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                                        130 N.J.L.J. 882
                                        March 16, 1992


Appointed by the New Jersey Supreme Court


Real Estate Closing Practices

    The Committee has received a number of inquiries and complaints concerning what has been identified as the "South Jersey Practice" of closing title in real estate transactions. The most recent inquiry was from the Unlawful Practice of Law Committee of the New Jersey State Bar Association stemming from its investigation and concerns arising from a May 1, 1990 unpublished opinion in Sears Mortgage Corp. v. Michael Rose & Emery Caesar, et al., Docket No. F-2386-88 (Chancery Division, May 25, 1990), which, in dicta, appears to approve and encourage the use of the so-called "South Jersey Practice" throughout the State of New Jersey.See footnote 1 1
    In reviewing the inquiry we have considered existing case law in the area of unauthorized practice of law as it pertains to real estate practice as well as applicable published Unauthorized Practice of Law Opinions and Rules of Professional Conduct. The Committee's opinion is based on the manner in which a typical South Jersey real estate transaction occurs. The description of the "South Jersey Practice" is taken from the information supplied to the Committee in the inquiry as well as the Chancery Division's findings of fact concerning "The Northern Jersey Practice vs. the Southern Jersey Practice" in Sears Mortgage Corp. v. Rose, supra, and similar findings in Client Security Fund v. Security Title & Guaranty Co., supra, 249 N.J. Super. 113. Whether the "South Jersey Practice" described below constitutes the unauthorized practice of law will have no impact on the issues being considered in Sears or Client Security Fund.See footnote 2 2 The use of the reference "South Jersey Practice" is to identify a set of procedures typically followed in southern New Jersey in closing real estate titles. The reference in no way limits the scope of this opinion, which is intended to address all real estate closing practices.

A. Facts Pertinent to the Inquiry
    The following facts constitute the "South Jersey Practice." Customarily, the seller's real estate broker prepares the initial contract of sale. While these contracts typically contain the required attorney review clause, the sellers in South Jersey transactions are often not represented by counsel. After the agreement has been prepared by the broker, signed by the parties and the attorney review period has passed, the broker then orders a title search on behalf of the buyer. The broker will often be authorized by the contract, which the broker prepared, to obtain the deed and affidavit of title on behalf of the seller. When the title search is completed and a title commitment is issued, the commitment will be sent by the title company directly to the real estate broker, usually without a copy of the commitment being provided to the insured buyer. The broker then communicates with an attorney to prepare the deed and affidavit of title.
    The parties proceed to closing at the office of the title company or the office of the real estate broker. As the South Jersey Practice has developed, no lawyer is present at the closing and instead, the title company sends a title clerk, an employee of the title company, to conduct the closing. The title clerk prepares the closing statement, collects and deposits all closing funds and disburses those funds from the title company's account. The title clerk assumes the responsibility for the recordation of the deed, mortgage, and any other required documents, and the payoff of the existing mortgage, taxes and other liens. The title clerk usually reviews the mortgage closing package forwarded by the buyer's lender, attends to the execution of those mortgage documents by the buyer, and explains the documents to the buyer. The title clerk also generally assumes responsibility for satisfy ing the conditions stated in the mortgage company's commitment letter and final closing instructions, including the removal of exceptions from the title binder.

B. Questions Raised by the Inquiry
    Does the practice of conducting real estate transactions without the assistance of an attorney, which practice is prevalent in Southern New Jersey, constitute the unauthorized practice of law? More specifically, do any or all of the following acts constitute the unlawful practice of law: (1) the ordering of a title search and abstract by a real estate broker; (2) the preparation of conveyance documents either by a title company or by an attorney retained by the broker; (3) the removal of exceptions to the title by a title company; involving rendering legal opinions and lawyer activity; and (4) the practice by title companies of conducting closings or settlements without the presence of attor neys.

C. Response to Inquiries

     (1)     A Real Estate Broker May Not Order a Title Search and Abstract

    The question whether the ordering of a title search and abstract by a real estate broker constitutes the unauthorized practice of law was answered by this Committee in the affirmative in 1972 in Opinion 11, 95 N.J.L.J. 1345. Opinion 11 determined it was the unauthorized practice of law for a title company to issue a title policy or provide an abstract of title to a person other than the present owner and prospective purchasers or an attorney. The Committee concluded that the skill and knowledge possessed by a lawyer is of value to the public in ordering title searches and policies:    
    It is obvious that the selection of the proper title search or title policy and the extent and nature of the legal liability of the searcher or insurer is fraught with numerous legal problems for which buyer's attorney is trained to advise. Based on such advise, the buyer can make a sound decision and avoid unnecessary expenses and headaches.

Unauthorized Practice Opinion 11.
    Subsequent to the issuance of Opinion 11, the New Jersey Legislature enacted the Title Insurance Act of 1974, N.J.S.A. 17:46B-1 et seq. Section 9 of the Act provides, in part, that on every application for a commitment for title insurance, the name and address of the applicant and the proposed insured shall be set forth in full. Section 9 also requires that except where the applicant is an attorney at law of the State of New Jersey representing the proposed insured, or the proposed insured is a governmental authority, the title company is required to mail a notice to the address of the insured notifying the insured that there may be conditions, exceptions, and limitations of the insurance liability of the title company contained in the commit ment to insure, and that the proposed insured is entitled to review the title commitment before the transfer of title with an attorney at law of the insured's own choosing.
    Based upon the Title Insurance Act of 1974, and the reasons already set forth in Opinion 11, the Committee finds that the ordering of a title search by a real estate broker constitutes the practice of law. "As stated by our Supreme Court, the public has the 'right to protection against unlearned and unskilled advice in matters relating to the science of the law.'" New Jersey State Bar v. Divorce Center, 194 N.J. Super. 532, 538 (Ch. Div. 1984), citing Tumulty v. Rosenblum, 134 N.J.L. 514 (Sup. Ct. 1946). Because we find that the same is not in the public interest, the acts described above constitute the unauthorized practice of law. We reaffirm our conclusions in Opinion 11.

(2)    An Attorney Retained By a Title Company or a Real Estate Broker May Not Prepare Conveyance Documents for a Real Estate Transaction

     The preparation of conveyance documents by either a title company, broker or an attorney retained by the title company or the broker constitutes the unauthorized practice of law. The New Jersey Supreme Court has held that the "practice of law embraces the art of conveying, which has been defined as 'a term including both the science and art of transferring titles to real estate from one man (sic) to another.'" Cape May County Bar Association v. Ludlam, 45 N.J. 121, 125 (1965). In that case, the Court held that the aspect of conveyancing which encompasses the drafting of legal documents has been proscribed to all but licensed attorneys because "the exercise of judgment in the proper drafting of legal instru ments or even the selecting of the proper form of instrument, necessarily affects important legal rights." Id. at 126. The Supreme Court reaffirmed this conclusion in New Jersey State Bar Association v. Northern New Jersey Mortgage Association, 32 N.J. 430 (1960), which also concluded that a title company could not draft deeds, affidavits of titles, etc. where the title company is acting only in its capacity as title insurer and not on behalf of itself as either a seller or mortgagor. Further, N.J.S.A. 17:46B- 13 provides that no title insurance company and no title insurance agent shall engage in the practice of law or render legal services, legal advice or legal opinions. That subsection further provides that nothing in the Act is to be construed as permitting or authorizing any act by a title insurance company or agent which was then or may in the future be prohibited by the New Jersey Supreme Court.See footnote 3 3

    Further, a broker or title company may not have an attorney of its choice draft the closing documents. The Supreme Court, in Stack v. P. G. Garage, Inc., 7 N.J. 118 (1951) stated that it could not permit one who is not a lawyer to be engaged in the business of handling legal matters for others even if it retains an attorney to perform the legal work.
    Such a practice, if tolerated, would destroy the confi dential relationship of attorney and client, thwart the control of the courts over the practice of law and irreparably impair the sound administration of justice.

7 N.J. at 123. Since neither a broker nor title company may prepare conveyance documents, they are likewise prohibited from retaining legal counsel to do the same acts. Therefore, it is evident that the drafting of a deed and seller's affidavit of title must be performed by a licensed attorney other than an attorney at law acting on behalf of a title company which is either a seller or mortgagor in the transaction.

(3)    A Title Company May Not Remove Exceptions from a Title Policy by Participating in Clearing Legal Objections to the Title

    In New Jersey State Bar Ass'n. v. Northern N.J. Mtge. As sociates, 32 N.J. 430 (1960), the Supreme Court held that a title company's participating in clearing objections to the title which necessarily involved some legal opinion and activity constituted the unauthorized practice of law:
    The third category discussed by the Title Company relates to its "insuring titles and causing searches and ab stracts to be made; and we also agree that it may have a legal representative to protect its interests at the title closings, although it is regrettably noted that in approximately 50 per cent of the past closings the purchasers had no independent counsel and in approximate ly 10 per cent of the closings the sellers had no independent counsel. The real difficulties arise where, as the evidence here indicates, the Title Company par ticipates in clearing objections to title, which neces sarily involves some legal opinion and activity, and also imposes a charge (apart from the title insurance premium, recording fees, etc.) for "search and title abstracting" in an amount far exceeding its actual cost for search and abstract. We hold the opinion that while the Title Company may properly voice its objections to the title and not issue its title policy or lend its money on mortgage until the objections have been removed, it may not participate in the preparation of legal instruments or in the taking of other legal steps necessary to remove the objections to the title or to cure the defects therein . . . .

32 N.J. at 445 (citations omitted). The Court concluded the public interest is significantly advanced by purchasers being encouraged to retain independent counsel:
    Finally, the Title Company contends that the public policy of this State compels the judicial conclusion that its activities do not constitute the unauthorized practice of the law. We have, earlier in this opinion, set forth the activities of the Title Company which we have found to constitute unauthorized practice and they will be enjoined. To the extent that this action serves to remove unwarranted charges imposed by the Title Company on purchasers and to encourage parties to obtain the important protection of independent counsel, the public interest will not be disserved but on the contrary will be significantly advanced . . . .

32 N.J. at 447 (citation omitted).See footnote 4 4

    In light of this decision, it is evident that the clearing of title objections by a title company which involve some legal opinion and activity constitutes the unauthorized practice of law.

4.    The Practice of Title Companies in Conducting and in Encourag ing Closings or Settlements Without Presence of Attorneys Con stitutes the Unauthorized Practice of Law    

    In Opinion 11, the Committee considered evidence of the "growing practice in the southern part of the State to exclude lawyers from the real estate transaction completely." We deter mined that the practice of title companies in conducting closings or settlements without the presence of attorneys, which is part of a system that discourages the presence of attorneys, constitutes the practice of law by a lay corporation which was not in the public interest and constituted the unauthorized practice of law. See also New Jersey Bar Ass'n., supra, 32 N.J. at 445-447. Since the issuance of Opinion 11 in 1972, this practice has continued and, we note, some have even recommended that the practice, now found mainly in southern New Jersey, be expanded to other portions of the State.
    In New Jersey State Bar Ass'n v. New Jersey Ass'n of Realtor Boards, 93 N.J. 470 (1983), the Supreme Court was asked to address the issue of whether the preparation of a form contract for the sale of property by a licensed real estate broker who had negotiat ed the sale was the unauthorized practice of law. A consensual resolution of the controversy was agreed upon by the parties and, after public hearings combined with the trial testimony and evidence, the Court approved a consent judgment. The settlement, as approved by the Court, allows the realtor to consummate the contract phase of the transaction (provided that contract contains the court approved language allowing a three day attorney review period), with attorneys handling the actual transfer of title. The lower court stated: "[m]ost importantly, however, [the settlement] serves to protect the public interest by making the contract subject to prompt attorney review if either buyer or seller so desires." 186 N.J. Super. at 396.
    The current real estate practice in southern New Jersey appears to chill the intent of the consent judgment approved in N.J. Ass'n of Realtor Bds. While the real estate contracts prepared in southern New Jersey presumably all contain the three day attorney review clause, the practice of that area's real estate brokers appears designed to dissuade the parties from retaining the services of an attorney. In its decision, the Supreme Court acknowledged that there is an inevitable or unavoidable overlap between the realty and legal professions, but the Court found that the public's interest would be safeguarded "through the settlement's attorney review provisions." Id. at 474. However, such a review provision cannot fulfill the Court's vision of safeguarding the public interest if the retention of attorneys by the parties is discouraged. As Justice Schreiber stated in his dissent, language indicating that a party may choose to consult an attorney who can review and cancel the contract "can scarcely serve as an adequate safeguard" when there are no assurances that the parties will even read the contract or "that the realtor will read that advice to the parties." 93 N.J. at 485. Again, we emphatically decide that the practice of title companies in conducting closings or settlement without the presence of attorneys constitutes the unauthorized practice of law.

    By this Opinion, the Committee has reiterated and affirmed existing case law and its prior Opinion 11. The evident fact that the practices of real estate brokers and title companies addressed by the inquiry have grown and proliferated since the publication of Opinion 11, notwithstanding the clear and established case law, is disturbing. The unauthorized practices by real estate brokers and title companies discussed in this Opinion could not exist absent the acquiescence or participation in the transactions by members of the bar representing or employed by banks, other lenders and title companies. RPC 5.5(b)See footnote 5 5 provides that it is unethical for an attorney to assist a person who is not a member of the bar in the performance of an activity that constitutes the unauthorized practice of law.

* * *

Footnote: 1 1We understand an appeal from the Chancery Court decision is pending before the Appellate Division, Sears Mortgage Corp. v. Rose, Docket No. A-1959-90T1. Also, there is an appeal pending in a case with related subject matter. See Client Security Fund v. Security Title & Guaranty Co., 249 N.J. Super. 113 (Ch. Div. 1991), Docket No. A-4570-90T1. Our opinion does not address the subject matter of either Superior Court case which concerns the liability of title companies for the acts of attorneys in real estate transactions. Indeed, the Court in Client Security Fund considered the existence of the North Jersey and South Jersey closing practices and found the "form of the closing" to be "legally neutral" to the question before the Court. Id. at 121-22 and 127- 28.

Footnote: 2 2In Sears, the parties presented expert testimony concerning the differences between closing procedures in southern New Jersey and northern New Jersey. The trial court noted there was no real dispute concerning the evidence on the differences. Similarly, the parties in Client Security Fund presented proofs concerning the differences between the South Jersey and North Jersey title settlement or closing practices. 249 N.J. Super. at 120-21. The Court, however, found the proofs interesting but not relevant. Id. at 121. The issue before the Court in both cases was whether the title company for the purchaser was obligated to pay-off the seller's existing mortgage which was not paid at closing because the buyer's attorney misappropriated the purchase monies.
Footnote: 3 3In Client's Security Fund, the Court observed:

    Certain aspects of a "South Jersey" closing may run afoul of N.J.S.A. 17:46B-13 which in pertinent part, provides: "No title insurance company and no title insurance agent shall engage in the practice of law or render legal services, legal advice or legal opinions."

249 N.J. Super. at 128 n.3.

Footnote: 4 4With respect to the Supreme Court's admonition concerning the important protection afforded the public by independent counsel, this committee notes that numerous statutes affect or govern aspects of residential real estate closings and, in particular, residential mortgage lending transactions. Statutes such as the Truth and Lending Act 15 U.S.C. §1601 et seq., the Real Estate Settlement Procedures Act 12 U.S.C. §2601 et seq. and New Jersey's recently enacted Act Concerning the Regulation of the Mortgage Loan Application and Commitment Process, N.J.S.A. 17:6F-12 et seq. (the "New Jersey Act") require certain disclosures to be made to borrowers, or regulate actions that a lender may take in originat ing a residential mortgage. The complexities of these and similar statutes and their requirements again underscore the need for an attorney in the process to act as the guiding hand for the borrower. Indeed, in the legislative findings in the New Jersey Act, the Legislature found that:

    In the 1980's the mortgage loan application, commitment and closing process has become very complex: in most cases it is no longer a simple transaction between the local lender and a borrower, but often involves several parties on the lending side, a wide variety of settlement activities to be performed and paid for, considerable disclosure requirements on the part of the lender, and detailed information requirements on the part of the borrower, which together often create confusion on the part of the borrower, misunderstanding between the borrower and the lender, and borrower frustration with the whole process.

N.J.S.A. 17:16F-12(b).

Footnote: 5 5The rule reads:

        A lawyer shall not:
        (b) assist a person who is not a member of the bar in performance of activity that constitutes the unauthorized practice of law.
RPC 5.5(b).

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