Sunday, March 23, 2014

Marketability of Title

When preparing for the MBE, you're sure to come across questions testing the concept of marketable title. Because the examiners test this concept in a variety of ways, it's important to know it well. And the first thing to understand is that there is an implied warranty in every land-sale contract that at closing the seller will provide the buyer with marketable title.

Questions often require a determination as to whether title is marketable, and the best way to address such questions is to understand what types of defects cause title to be deemed unmarketable. Defects in the chain of title can render title unmarketable, as can adverse possession. The adverse possession questions show up often, so note carefully that on the MBE, title acquired by adverse possession is not marketable, despite the fact that modern law is generally to the contrary. Though you should always look for twists in the questions in which the examiners tell you to apply modern law, the default rule is that because a purchaser of land acquired by adverse possession may be forced to defend in court his rights to the land, the title is deemed unmarketable.

Further, a variety of encumbrances on land will deem the title to that land unmarketable. These encumbrances include mortgages, liens, easements, and covenants. In regards to mortgages, you'll come across questions in which there is a mortgage on the property that is the subject of the sale, and buyer claims that title is unmarketable. Seller will have the right to satisfy the mortgage up until the time of closing, and can use the proceeds of the closing to satisfy the mortgage. Therefore, oftentimes the closing itself will render title marketable.

An easement that reduces the value of the property renders title unmarketable. Distinguish this from an easement that benefits property (for example a utility easement allowing others to service the property) which generally will not render title to that property unmarketable provided the easement was visible and known to the buyer when the seller and the buyer agreed to the sale.

Finally, note the rule regarding zoning regulations and their effect on marketability of title. Generally, zoning restrictions do not effect the marketability of title, as the regulations are not considered encumbrances. An existing violation of a regulation, however, is far different, and if there is an existing violation of a zoning regulation, then title to the property on which the violation is taking place will not be deemed marketable.

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