Title Issues - Part I
I begin a series of newsletters addressing the concept of title by
reviewing the definitions of "marketable title" and "insurable title."
Delivery of marketable title (also stated as "clear title," "good
title" and "merchantable title") is at the heart of every real estate
transaction. This requirement is so basic that if a contract is
silent about the quality of title a seller must convey, then marketable
title is implied.
Despite its importance, there is very little
guidance on what marketable title is, and this lack can lead to immense
frustration. Whether title is marketable is fundamentally a legal
opinion, and, as we all know, lawyers often differ in their opinions.
The most quoted definition states that a "'marketable title' is one
free from reasonable doubt in law or fact as to its validity."
This standard is obviously vague. I find the following alternative
definition a little more helpful: "a title that is free from major
defect, such as a judgment or lien, and can be freely conveyed to a
reasonable buyer." These statements essentially mean title
that is good enough for the buyer to be confident she is getting
complete ownership of the property.
Courts have also articulated three additional rules regarding
marketable title that actually help in negotiating and addressing title
defects. First, marketable title does not mean perfect
title. If you are working in a transaction where a title issues
arises, do not despair immediately. Many title defects are not so
bad as to defeat contracts. Second, marketable title does not mean
one that the buyer is willing to accept. The buyer does not get
to dictate what good title is. A title with a technical defect may
still comply with the contract and require the parties to close.
Third, as a corollary to the last rule, marketable title is not defined
solely by the opinion of the buyer's attorney; however, there is no
definitive way to determine what opinion controls absent litigation.
In contrast to marketable title, "insurable title" may have
encumbrances or defects that a reasonable buyer would not normally
accept. However, a title insurance company may be willing to
insure against loss from the defect. One common example is an
uncanceled deed of trust due greater than 15 years ago. Such a
deed of trust is a lien against the property, but by state statute, it
is deemed canceled. Most title insurance companies will insure
over the risk of that lender demanding payment. By covering title
defects, title insurance allows some deals to go forward that might not
In upcoming newsletters, I will review the buyer's and seller's roles
regarding title under the Offer to Purchase and Contract, and will give
examples of "bad title" with suggestions on how you may be helpful in
not hesitate to contact me to receive more information on this topic or
to suggest topics for future editions of 'A Legal Moment'. You may not
rely on this content as legal advice for any specific situation, but
should instead contact an attorney for specific advice.