Kelly Moore: Marketable Title

Marketable title for real estate is a title that a court of equity considers to be so free from defect that it will legally force its acceptance by a buyer. Marketable title does not assume that absolute absence of defect, but rather a title that a prudent, educated buyer in the reasonable course of business would accept. For real estate practitioners, the most complete reference to title issues is found in the preprinted wording contained within an agreement/contract. If you cannot produce a clear title of deed to the property then the prospective buyer should expect to lose in a specific performance action.

Merchantable title and marketable title are synonymous terms.
In the absence of an agreement to the contrary, there is an implied undertaking in the contract that the vendor (person selling the property) has a marketable title. The contract typically provides that on failure of a vendor to deliver good and marketable title, the vendee (buyer) may rescind the contract and recover any deposit.

Defects that make title unmarketable

• Outstanding mortgages/liens
• Restrictive covenants
• Outstanding future interests of others in the property, i.e. a “reverter”.
• Encumbrances
• Easements on the property
• Variations in the names of grantors and grantees
• Variations in the chain of title
• Outstanding dower interests.
• Adverse possession claims
• Structural encroachments
• Existing violations of an equitable servitude or covenant
• Zoning restriction violations
Actions that do not defeat marketability
• Zoning restrictions (so long as there are no current violations of the restrictions)
• Other land use regulations

One of the most important concepts in real estate sales you’ll probably never hear about unless you don’t have it is marketable title. In this lesson, you’ll learn what marketable title is and why it’s important. On the other hand, unmarketable title is title to real estate with a substantial defect that creates an unreasonable risk to a purchaser of either being pulled into costly litigation or suffering a substantial economic loss such that a reasonably prudent purchaser will not accept the title. While the title may end up being good, the risk is just too substantial for a reasonable purchaser to take a chance with purchasing the property. You should keep in mind that a claim of adverse possession is just one of many types of defects or challenges to an owner’s title to property that can make the title unmarketable. Other examples include, but are not limited to, unreleased liens that have been paid and a gap in the owner’s chain of title. A chain of title is the historical record or deeds of the transfer of real estate throughout time from the original owner to the present owner and all the transfers in between. A gap in the chain means there’s no documentation that shows all the transfers up to the present owner and calls into question whether the present owner’s title is good.

Ownership and possession of real property that is readily transferable since it is free from valid claims by outside parties. The concept of marketability of title refers to ownership of real estate. Under law, titles are evidence of ownership. Selling real estate (land and the property attached to it) involves transferring its title. A marketable title is one that can be transferred to a new owner without the likelihood that claims will be made on it by another party. The concept is crucial in all real estate transactions because buyers generally expect to receive property to which no one else can lay claim; they do not expect that their ownership will later be challenged. Marketability of title is addressed in the contract for sale. Unless a contract for sale specifies that a third party has claims on the real estate, there is an implied provision that the seller has a good or marketable title, which the buyer will receive. However, some real estate that is for sale will have outside claims against it. These claims are known as clouds and encumbrances. For instance, the owner of the title may have outstanding debts or owe interest that has resulted in a lien being placed on the property. The lien gives the owner’s creditor a qualified legal right to the property in question, which remains in effect until the debt is settled. Because liens are long-lived (they can remain in force across generations), many states have tried to simplify land transactions by adopting marketable title acts. Generally, these laws limit the duration of a lien to a period of years during which the lien holder must take some action to satisfy the lien, or it is extinguished. Typically these laws apply to liens in existence at the time of the law’s creation, as well as to future liens. Ordinarily, contracts for the sale of real estate provide a remedy for a buyer who later discovers that the title is not marketable. If the seller has failed to provide marketable title, the buyer is permitted to rescind the sale that is, to back out of the contract and receive a refund of the money paid for the property.

The Difference Between Clear Title and Marketable Title

The differences between marketable title and clear title is that marketable title only warrants the contract promising the buyer that the property is free from all encumbrances while clear title deals with the title on the deed.

Marketable Title: Is a implied warranty in the land sale contract that says the title to property is not subject to a claim or defect that would present a substantial probability of litigation and buyer is receiving property free from reasonable doubt. Seller is also promising there is no encumbrances on property. Encumbrances include mortgages, tax liens, judgment liens, zoning violations, use restrictions and easements. The seller has a duty to clear all of these before the closing date of the contract and if seller fails to do so within reasonable time after closing, seller will be in breach.

Clear Title: Once the contract is performed and buyer gets possession of the property at closing date, the contract merges with the deed and the warranties of the deed controls. Once the contract is extinguished, buyer cannot claim the title is unmarketable and must go after the seller for any defects in the deed. Buyer can claim that the deed does not have clear title and another 3rd party is claiming rights to the property.

How Can I Make Sure That the Property Has Marketable Title?

If you are a buyer and are submitting a offer to purchase a property, it is your duty to investigate whether the title is marketable. Here are some ways you can learn if the property has marketable title.
• Set Conditions on Offer: You may make the offer contingent upon your acceptance of the status of the property’s title. This way if the title status is not marketable at closing you may back out of the deal without breaching the contract.
• Ask Seller: You may also ask the seller about any encumbrances on the title and seller must disclose this fact if he or she knew of it.
• Look at Seller’s Title Policy: You may also request to see the seller’s title policy, but the title policy would only reveal any encumbrances that were on property at the time seller purchased property nothing after that
• Title searches: Record searches are the best way to make sure a piece of real property has marketable title or uncover any encumbrances. In this process, an experienced title searcher will examine the public records in the city where the real property is located. This person will examine the grantor and grantee indexes for all recorded documents in the land registry concerning a particular piece of property. This search will produce a map of the chain of title.
A chain of title is what is produced by a title search. The chain of title lists all of the legally recognized conveyances of the property and is evidence that a piece of property has validly passed down through the years from one owner to the next without any problems. The title search will also determine if there are any encumbrances on the property, such as mortgages or liens. If the title search turns up nothing other than a valid chain of title, and if there are no other known encumbrances on the property, then the title is “good and marketable.” Usually an attorney or title searcher does a record search on the property few days before the closing date, at which various inspections and financing issues are usually cured. However, waiting couple days before closing could be costly since if an unwanted encumbrance comes up there will be not enough time to resolve the issue. Therefore, it would be a good idea to condition the purchase of the property and sale contract on a satisfactory title status. As a title search of most properties will reveal, almost no property has marketable title. Title searches usually turn up encumbrances on properties such as mortgages, real estate taxes, easements for sidewalks and other municipal improvements, federal taxes, government claims, legal judgments, foreclosures, condemnations, covenants, and private easements. When you do a title search, you are not usually looking for marketable title, but rather you are looking to determine what encumbrances are on the property and if they will pose any serious legal threats to your enjoyment of the property. A real estate attorney should be able to help you out on your marketable title issue. Property law is a confusing area of the law, and one should never go it alone.

Seller’s Encumbrances

Property owners can create encumbrances against property titles. For example, a business owner may encumber his real estate with a commercial mortgage. Creditors recording judgment liens for property owners’ unpaid debts create title encumbrances. Such liens must be discharged to make title marketable. Landowners may also encumber property for the benefit of others. For example, an easement can allow an adjoining landowner the right to use a commercial ingress on a neighboring land parcel. These types of encumbrances generally are not significant enough to render title unmarketable.

Land Use Restrictions

Encumbrances can also be created to comply with governmental requirements. For example, a municipality may require building restrictions, such as requiring minimum lot sizes, for commercial buildings. Zoning restrictions, which classify property as commercial, industrial, and residential, also restrict property uses. Land developers must generally reserve utility easements on properties before erecting structures. Government encumbrances typically do not prohibit marketable title since they usually do substantially interfere with the property’s use and enjoyment.

Title Searches and Insurance

Commercial real estate purchasers can determine if property titles are marketable by conducting title searches. Title companies examine public land records to disclose property interests, such as liens, easements, and building and use restrictions. Title searches protect purchasers by allowing them to require discharge of property encumbrances prior to closing so marketable title is conveyed. Title insurance policies can also be purchased at closing. Title insurance forever defends new owners from challenges based on pre-closing title defects.

Examples of Marketable Titles

When you purchase a home or other piece of real property, the title or ownership rights to that property are transferred to you from the seller. The escrow or settlement period of the transaction generally involves a thorough title search on the property and subsequently the purchase of title insurance. In order to transfer the title, the title must be deemed marketable, meaning that it does not contain defects so great that the title holder risks being unable to sell or transfer ownership of the property. A marketable title, however, can take a few different forms.

Clear Title

A clean title is perhaps the most marketable of all titles. The title industry uses the term “clean” to identify a title that has a clear and unbroken chain of ownership and is free from liens, levies, encumbrances, unpaid mortgages, and a host of other defects or “clouds” that could jeopardize an otherwise sound transaction. A clear title is very marketable, as there is little risk involved for the new buyer.

Insurable Title

Some marketable titles are identified as “insurable” instead of “clean.” This means that, while the title may not be completely free and clear from defects, the identified issues pose a low risk, and therefore a title insurance company is willing to underwrite a title insurance policy for the property. Sometimes the title insurance company will underwrite a policy that names a known risk as an exception to coverage — meaning the owner cannot file a claim on that specific risk later down the line. Other times, the company deems that an issue is so low risk that they are willing to cover the issue if or when it presents a problem for the owner in the future.

Possessory Title

Often times, a possessory title is also marketable. A possessory title does not have an immaculate chain of ownership, meaning that the previous owners were not all conventional buyers or legal heirs to the property. However, these “owners” attained their ownership status by occupying the home for a set number of years (which varies from state to state). To prove common-law possessory title, a judgment must be filed by an attorney that names the occupants as prescriptive owners.

Title with Known Easements

Often, property titles may have encumbrances that may affect the usage of a property, but not its ownership status. For instance, a property may have a city easement that prohibits the owners from installing a pool in their backyard due to city sewage or electrical lines that run through the property. This easement may affect the title of the property because it limits the actual ownership rights of the title holder. However, this type of title is still considered marketable, as these easements do not present major financial risk.

Real Estate Lawyer Free Consultation

When you need legal help with real estate in Utah, please call Ascent Law LLC for your free consultation (801) 676-5506. Title Problems. Evictions. Quiet Title Actions. Liens. Removal of Liens. Lawsuits. We do all this and more. We want to help you.