## Facts

- Jon L. Nelson and Anne E. Nelson (sellers) agreed on April 17, 1993, to sell their home to Walter E. Anderson and Shelly S. Anderson (buyers).
- The buyers paid a $1,500 earnest-money deposit. The balance was due at closing upon delivery of “a warranty deed conveying a merchantable title, free and clear of all encumbrances, except those mentioned in the contract.”
- Closing was initially set within 30 days, then extended by written agreement to June 30, 1993.
- The contract required the sellers to obtain a title insurance report. The buyers had 10 days after receiving the report to object to title defects, and the sellers had 90 days to satisfy objections.
- The title report disclosed a recorded restrictive covenant on the subdivision plat requiring a 10-foot setback from adjoining property lines; the house was only 4.7 feet from the north lot line, violating the covenant.
- The buyers made a timely, specific objection based on the setback violation.
- The sellers obtained written assurances from the title insurer that, for an additional fee, it would “insure over” the building-line exception for the buyers; the insurer later confirmed it would also insure over the exception for subsequent purchasers.
- The buyers remained unwilling to accept title subject to an existing recorded violation, refused to close by June 30, 1993, and purchased another property.
- The sellers later sold the home to a different purchaser at a lower price.
- The sellers sued the buyers for damages for breach of contract; the buyers sought return of the earnest money. The circuit court granted summary judgment for the buyers, holding the sellers failed to deliver merchantable title. The sellers appealed.

## Issues

1. Whether a property built in violation of a recorded setback covenant is burdened by an encumbrance that renders title unmerchantable under a contract requiring “merchantable title” free of unlisted encumbrances.
2. Whether a title insurer’s written commitment to “insure over” the setback violation for the buyers (and later purchasers) satisfies the seller’s contractual duty to convey merchantable title.

## Decision

- The Appellate Court of Illinois, Fifth District, affirmed summary judgment for the buyers.
- An existing violation of a recorded restrictive covenant is an encumbrance that makes title not reasonably secure against future litigation and therefore not merchantable.
- The title insurer’s willingness to insure over the exception did not remove the violation or the risk of enforcement; it did not convert an unmerchantable title into a merchantable one.
- Because the sellers did not tender merchantable title as promised, the buyers were justified in refusing to close and were entitled to recover their earnest money.

## Legal Principles

- Marketable (merchantable) title in Illinois is not perfect title; it is title “reasonably secure against the hazard, annoyance, and expense of future litigation.”
- A recorded restrictive covenant, coupled with a present physical violation of that covenant, can constitute an encumbrance that renders title unmerchantable where it exposes the purchaser to a realistic possibility of enforcement action by parties entitled to enforce the restriction.
- A buyer need not accept title that carries a reasonable chance of litigation or remedial demands that could affect value or resale.
- Title insurance is a contract of indemnity against loss; an insurer’s agreement to insure over an exception does not eliminate the underlying encumbrance or the prospect of suit, and it does not satisfy a seller’s promise to convey merchantable title.
- Summary judgment is proper when the material facts are undisputed and only the legal effect of those facts on marketability and contract performance remains.

## Conclusion

The court held that the sellers breached their contract by failing to convey merchantable title because the house was built in violation of a recorded 10-foot setback covenant, creating an encumbrance and a reasonable prospect of enforcement litigation; the title insurer’s offer to insure over the defect did not cure the violation or satisfy the sellers’ obligation, so the buyers could refuse to close and recover their deposit.


Nelson v. Anderson, 676 N.E.2d 735 (1997)