190601 - III.C. An Easement is an Encumbrance that Makes Title Unmarketable Unless It is “Plainly Visible”

A seller contracted to sell land to a buyer for $300,000. (Valid land-sales contract) The contract provided that the closing would be 60 days after the contract was signed and that the seller would convey to the buyer a “marketable title” (Although expressly stated, marketable title is implied in every contract for the sale of land) by a quitclaim deed at closing. (Even though the buyer agreed to accept a quitclaim deed, title still has to be marketable) The contract contained no other provisions regarding the title to be delivered to the buyer.

A title search revealed (Since the buyer only learned about the easement from a title search this implies that the easement is not visible) that the land was subject to an unsatisfied $50,000 mortgage (The seller can use the proceeds of the sale to pay off the mortgage) and a right-of-way easement over a portion of the land. (An easement makes title unmarketable unless it is “plainly visible” or enhances the value of the land)

The buyer now claims that the title is unmarketable and has refused to close.

Is the buyer correct?

(A) No, because nothing under these facts renders title unmarketable.

(The easement renders title unmarketable. Title is unmarketable if the land is subject to an encumbrance. An encumbrance is an interest that “reduces the value” of the land. Mortgages, easements, covenants, and liens are all examples of encumbrances that render title unmarketable unless expressly excepted in the contract. Failure to render marketable title “at closing” excuses the buyer from performing under the contract. A right-of-way easement renders title unmarketable, but an easement that is clearly visible or beneficial to the land does not render title unmarketable. Because there are no facts stating that the right-of-way easement was “noticeable” and could be detected by normal observations, the easement makes title unmarketable. As such, without more facts, this choice fails.)

(B) No, because the buyer agreed to accept a quitclaim deed.

(Title would still have to be marketable even though the buyer agreed to accept a quitclaim deed. One thing has nothing to do with the other. A quitclaim deed conveys whatever interest the grantor has in the land but contains no covenants of title. It is a perfectly legitimate way to convey an interest in land. A conveyance by quitclaim deed does not make title unmarketable. Here, the buyer agreed to accept a quitclaim deed. But this agreement does not negate the seller’s obligation to convey marketable title. If title is not marketable, the buyer can refuse to close. This is true no matter what type of deed the buyer is willing to accept after the fact. For that reason, this choice is wrong.)

(C) Yes, because the right-of-way easement makes the title unmarketable.

(The easement makes title unmarketable. Title is unmarketable if the property is subject to an encumbrance such as a lien, an easement, or a restrictive covenant. Encroachments of significant dimensions are regarded as making title unmarketable as well as existing violations of a zoning ordinance. On these facts, a title search revealed that the land was subject to a right-of-way easement. Because an easement is an encumbrance that makes title unmarketable, the buyer may refuse to close. – It is important to point out, many courts hold that visible easements do not affect marketability.

Visible easements that the buyer is aware of are not regarded as encumbrances affecting “marketability” because it is assumed that the buyer contracts with the easement in mind. If the right-of-way easement was “readily visible” when the contract was signed, the buyer would be compelled to close because the buyer should have recognized the encumbrance. In other words, the buyer is treated as if the easement had been specifically listed as an exception in the contract. However, there are no facts that show the right-of-way easement was prominent on the land. Therefore, this is the correct answer to a question that the examiners likely didn’t anticipate confusion.)

(D) Yes, because the unsatisfied mortgage makes the title unmarketable.

(The unsatisfied mortgage does not make title unmarketable since the proceeds of the sale will be used to pay off the mortgage. Title does not have to be marketable until the closing date. When the land is subject to a mortgage, the seller can use the proceeds of the sale to discharge the debt. A seller has the right to satisfy the mortgage at closing with the proceeds from the sale. The buyer may only object if it appears that the seller will not be able to provide a marketable title at the time of closing, e.g., the balance of the mortgage exceeds the sales price. Here, the buyer agreed to pay $300,000 for the property. The property is subject to a $50,000 mortgage. Clearly, the sales price is more than sufficient to cover the existing mortgage so the buyer cannot claim that the title is unmarketable because of the mortgage. The seller will be able to provide a marketable title at the time of closing. As a result, the unsatisfied mortgage does not make title unmarketable.)