Contracting for Title Quality
• Under the derivative title principle, Buyer acquires only the title that
the Seller has (thus, Buyer needs to investigate Seller’s title)
– Problem: title investigation takes time/expense
– Buyer doesn’t want to incur this expense before making an offer
(and having the Seller at least conditionally bound on to perform on
the offered terms)
– Thus, Buyer needs to make sure that the contract appropriately
protects Buyer’s ability to do necessary “due diligence” before Buyer
is unconditionally bound
• Most contract forms will provide some period of time,
post-execution and pre-closing, in which buyer can
investigate seller’s title
– If K does not specify otherwise, the Seller is impliedly
obligated to provide “marketable” title at closing (if title is not
marketable, Buyer’s obligation is excused)
– But parties often specify, in detail, the quality of title seller
must provide, the types of interests to which buyer can or
cannot object, and the date prior to closing by which Seller
must establish title of agreed-upon quality
Haisfield v. Lape
“Marketable Title”
• Unless K provides otherwise, Seller is impliedly obligated to
deliver marketable title
– This means Seller’s title must be one that a reasonable buyer
would accept, free from reasonable doubt or the unreasonable risk
of litigation over its validity
– If title is “unmarketable,” Buyer is excused and can recover
deposit (and Buyer may have a claim for expectation damages —
more on that in 2 weeks time when we cover remedies)
• So what issues render title “unmarketable”?
• Haisfield contracted to buy Laurel Ridge Farm from Lape
– Contract: “Seller shall convey ... free of all encumbrances,
tenancies, and liens ... but subject to such restrictive covenants
and utility easements of record which do not materially and
adversely affect the use of the Property for residential purposes
or render the title unmarketable.”
• Title search revealed 30-yr restrictive covenant benefitting
Oakmont (neighboring land) prohibiting owner of Laurel Ridge
Farm from building a structure visible from Oakmont. Does this
render title unmarketable (and if so, why)?
• Easements and covenants are “encumbrances,” and
thus render title unmarketable, unless no reasonable
person in the position of the buyer would have a
reasonable basis to object to their existence
• What easements or covenants would be
unobjectionable?
– E.g., a utility service easement (utility service facilitates the
property’s use/development)
– E.g., a “residential use only” covenant, as applied to property
that was also zoned by the city for “residential” use only
Haisfield v. Lape
• Even on those facts, a reasonable buyer could still
object; title to Laurel Ridge Farm is still unmarketable
due to the view easement
– Rationale: the parcel is large (99 acres), and a reasonable
buyer might wish to divide it into smaller parcels
– Presence of the covenant would render many portions of the
99 acres unusable for development, and would thus chill the
potential market for the land
Haisfield (View Easement)
• Suppose that the Lapes introduced evidence
showing that Haisfield (the buyer) could
have built a home on Laurel Ridge Farm in
at least 5 different locations, none of which
would have been visible from Oakmont
• On this basis, can the Lapes argue that their
title to Laurel Ridge Farm is marketable?
Why or why not?
• Lambert contracts to buy condo unit from
Mitchell (K requires “marketable title”)
• Title search reveals these recorded
covenants:
–
–
–
–
“Residential use only”
“Caucasians only”
“No pets in any unit”
“No smoking in any unit”
• Do any of these covenants affect
marketability of title?
Problem 5
Problem 5: Racial Covenant
• Covenant is not legally unenforceable (FHA, Civil Rights Act),
and thus creates no encumbrance
• Lambert faces no risk of nonfrivolous litigation, so presence of
this covenant doesn’t make title unmarketable
• Can Lambert argue that the presence of the covenant is
subjectively bothersome to him (and to other reasonable
people) such that he should be able to object anyway?
– No; on that theory, any land w/racially restrictive covenant
anywhere in its chain of title would be unmarketable (bad policy)
Would
“No Smoking” or
“No Pet”
Covenants
Render Seller’s
Title
Unmarketable?
Problem 2: “Residential Use”
• Covenant is an encumbrance (it is legally enforceable by
neighboring owners)
• But it is doubtful whether it would render title unmarketable
– If the land was undeveloped land in a zone that permitted
nonresidential use, a reasonable buyer could properly object
(covenant would prohibit potentially desired uses)
– Here, though, Lambert is buying already-built residential
condo unit; objection to a “residential use” covenant would be
more likely viewed as objectively unreasonable
No-Smoking/No-Pet Covenants
• Suppose that Mitchell argues: “My title to the condo
unit is still marketable, notwithstanding the existence of
these covenants, because Lambert can still readily sell
the unit; lots of prospective condo unit buyers would be
willing to buy the unit subject to these covenants.”
• Should the court accept this argument and hold that
Mitchell’s title is marketable? Why or why not?
• No
– Even though covenants may not be
unreasonable restraints on alienation,
they still render the title unmarketable
– While it is true that many reasonable
buyers would not want to smoke or
have a pet, other reasonable buyers
might wish to smoke or own pets
– In the future, smokers or pet owners
would not be willing to buy the home
from Lambert (limiting his universe of
possible buyers)
Problem 2: “Exceptions” in Contract
• Mitchell should provide a copy of the CC&Rs to prospective
buyers for pre-contract review, and then have signed K
“carve out” any of the CC&Rs from Seller’s title obligation
– E.g., “Seller shall deliver marketable title to Buyer at closing, but
subject to the provisions of [recorded document containing CC&Rs],
the acceptability of which Buyer acknowledges by execution of this
agreement”
– This carve-out would allow Buyer to object to other title defects
identified prior to closing, but not the CC&Rs
• Suppose that Mitchell is just getting
ready to put his condo unit on the
market
– It’s a soft market, the CC&Rs for the
condo are extensive, and he’s worried
that potential buyers who “find better
deals” will claim one or more of the
covenants to be unacceptable, as a
pretext to get out of the deal
• How can Mitchell protect against
this risk?
Problem 2
• Seller tenders proposed contract to potential buyer, Gomer
– Contract: “Seller will convey marketable title, subject to easements
and restrictions of record”
– Seller has not provided Gomer with a title report, nor has Gomer yet
obtained a title report
• Gomer signs contract; then, in a title search, Gomer (who has
dogs) discovers a “no-pet” covenant
• Must Gomer perform, or should he be excused? Why?
• Problem: If Buyer agrees, court may conclude that Buyer
accepted all record matters as “exceptions” from Seller’s
marketable title obligation
• Buyer should not sign proposed K, unless Buyer has already
reviewed the listed exceptions and finds them
unobjectionable
• If Buyer has not reviewed the listed exceptions already,
Buyer should modify agreement as follows: “..., as long as
none of these matters shall interfere with Buyer’s intended
use of the Property”
Marketable Title and Adverse Possession
• Tri-State Hotel: title by AP is unmarketable, so Seller
cannot enforce contract
• Conklin: title by AP is marketable, if Seller can prove, in
Seller v. Buyer lawsuit, that Seller has a good title; if so,
Seller can enforce contract
• Which case reaches the better result, and why?
Problem 4: Title by Adverse Possession
• Buyer has contracted to by Blueacre from Seller
– Title search reveals that Seller lacks record title to Blueacre, so
Buyer objects that Seller’s title is unmarketable
• Seller sues for specific performance of K, and offers
uncontroverted proof of Seller’s continuous adverse
possession for > 27 years (20 years for title by AP)
• Should Buyer have to perform, or should Buyer be excused
from performance?
Problem 4: Curing a Title Defect
• Suppose you are the Seller in
Problem 4
• In jurisdictions (most) that treat title
by AP has unmarketable, how can
you put yourself in a position to
tender marketable title and thus
enforce a contract of sale?
Marketable Title and AP
• If deed exists, it could be recorded now (even late)
• If deed doesn’t exist or is lost, Seller could try to get
quitclaim deed from record owner(s) (or their successors)
• If no cooperation, Seller would have to bring a “quiet title”
action and establish title by AP
Contracting Strategy: “Insurable” Title
• Another possibility: Seller might want the contract to provide for
“insurable title” rather than “marketable title” (n. 1, p. 88)
– All persons w/record interests must be joined; memo of quiet
title decree can be recorded
– Problem: potentially very expensive
– If Buyer agrees to “insurable title” standard, Buyer would then have
to accept Seller’s title, even if not marketable, if title insurer agrees
to insure Buyer against the risk posed by the defect (in this case,
lack of record title)
– Would a title insurer agree to “insure over” this problem? Why or
why not?
Zoning and Title (Problem 6)
Title and Zoning Problems
• Litton enters written K to buy home
from Trachtenberg
– Trachtenberg has used home as a law
office
– Litton intends to do the same
– After K signed, but before closing,
Litton learns land is zoned R-1
(residential), and he refuses to close
• Trachtenberg’s title is not unmarketable just because the land
is zoned R-1 (residential)
– The government’s zoning (police) power is regulatory, not
proprietary (not a “title” interest)
– Litton may get sued (zoning enforcement) if he uses unit as a law
office, but not b/c of “title” to the unit
– Litton could have bargained for “zoning” contingency
• Should the fact that ordinance is being violated matter?
• Case law has split
– Lohmeyer v. Bower (KS): zoning violation
renders title unmarketable (risk of litigation)
– Weight of authority is contrary [Note 2(f), pages
91-92] [cf. Elysian Inv. Group: violation of
building code may affect value of land, but not
title to it]
• Litton might argue that Trachtenberg’s prior
use of land as law office = implied warranty
such use was legal/permitted
– Better approach: Litton should have made his
obligation contingent on acceptable zoning
Zoning
Violations