Real estate contracts - Marketability of title

Learning Outcomes

After reading this article, you will be able to explain the implied covenant of marketable title in real estate contracts, identify common defects that make title unmarketable, and determine the remedies available to buyers and sellers when marketable title cannot be delivered. You will be able to apply these principles to MBE-style questions and avoid common pitfalls tested on the exam.

MBE Syllabus

For MBE, you are required to understand the legal standards for marketability of title in real estate contracts. This includes:

• The implied covenant of marketable title in land sale contracts.
• What constitutes a defect rendering title unmarketable.
• The effect of encumbrances, adverse possession, zoning, and future interests.
• The timing of the marketability requirement and the doctrine of merger.
• The remedies available to buyers and sellers when title is unmarketable.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following is most likely to render title unmarketable?
   1. A visible utility easement.
   2. An outstanding mortgage that will be paid off at closing.
   3. Title acquired solely by adverse possession.
   4. A minor error in the property’s legal description.
2. If a seller cannot deliver marketable title at closing, what is the buyer’s primary remedy?
   1. Damages only.
   2. Rescission or specific performance with abatement.
   3. Forfeiture of the deposit.
   4. None; the buyer must proceed with the purchase.
3. When must a seller provide marketable title under a standard land sale contract?
   1. At the time the contract is signed.
   2. At the time of closing.
   3. At the time the buyer takes possession.
   4. At the time the deed is recorded.

Introduction

In every contract for the sale of real property, unless expressly stated otherwise, there is an implied promise that the seller will deliver marketable title at closing. This means the title must be free from reasonable doubt and not expose the buyer to litigation or risk of loss. Understanding what makes a title unmarketable, when the obligation applies, and the remedies for breach is essential for MBE success.

Key Term: Marketable Title Title to real property that is free from reasonable doubt in law or fact, and not subject to significant risk of litigation, so that a reasonable buyer would accept it.

The Implied Covenant of Marketable Title

Every land sale contract includes an implied covenant that the seller will provide marketable title at closing, even if the contract is silent on the issue. This covenant cannot be waived unless the buyer does so expressly.

Key Term: Implied Covenant of Marketable Title An unwritten promise in every real estate contract that the seller will deliver marketable title at closing, unless the buyer waives this requirement.

What Makes Title Unmarketable?

A title is unmarketable if it exposes the buyer to a reasonable risk of litigation or loss. Common defects include:

• Outstanding interests held by third parties (e.g., future interests, life estates, or claims by heirs).
• Title acquired solely by adverse possession, unless confirmed by a court judgment.
• Existing encumbrances, such as mortgages, liens, restrictive covenants, or easements, unless the buyer has agreed to accept them.
• Significant encroachments or boundary disputes.
• Violations of zoning or land use regulations.

Key Term: Encumbrance A claim, lien, easement, or restriction that burdens title to real property and may affect its marketability.

Key Term: Adverse Possession A method of acquiring title to land by continuous, open, and hostile possession for the statutory period, which may render title unmarketable if not quieted by court action.

When Must Title Be Marketable?

The seller must provide marketable title at closing, not before. The buyer cannot refuse to perform based on a defect that is curable before closing. If the seller cannot cure the defect by the closing date, the buyer may refuse to complete the purchase.

Key Term: Doctrine of Merger The principle that, at closing, the contract merges into the deed, and the buyer’s remedies are thereafter limited to the warranties in the deed.

Common Defects and Their Effect

• Outstanding Mortgages or Liens: These make title unmarketable unless they will be paid off and released at closing from the sale proceeds.
• Easements: An easement that is visible, beneficial, or known to the buyer may not render title unmarketable. However, undisclosed or burdensome easements do.
• Restrictive Covenants: These are encumbrances and make title unmarketable unless accepted by the buyer.
• Title by Adverse Possession: Unless the seller has obtained a court judgment quieting title, title held solely by adverse possession is unmarketable.
• Zoning Violations: Existing violations of zoning or land use laws render title unmarketable, but mere zoning restrictions do not.

Timing and the Doctrine of Merger

The requirement to deliver marketable title applies only up to closing. Once the deed is delivered and accepted, the contract merges into the deed, and the buyer cannot later complain of unmarketable title unless the deed contains warranties covering the defect.

Remedies for Unmarketable Title

If the seller cannot deliver marketable title at closing, the buyer may:

• Rescind the contract and recover the deposit.
• Seek specific performance with a reduction (abatement) in the purchase price if the defect is minor.
• Recover damages if the seller acted in bad faith or the contract so provides.

The seller cannot force the buyer to accept unmarketable title unless the buyer has waived the requirement.

Worked Example 1.1

A buyer contracts to purchase a house. Before closing, the buyer discovers that the property is subject to an old, unreleased mortgage. The seller promises to pay off the mortgage at closing using the sale proceeds. Is the title marketable?

Answer: Yes. If the seller will pay off and release the mortgage at closing, the title is considered marketable at the time required. The buyer cannot refuse to close based solely on the existence of a mortgage that will be satisfied at closing.

Worked Example 1.2

A seller acquired title to a parcel by adverse possession but never obtained a court judgment. The buyer refuses to close, claiming the title is unmarketable. Is the buyer correct?

Answer: Yes. Title held solely by adverse possession is generally unmarketable unless confirmed by a court. The buyer may refuse to close and seek rescission.

Exam Warning

Many MBE questions test whether a visible, beneficial easement (such as a utility line) renders title unmarketable. Unless the buyer objects or the easement is undisclosed and burdensome, such easements do not make title unmarketable.

Revision Tip

Always check whether the defect is curable by closing. The seller has until closing to deliver marketable title, and minor defects that can be cured in time do not excuse the buyer’s performance.

Key Point Checklist

This article has covered the following key knowledge points:

• Every real estate contract includes an implied covenant of marketable title unless waived.
• Title is unmarketable if it exposes the buyer to reasonable risk of litigation or loss.
• Common defects include outstanding interests, adverse possession, encumbrances, and zoning violations.
• The seller must deliver marketable title at closing, not before.
• After closing, the doctrine of merger limits the buyer’s remedies to deed warranties.
• The buyer may rescind, seek specific performance with abatement, or recover damages if title is unmarketable.

Key Terms and Concepts

• Marketable Title
• Implied Covenant of Marketable Title
• Encumbrance
• Adverse Possession
• Doctrine of Merger