Title Issues of the Peculiar Variety - Over Burdening of Homestead, Mezzanine vs. 2-Story Restrictions John Rothermel September 20, 2018
In order to obtain a CE Certificate or CLE Credit, you must listen to the webinar for a minimum of 55 minutes obtain the password (provided at the end of the presentation) follow the instructions as given 2
ATTORNEY INFORMATION Because of opinions expressed by the Texas Department of Insurance (TDI) concerning rebates, legal credit is available only to: Attorneys who own title agencies that are Stewart Title Guaranty Agents Attorneys employed by a title insurance agent licensed with Stewart Title Guaranty or Stewart entities Fee attorneys who have an Escrow Officer license through a Stewart Title Agent or Stewart entity We welcome any other lawyers to listen, but cannot provide continuing education credit to you. 3
Title Issues of the Peculiar Variety: Overburdening of Homestead; Mezzanine v. 2-Story Restrictions John Rothermel Senior Vice President Regional Underwriting Counsel Senior Underwriter SW Regional Underwriting Office Stewart Title Guaranty Company
OVERBURDENING HOMESTEAD 5
Overburdening of the Homestead and Spreading Lien to Homestead To some extent, this problem was dealt with in 1999 and 2005 when Texas passed legislation and a constitutional amendment dealing with the twin issues of overburdening of homesteads and spreading of liens. 6
Overburdening of the Homestead and Spreading Lien to Homestead Overburdening • releasing part of homestead property from lien Spreading • using homestead as collateral to buy more homestead property 7
Overburdening of the Homestead and Spreading Lien to Homestead Although, these issues are no longer relevant as to the previous facts, the history lesson remains important and will allow you to understand when NOT to worry about a proposed deal. 8
Stewart found the problem. Stewart fixed it. It is very difficult to find the case law creating the doctrine of overburdening and spreading. It was first published in a Stewart Examiner’s Manual created in the mid-1960s. Stewart took the position because of a couple of cases from the 1940s. Stewart would not insure a loan where spreading or overburdening could be alleged. • John Hancock Mutual Life Insurance v. Glasgow (135 Tex. 470, 141 S.W.2d 942) • Baxter v. Crow (133 S.W.2d 187) Apparently, the entire title industry followed suit. 9
Stewart found the problem. Stewart fixed it. Since we were amending the constitution anyway, we decided to fix the problems. The constitutional amendment for overburdening was drafted first and the author wouldn’t allow spreading to be added, so we had to find a creative place in the property code, and we did. 10
Overburdening and Spreading Art. 16 Sec. 50 of the Texas Constitution provides the only time homestead property can be used as collateral is for a debt. – Purchase Money – Taxes – Improvements – Owelty Liens – Federal Tax Liens – Home Equity Loans – Reverse Mortgages – MHU Refinances 11
Overburdening and Spreading The rationale of the bankruptcy courts in declaring owelty liens unconstitutional (pre-1995 amendments) applies to spreading of the liens doctrine. “ Not using homestead property you already own as collateral to buy more.” 12
Overburdening and Spreading A owns property and wants to buy additional property. Lender wants the lien to be against the additional property and the borrower’s homestead. Looking at the list of permissible homestead loans, where would this fit in? – It doesn’t. – And even though spreading no longer applies when acquiring additional homestead property, we wouldn’t allow homestead property to be used as collateral for non- homestead acquisition, like a commercial building in town when you live on a rural homestead or vice versa. 13
Overburdening and Spreading The concept of adding the homestead to a purchase money lien on other land, EVEN IF IT WAS TO BE HOMESTEAD, would be prohibited. Thus, the doctrine of spreading of the liens would have declared the lien invalid. The Stewart lobbying team overturned this doctrine. (See Art. 16 Sec. 51.) 14
Legislative Fix to the Overburdening Problem Art. 16 Sec. 51. SIZE OF HOMESTEAD; USES; RELEASE OR REFINANCE OF EXISTING LIEN. The homestead, not in a town or city, shall consist of not more than two hundred acres of land, which may be in one or more parcels, with the improvements thereon; the homestead in a city, town or village, shall consist of lot or contiguous lots amounting to not more than 10 acres of land, together with any improvements on the land; provided, that the homestead in a city, town or village shall be used for the purposes of a home, or as both an urban home and a place to exercise a calling or business, of the homestead claimant, whether a single adult person, or the head of a family; provided also, that any temporary renting of the homestead shall not change the character of the same, when no other homestead has been acquired; provided further that a release or refinance of an existing lien against a homestead as to a part of the homestead does not create an additional burden on the part of the homestead property that is unreleased or subject to the refinance, 15 and a new lien is not invalid only for that reason.
Overburdening of the Homestead A owns 83 acres of land and has a mortgage of $290,000. A has paid the loan down to $160,000 and asks the lender to release 40 acres of the homestead land. The doctrine of overburdening would not allow this. Currently, each acre bears a debt loan of $3493.98 (290000/83). 16
Overburdening of the Homestead Upon the release, each acre bears $3720.93 (160000/43). So each remaining acre would now bear more debt than it originally started with and thus wouldn’t be allowed under the Texas Constitution. The Stewart lobby team fixed this problem, too. 17
Legislative Fix to Spreading Sec. 5.042. ABOLITION OF COMMON-LAW RULES. (a) The common-law rules known as the rule in Shelley's case, the rule forbidding a remainder to the grantor's heirs, the doctrine of worthier title, and the doctrine or rule prohibiting an existing lien upon part of a homestead from extending to another part of the homestead not charged with the debts secured by the existing lien upon part of the homestead do not apply in this state. 18
MEZZANINE V. 2-STORY 19
In 1920, Mrs. Dorothy Smith owned three adjacent lots. She wanted them to be developed into a nice area and restricted each of them to a 2-story single family home. Three nice homes were built and remained until 2014. In 2014, a developer bought two entire blocks of land, including the two adjacent lots to tear all homes down and build a nice townhouse addition of 3-story homes. The developer knew about the 2-story restriction which would destroy the uniformity of his addition. What to do? 20
Developer consults a very smart attorney who advises that a mezzanine would comport with the restrictions because the third floor wouldn’t actually be a floor. Attorney purporting to represent the Heirs of Mrs. Smith sent a letter to the developer stating that the restrictions had been violated and demanding several thousand dollars in damages. 21
Questions — Does a mezzanine violate a 2-story restriction? What is a mezzanine? • Under the 1920 building code, there was not a definition of a mezzanine. • Under the 2012 building code, there is. 22
A mezzanine Think of a theatre — You have the main floor and you have a balcony, but many theatres also have a mezzanine, a sort of ½ balcony between the main floor and the balcony. Under modern building codes, a floor covers more than 40% of the floor beneath it. A mezzanine covers less than 40% of the floor beneath it. 23
A mezzanine Think of the bonus room that partly covers a den (but not the kitchen, living room and dining room or the bedrooms) — What was Mrs. Smith thinking when she restricted the homes to 2-stories? Would she have considered the mezzanine a floor? Too expensive of a test case for the underwriting premium. 24
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