure at the time in connection with Connecticut residential real estate closings). This case highlights the importance of hiring an attorney before -- not after -- entering into a residential purchase agreement (especially since this is the largest expenditure that many people make in their lifetimes) and meeting with the attorney beforehand and disclosing all relevant facts concerning the purchase.

Reporter's Comment 3: The court was particularly bothered by the fact that the Buyers had never informed Mr. Dowley of their intention to occupy the premises year-round, pointing out this fact several times in its opinion. This indicates that the court may have ruled in favor of the Buyers if they had informed Mr. Dowley of this intention, and he had then failed to inform them before closing of the applicable zoning regulations that forbade year-round occupancy. (The court noted that the land was lakefront property and that the land use administrator for the town testified that the zoning office is located next to the town clerk's office, which contained the East Haddam land records). This would seem to place an unexpected -- and perhaps unjustified -- burden on Mr. Dowley, based on Mr. Wells' testimony (and the Connecticut appellate court's decision in Frimberger, supra) that the only obligation of a purchaser's attorney (unless expressly agreed otherwise) is to search the land records for notice of existing violations of zoning regulations.

Reporter's Comment 4: Even if Mr. Dowley had checked the applicable zoning ordinances and regulations and informed the Buyers of the restrictive zoning provision, it is doubtful whether the Buyers would have had any recourse against the Sellers. The purchase agreement called for the Sellers to deliver a warranty deed "subject only to the provisions of any ordinance, municipal regulations, public or private law, restrictions and easements as appear of record, if any, provided they do not affect the marketability of title." The deed delivered by the Sellers stated that the premises were conveyed "free from all incumbrances whatsoever, except as herein stated"

(none were listed). The court noted that, under Connecticut law, no encumbrance would be deemed to exist for zoning matters unless a zoning violation had occurred and was recorded in the land records prior to the closing. As noted earlier, the court stated that "the title work for which [the Buyers] were charged enabled their attorney to ascertain that the Buyers were getting what their real estate agreement required, good title." Again, this case highlights the importance of involving the attorney (and the title company) at the earliest stages of the proposed transaction, and making full disclosure.

Reporter's Comment 5: As the court correctly pointed out, even if the purchase agreement had required the Sellers to provide the Buyers with an owner's policy of title insurance, the policy exclusion for governmental laws and regulations would have precluded any claim against the title company based on zoning matters, whether or not an actual violation had occurred (unless recorded in the land records). Specifically, the policy excludes coverage for claims based on any law, ordinance or environmental regulation (including but not limited to building and zoning laws, ordinances or regulations) that restricts, regulates, prohibits or is related to the occupancy, use or enjoyment of the land, or relates to environmental protection. This exclusion does not apply when a lien or some notice of violation or enforcement related to the governmental regulation or police power has been recorded in the public records prior to the effective date of the policy.

Editor's Comment 1: The editor concurs that the failure to suggest that Buyers obtain a title insurance policy, although it might be actionable malpractice in the proper circumstances, had nothing to do with the loss here. To say this, however, is not to say that zoning matters are totally outside the purview of an attorney retained to assist buyers in the purchase of a home. Although, it is true, that the Buyers had already signed a contract here, the attorney was in a position to advise them concerning the rights and obligations created under that contract. If his representation did not include this function - one which typically clients would expect - then the attorney had a duty to so advise the clients. An attorney can limit services strictly to review of matters of record title, but clients should not be expected to understand that such limits exist unless they are so informed (or unless the attorney has reason to believe that usage and custom in the area are so clear that buyers would understand this limitation).

The editor is not suggesting that the attorney becomes a general personal and business advisor as a consequence of one client visit. But when clients come to an attorney for assistance in the acquisition of real estate, and provide the attorney with a copy of the contract, then some duty arises to assist the parties in understanding the transaction.

In reviewing the contract, the attorney should use a reasonable degree of skill and diligence to ascertain whether there might be special issues that ought to be addressed pre closing. As Jack Murray, the reporter, suggests above, it is relevant to ask whether there it would be reasonable to expect that the Buyers here were unwittingly buying into a seasonal restricted property but expecting to live there year-round. If the attorney had actual knowledge that this area was one where such zoning "gotchas" are common, then perhaps the attorney would have had the duty to inquire whether the Buyers were potential victims. It is quite possible that the Buyer's expectations in this regard would have been created by express or implied representations by the Sellers, and it is far easy to exploit such an argument to avoid closing or modify the deal than it is to recover adequate damages after closing has occurred. In fact, even if there had been no claim against Sellers, Buyers might have elected simply to refuse to close and to pay whatever damages accrued.

If the attorney had no reason to believe that a seasonal restriction might be present here, then the editor, at this distance, is in no position to second guess the trial court.

Editors Comment 2: It would be useful for the Attorney's Title Standards or other bar generated statement of the responsibilities of a title attorney to address issues such as this, and the editor would certainly credit any "safe harbor" instruction as to disclosures or basic inquiries designed to insure that clients receive what they actually and fairly expect to receive when they consult an attorney.

But the bottom line is that the attorney frequently knows what questions the client buyer ought to be asking, and the buyer frequently does not.

To leave it to the consumer client to define the scope of representation is not always the best professional decision.

The Reporter for this DD is Jack Murray of First American Title Insurance, Chicago.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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