Marketable versus Insurable Title

 

In contract negotiations, an often neglected provision is the quality of title to the property to be conveyed. It may be seen as a matter for the lawyers, but whether or not the final language calls for “good and marketable” or “marketable and insurable” title is significant. Traditionally, marketable title is what is to be conveyed, but few titles are perfect, which is what a truly marketable title requires. The availability of title insurance to cover the acceptable title defects is one answer to that problem, but it has to be borne in mind that an insurable title is not a perfect one.
Justice Potter Stewart admitted that a definition of obscenity might not be possible but that he knew it when he saw it. A definition of marketable title might be similarly difficult but the courts seem to know it when they see it. Given that most real estate purchase contracts promise delivery of marketable title, it would seem that its definition is a matter of common understanding. The converse is probably closer to an accurate statement. The title industry has not assisted in defining marketable title even though its policy forms have included unmarketability of the title as one of the insuring provisions. 
A comprehensive statement about marketable title appears in Madbeth v. Weade, 204 Va. 199, 129 S.E.2d 667, 669-670 (1963):
A marketable title is one which is free from liens or encumbrances; one which discloses no serious defects and is dependent for its validity upon no doubtful questions of law or fact; one which will not expose the purchaser to the hazard of litigation or embarrass him in the peaceable enjoyment of the land; one which a reasonably well-informed and prudent person, acting upon business principles and with full knowledge of the facts and their legal significance, would be willing to accept, with the assurance that he, in turn, could sell or mortgage the property at its fair value.
Many subsequent decisions have quoted this passage but have usually relied upon one of the clauses to support the finding of marketability or lack thereof. In other words, it would appear that a title is marketable if it meets one of the Madbeth tests, not all of them. That suggests that a marketable title may be less than a perfect condition which is an impression favorably drawn from cases in other jurisdictions as well.
Madbeth addresses a couple of other points about marketable title that are important to remember. First, in Virginia, marketability of title is a question of law, not of fact. Other jurisdictions have found marketability to be a fact issue. See, “Title Insurance Coverage for Unmarketability of the Title,” John C. Murray, PLI (Commercial Real Estate Financing 2006: What Borrowers & Lenders Need to Know Now), January-March 2006. If it is an issue for the court, expert opinion on title would not be admissible at trial. 
The second matter raised by Madbeth is that, upon identification of a defect or encumbrance establishing a potentially unmarketable title, the burden shifts to the proponent of the title to establish that it is marketable or to remove the defect. In other words, it seems that it takes something less than a prima facie showing of unmarketability to shift the burden of proof to the proponent of marketability. Given that the law undoubtedly assumes good title in a record holder of same, this seems to be an opening for the very chaos that Madbeth’s definition above would seek to avoid. 
As mentioned above, the 2006 ALTA policies insure against loss or damage resulting from an unmarketable title. “Unmarketable title” is defined in the Conditions as a title affected by an alleged or apparent matter that would permit a prospective purchaser or lessee of the Title or lender on the Title or a prospective purchaser of the Insured Mortgage to be released from the obligation to purchase, lease, or lend if there is a contractual condition requiring the delivery of marketable title. This language would appear to read as a shorthand version of the Madbeth test. An untested portion of the definition, however, is what happens to insurance protection for a seller who contracts to convey “free and clear of all liens” as this, would appear to be greater than a marketable title.
Commercial real estate contracts often offer to convey title that is marketable and insurable. “Insurable title” in this context, in the common understanding of commercial counsel and lenders, probably means those title defects or marketability issues that a title insurer would “insure against” under normal policy provisions or special coverages but without additional premium. Sometimes the title to be conveyed is called marketable subject only to the list of permitted exceptions which is usually the title insurer’s schedule of special title exceptions presented to the purchaser during the purchaser’s due diligence period. Cases that discuss insurable title, however, are even rarer than those on marketability.
At common law, any defect in or burden upon the title would make it technically unmarketable. The modern approach seems to be an unmarketable title is one which has such a serious defect that a reasonable person with knowledge of the defect would not purchase the property in the exercise of good business judgment. Furthermore, such purchase would expose the purchaser to the hazard of litigation or the inability to resell or mortgage the property. For example, ordinary easements for utilities, although they impact the title adversely, do not support an unmarketability of title claim because such easements are normally accepted in the sale of real estate. Also, mortgage or judgment liens that are to be satisfied out of the seller’s purchase money do not permit the purchaser to reject the title.
As a title underwriting principle, however, a known marketability problem should be disclosed to the purchaser even if such is insurable so that the purchaser may choose to accept insurance over the problem. Be aware that a contract that promises “insurable title” in order to avoid the seller’s obligation to deliver one that is marketable may be seeking to compel the purchaser to accept an unmarketable title if a title underwriter will “insure over” the defect.
Note that this title insurance coverage is limited to unmarketable title and in no way covers land that is not saleable due to, for example, environmental damage to the land which makes it only nominally valuable. Such land may be “unmarketable” but its title may be clear.
The final advice as to whether or not marketable or insurable title is preferable for any party to the contract is a legal one. Certainly, though, the quality of the title is an important consideration for all during negotiations and, with well-crafted contingencies, may be a way out of a bad deal or the means to collect damages from a buyer grasping at straws to avoid performance. Advice of counsel is necessary; knowledge of the title in advance by the seller or provision for a reasonable period for due diligence as to the title for the buyer is recommended.
R. Michael Smith is Underwriting Counsel for Conestoga Title Insurance Co. He has been a member of the Virginia State Bar since 1973 after graduating from the University of Virginia with a B.A. with distinction in History and obtaining his J.D. from the University of Virginia School of Law. He spent most of the last thirty years in title insurance and financial services employment serving as underwriting counsel for title insurers in Fairfax, Virginia, before moving to Lancaster, Pennsylvania. In 2014, he was appointed as an Advisor to the Title Forms Committee of the American Land Title Association and he is a member of the Real Property/Trust & Estates Section of the American Bar Association. While Mr. Smith’s focus in title insurance has been in Virginia, he also has experience with underwriting and agency operations in the Mid-Atlantic and Midwest.

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