Facts
- Tri-State owned the Broadview Hotel in Wichita, Kansas, and adjacent tracts slated for sale through a series of option purchase contracts.
- The contracts required Tri-State to provide abstracts showing “good and marketable title” to each tract by specified dates.
- The contracts gave Sphinx the election to (a) cancel and recover its escrowed option payments if marketable title was not shown by the deadline, or (b) waive defects and proceed with whatever title Tri-State could convey.
- An attorney drafted the contracts, examined title, and served as escrow agent for Sphinx’s deposits.
- Title examination revealed an outstanding record fee title in a dissolved third party to a narrow strip of land located beneath a portion of the hotel.
- Tri-State asserted it had likely acquired the strip by adverse possession, but could not complete a quiet-title action to remove the record defect by the contractual deadline.
- Sphinx canceled under the marketable-title clause and demanded return of its option payments.
- Tri-State sued to retain the escrowed payments, claiming the defect was insubstantial and did not make title unmarketable.
Issues
- Whether an outstanding record title in a third party to land beneath part of the hotel rendered Tri-State’s title unmarketable under the contracts’ marketable-title requirement.
- Whether a seller’s claim of adverse possession can satisfy “marketable title” when curing the defect would require litigation (quiet title).
- Whether the contracts permitted Sphinx to cancel and recover deposits when marketable title was not shown by the specified date.
Decision
- The Kansas Supreme Court affirmed judgment for Sphinx.
- The court held the outstanding record title to the strip beneath the hotel was a substantial defect that rendered title unmarketable.
- Because Tri-State could not deliver marketable title by the contractual deadline, Sphinx properly exercised its contractual right to cancel and recover its escrowed option payments.
Legal Principles
- A marketable title is one free from reasonable doubt and not exposing the purchaser to a reasonable risk of litigation; a buyer is not required to “buy a lawsuit.”
- An outstanding record interest in a third party that must be eliminated through litigation (including a quiet-title action), even if the seller claims adverse possession, makes title unmarketable.
- Where a real estate contract expressly conditions performance on delivery of good and marketable title by a stated date and grants a cancellation election, courts enforce that allocation of risk as written; the purchaser may cancel and recover deposits absent waiver.
Conclusion
An outstanding record title in a third party to land under part of the hotel made the seller’s title unmarketable, and the buyer was entitled under the contracts to cancel by the deadline and recover its escrowed option payments rather than accept a title requiring litigation to perfect.